Monday, March 17, 2008

The Bear Stearns story, Predatory Lending and Housing Bubble

Bernanke (right) to the rescue: The Anti Robin Hood (giving from the poor to the rich) smiling benevolently at ex-CEO of Bear Stearns, James Cayne, off to golf in Hawai'i on his well earned retirement.

There once was a "respectable" financial institution, called the Bear Stearns.

This company was in the business of playing the market - feel free to see my views on the whole global stock market scene here.

This company's one activity was to lend money to people who wanted a house. The trouble was, many of these supplicants could not afford a house, and any normal banker professional expert (as opposed to an "expert") would never, ever, EVER give those people loans after a quick investigation of their financial history. In effect, they were the working poor who could not afford a house, and should never have been given a loan for said house.

But the brave people at Bear Stearns (and other "respectable" financial institutions) decided that they WILL give those people who cannot afford a house/business etc etc a loan at some very, very special loans, called subprime, and ARM loans . Also they did a lot of activity in hedge funds - aka playing the markets... except that I won't get into it here, but a hedge fund is basically a SCAM, as it is a fund that is outside a regulatory scheme of normal funds, such as mutual funds. Also, by law, the hedge fund managers are not required to release any information to you, the hedge fund investor, preserving their secrecy. It is, again, basically a scam (Should do an article post just on hedge funds in the USA and the idiots who "invest" in them).

Subprime loans means that, in effect, the bank/financial institution is lending money to people with no money and no ability to pay the loan back. Because people in those situations are desperate and also quite stupid (yes, I did just call all the people who took a subprime loan for their house stupid). This results in an foreclosure epidemic in the USA, and of course the bush government just recently passed laws that make bankruptcy for normal citizens (corporations are excepted!) much, much harder.

As in even if you lose a house, you still have to pay off you credit card debt and of course your debt to lending institutions - such as Bear Stearns, for example.

ARM or Adjustable Rate Mortgage is a very complicated concept, that simply means that you Joe Schmoe get a loan at a superb low rate in the beginning (and I mean laughably low rate, so that even really poor people who cannot afford a house payments - these people CAN afford to pay off ARM loans beginning rate). But the catch is, the ARM rate of the loan is tied to a market index, which if you have been paying attention on my blog always goes up.

Of course, some companies in the USA just said fuck it and used their own index to determine the ARM rate. What does that mean? It means you are fucked, dumbass, that's what. These are numbers that the financial "experts" who gave you the ARM loan pull out of their ass - this is very popular in the USA.

Interestingly, anybody who ever took out an ARM loan can tell you that the ARM rate never goes down, but somehow always goes up, up, UP, finally to balloon into a higher rate than if the Joe Schmoe dumbass who took an ARM loan took a normal loan (but then again he would never be given a normal, standard loan as he simply cannot afford it. Hence catch-22. Hence, don't buy a house if you cannot afford it, you idiot, no matter what the man in the suit tells you!).

Common sense strikes again

So what happens when a bank/financial institution lends money to people who will not be able to pay it back? Yes, this is a rhetorical question, and if you, the reader, cannot answer that then perhaps this is a bit over year head - go invest in the mutual funds and have fun!

What happened was a pyramid scheme - the banks/financial institutions lend to more and more people to cover their ass because the people that they lent before could not make payments.

Eventually, common sense and reality had to catch up with them.

Corporation is a private person too!
So what happens to you, Joe Schmoe American Citizen, when you cannot afford to pay off your house loan? Well, you cannot declare bankruptcy, because as I noted before, a law was passed recently to make it harder for you to do. So all you can do is to wait for that nice repo man (who when all is said and done is a legalized thief) to come at 1AM to your house and drive your car away. Then the sheriff comes and impounds your house - and you and your children have to move somewhere - the sheriff doesn't care where, the street or under the bridge in a cardboard for all he cares!

Now, since in American law a Corporation is a private citizen, which means that it has the same laws just like you in the eyes of the law.

*Excuse me as I laugh for a minute here. Thanks!*

As I was saying, the corporation is a private citizen in the eyes of the law and has the same rights and duties as you, Joe Schmoe citizen. Except, of course, the laws were changed in the states to the benefit of corporations - with the states essentially competing for corporations to set up their HQ, factories and warehouses in their state and not any other. Basically it boiled down to taxes and loans - state's were wooing the corporations (still are!) and saying to them: "Come set up in my state, and you will not have to pay taxes for X years and also to sweeten the deal we, the state government, will give you a loan to start up!"

Can you imagine that, Joe Schmoe American?

A state saying to YOU, private citizen: "Move into our state, and you will not pay taxes for 5 years - and, here's $10,000 to help you make up your mind!".

Of course, the joke is on the states, as it is common in the Yoo Ess of Ey for states to offer all these perks and the corporations, while by law being located in a state, have their factories, warehouses and HQ elsewhere. In effect, they have a mailbox in Delaware, while all their employees work in Rajistan, India. The corporations pay very little taxes for years, while not employing American workers in that state - and choosing instead Mexico, China or Indonesia. Super! This system is just great!

Now, going back to the wonderful, "respectable" Bear Stearns financial institution, what happened was that they lent too much money to people who are now not able to pay them back.

Of course, the bank responds by taking Joe Schmoe's house, because Joe Schmoe can no longer make payments to the bank for it (perhaps because his ARM increased from 5% to 40%? You think?). Too bad the price of Schmoe's house in today's market just took a nose dive DOWN, because (Stay with me here! This is simple!):

Housing Bubble
The price of houses in America stayed up because more and more people could "afford" a house (or so they thought - by taking ARM and subprime loans described above), and as more and more people could buy a house, the iron law of supply and demand means that the prices went up.

Now, this whole pyramid lending scheme is seen by everybody, even the Joe Schmoe idiots with ARM and subprime loans, as just that - a pyramid scheme.

And of course, people cannot afford to buy a house anymore, because the price was kept artificially high due to everybody getting a loan and everybody "affording" a house - and we have just run out of suckers, nationwide. So now due to the iron law of supply and demand, since no one is buying houses and the banks/poor people are desperate to sell them - the prices of houses are going down, down, DOWN.

Simple right?

So now the prices of houses all across America are falling down, down, DOWN, but the all the construction companies built more and more houses to cash in on the boom before the bubble burst, to make profits off of it. After all, everybody was buying a house, and the prices of houses were going up up UP. Which now leads to a situation where, in AmericanGoy's city where you drive around in your car and every street has brand new apartment complexes for 5-20 families - and 1 occupant in them. And large signs screaming "LOW PRICES, JUST OPENED" even though the apartment complex was built "just" 8 months ago.

Back to the Bear Stearns and other "respected" financial institutions

Now we make our way back to Bear Stearns, although the same thing is happening to ALL other financial institutions in the USA.

Bear Stearns reacted to all these foreclosures with the "compassionate conservatism" that most Americans expect when they deal with a corporation. It sent a sheriff to impound the house and a repo man to steal the car in the night.

Trouble was, because as you just read above in the Housing Bubble section, the house is now not worth as much - and also, shockingly, everybody who could have bought a house (and again, shouldn't have because they were too poor in many cases) already bought a house.

Meaning nobody wanted that empty house - so the bank had to either keep that empty house or lower the price - again, and again, and AGAIN - to sell the damn thing and recoup some of its losses.

Obviously, entities like Bear Stearns lost a LOT of money when the Housing Bubble burst (balloon goes pop!).

Hence, the latest stories on the internet, TV and newspapers about Bear Stearns being in trouble (well DUH!).

Consequences of the Pyramid Scheme

There are consequences to all this of course.
First, the chief victims are the people who were suckered into the ARM and Subprime mortgage loans, because even though they are the typical idiots one finds here on the street, the banking professionals should have been doing THEIR job and refused them loans.

After all, not everybody can be educated enough, smart enough or knowledgeable enough to learn on his own about ARM and Subprime loans (even though, here in the USA you can just go to your library, get there on the internet for FREE and google "ARM loan" and "subprime loan").

Still, these were the suckers.

The banks/"respectable" financial institutions were the cons, the real bad guys in this. They made an effort to hoodwink the poor people into buying a house and keeping the pyramid scheme going, to make the economy under bush look "good".

Interestingly, only now, at the dead end of bush the retard's presidential term, is all this stuff coming to the fore, just waiting to explode in the next president's face (who will be a Democrat of course); but that's another story.

So, let us tally the victims:

The poor idiots who bought a house financed by an ARM or a Subprime loan - these people are fucked.

The people who worked for the "respected" financial institutions, being accountants, finance experts, are also victims, as they will lose their jobs. I have no mercy for them, as they should have known enough to spot the pyramid scheme, and too many of them enthusiastically participated in this system, to the point of LYING to their clients about ARM and Subrpime. So, fuck them! Enjoy going from $70,000 a year to $0, Mr. analyst. Bon chance, dickhead! (Don't let the door in the unemployment office hit your ass as you exit!)

And now we come to the people on top, the CEO's, who lead the "respectable" financial institutions. People like Chairman and Chief Executive James Cayne of Bear Stearns. They are, of course, the most to blame for this financial disaster.

After all, it is ultimately up to them to decide how a financial company will act - will it give out ARM and Subprime loans, and give in to greed to make money in the short term or act responsibly?

They told their employees: "Give out those risky loans!".

At any point in the "game", they could have just had a single, intelligent thought and said "Hmm, that does not make sense - we better not give out loans to those poor people, we already made enough money from these suckers!".

But no - this continued until the pyramid scheme exploded.

So what is the reaction of Chairman and Chief Executive James Cayne?

Strangely, Mr. Cayne is described by CNN Money as "upbeat".

I wonder why?

Perhaps the fact that he made $38.1 million in 2006, could that have something to do with it?

Perhaps the fact that, as states (with dry, gallows humor): "According to the New York Times, he walked with $232 million in compensation over the period from 1993 to 2006. This is just another example of how the global economy rewards extraordinary talent."

You see, in today's Yoo Ess of EY the concept of personal responsibility applies only to the poor people and the middle class working Joe Schmoes.

The elites, the very rich who make all the decisions that hurt the United States, and indeed the world (it is a global stock market after all), have no consequences.


In a normal country, Mr, Cayne would be put on trial, and then put against the wall and shot. In Soviet Union, his family would also be shot.

Being a "compassionate conservative", I am advising for a trial and then for Mr. Cayne to go to jail - for a very, VERY long time.

Don't hold your breath, though.

See you on the golf course as you enjoy your retirement, Mr. Cayne!

Bonus Material: these are some of the people who put us in the shit

Bear Stearns Cos. Chairman and Chief Executive James Cayne received a compensation package worth $38.1 million in 2006, according to a Tuesday regulatory filing.

The investment bank paid Cayne, 73, a $250,000 annual salary and a cash bonus worth $17.1 million. He also received $14.8 million in restricted stock awards, according to a document filed with the Securities and Exchange Commission.

Bear Stearns also provided Cayne $6.2 million in other compensation, which includes fees for Federal Trade Commission filings linked to his ownership of the company's stock. Cayne, who started at the company in 1969, owns about 5.3 percent of Bear Stearns common stock.

Cayne's compensation package was not as great as those of some of his colleagues on Wall Street.

Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein received $54.3 million in compensation after leading the top U.S. investment bank to record profits in 2006. Merrill Lynch & Co. Chief Executive E. Stanley O'Neal received total compensation for 2006 that the company valued at $46.4 million. John Mack's 2006 pay package for his work as Morgan Stanley's CEO totaled $41.4 million.

Bear Stearns also awarded its two presidents -- Alan Schwartz and Warren Spector -- hefty pay packages for last year.

Schwartz was awarded compensation worth about $35.7 million, while Spector was paid $35.3 million. Each had a salary of $250,000 a year, and a cash bonus of about $16.2 million.

And last but not least - since a corporation is a private citizen in the US law, what are the consequences to it? Does it declare bankruptcy?

Hell no - they were just bailed out by the FED.

As the NY Times article asks:
"WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in?"

Why, a helping hand from the government to the corporation (most?) responsible for the current crisis, of course.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.

Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.

Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.

And why is that?
After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat.

Because we the USA rescue ALL the banks, no matter what sin they committed, no matter if they lied, cheated and stole from their clients, because otherwise the WHOLE USA FINANCIAL SYSTEM HOUSE OF CARDS WILL COLLAPSE.

So, grab a glass of your favorite alcoholic beverage and drink a toast to Mr. Carney's $232 million retirement on a golf course in Hawai'i!


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AmericanGoy said...

Keep in mind - the working title of this article was "The SHORT history of Bear Stearns", but as I wrote it, I finally relented and turned it into
"The SHORT history of Bear Stearns (oh fuck it - another long AG post)".

AmericanGoy said...

One more thing - don't want to spoil the flow of the article but just spotted this on yahoo news:

"Market turmoil will not stop Visa IPO: analysts" from Reuters:

Gee, a company that offers CREDIT is BEGGING PEOPLE FOR MONEY.

This of course has no relation to the Bear Stearns fiasco and the "respectable" financial institutions meltdown.

No, VISA simply decided that then need the money NOW for undisclosed reasons...

Anonymous said...

Great post, AG!!!!


Anonymous said...

Jeez dude, lighten up. No one held a gun to the morons that got subprime loans. Think of it as evolution in action.

Anonymous said...

You mean I can't spend, spend, SPEND my way out of debt?

Gosh, that's what Uncle Sam's been trying to do for years and look where he's at!?!?

What ever happened to the magic money tree? You know, the one that grows in D.C. and magically sprouts 100 dollar bills. And no matter how many get picked off by Congress, more sprout up to replace the ones grabbed, what's wrong with that tree?

Anonymous said...

Jim Rogers on the Bear Stearns bailout

Bloomberg tracked down Jim Rogers somewhere in Asia and he was none too pleased with the way the U.S. government has been throwing its money around.

Click to play in a new window

On why Bear Stearns was bailed out:

You know the reason they did it this way was because, if Bear Stearns had to declare bankruptcy, you'd realize that Bear Stearns paid out billions of dollars in bonuses in January - six weeks ago. If he let them go into bankruptcy, they all would have had to send back their bonuses.

This is what they're doing, they're doing it so they don't have to give back their bonuses. That's why they didn't put them into bankruptcy. Jamie Dimon has gotten a great deal because the Federal Reserve is paying for it. The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders' Mazeratis.

On letting banks fail:

Investment banks have been going bankrupt since the beginning of time. What are you talking about? Let somebody go bankrupt - it's not the end of the world.

You remember what happened in the 70s when they tried this tactic - when Arther Burns kept printing money. Finally, interest rates had to go to over 20 percent and they had to bring in Paul Volcker who had to take draconian measures and put the country into a serious recession. How much more money do you think the Federal Reserve has?

On risks to the banking system:

In 1966, the entire Japanese financial community went bankrupt. Every broker in Japan was in bankruptcy. Japan came out of that and became one of the great powerhouses of the world.

In 1907, everbody on Wall Street was bankrupt. Everybody was bankrupt in 1907. America recovered from that and had a very nice future. Are you telling me that we're never going to have bankruptcies in the financial community again?

On Alan Greenspan's role in this mess:

The first two central banks in America failed. Between Greenspan and Bernanke - I've written this, it's in my book, long before this happened - they're setting up the failure of the central bank. The demise of the Federal Reserve.

The first two failed, this one is going to fail too - because of Greenspan and Bernanke. Greenspan laid the perfect foundation for Bernanke.


"How much more money do you think the Federal Reserve has?

Hell, i ain't no rocket scientist, but that's easy to answer.

They've got an unlimited supply of money. Well, at least that worthless Monopoly money that the printing presses have been shooting out 24/7, 365.

Yep, life is good when you're the King.

AmericanGoy said...

"Jeez dude, lighten up. No one held a gun to the morons that got subprime loans. Think of it as evolution in action."

Hi anonymous

The problem is that it affects ME. It is MY TAX MONEY used to bail out the dishonest financial institutions.

It is MY STOCK MARKET which is wiped out, which includes my 401K savings and index funds.

It is MY ECONOMY that is affected, resulting in employers not hiring any more; rather, they are laying off people.

Lighten up?
Fuck no man!
I am mad as hell that the CEO (mostly) responsible for this is just paid 23 million and told to enjoy his retirement.

Anonymous said...

First of all, Bear Stearns is an investment bank. They do not lend money to homeowners. Secondly, Bear Stearns EMC unit which services subprime loans has raped their customers for years through forced placed insurance, hiding payments, making money on foreclosures through accelerating payments on mortgage notes. This is all well documented on the internet, and if the media or FTC, and this administration would stop coddling and looking the other way, these type of crimes commited by the Big investment banks wouldn't go on. It's not just Bear Stearns however, it is their brother JP Morgan Chase, Fairbanks Capital and host of other thugs in business suits. Lastly, most of the homeowners mortgages that these "servicers" serviced did not have a problem making their payments until these "servicers" acquired them and started paying the insurance late, adding fees,basically padding the accounts to collect illegal and falsified fees. The people that took out these ARM's should have been more diligent as consumers. However it doesn't mean that they should not have had a home loan in the first place. Alot of minority people were steered into these loans even though their incomes were high. This is where the term predatory lending applies. The banks that loan money to people felt that these consumers could be taken advantage of. Unfortunately there are people that cloak themselves in the robe of respectability but are willing participants if the price is right. These bankers and servicers will one day get theirs. Too bad Eliot Sptizer couldn't control himself, if he had not given a reason for those pulling the srings to silence him this would be out in the open by now.