If You Think the Meltdown Was the Fault of Homeowners, Think Again…

If you’re thinking that our economic crisis was in some way the fault of homeowners who couldn’t afford their mortgages, please consider the following:

At the end of 2007, there were roughly $1.4 trillion in sub-prime mortgages in this country.

If “irresponsible sub-prime borrowers,” caused the meltdown, then $1.4 trillion would have solved the problem in its entirety, right?  Because that’s all the sub-prime loans there were.

But, between the Federal Reserve, the FDIC and the Treasury over $13 trillion has been pumped into financial institutions to fix the “housing correction,” which is what Hank Paulson was still calling our economic collapse as of November of 2008.

At the end of 2008, there were $11.9 trillion worth of mortgages in this country.  So, with $13 trillion, the government could have paid off every single one… and still had a little over a trillion dollars left over.

But there’s a lot more to the economic problem than that, explains Nomi Prins, my new favorite financial uber-genius and author of “It takes a Pillage.” Wall Street had been playing the leverage game… somewhat like they did in the 1920s, I suppose… but on mega-steroids.  Leverage means borrowing on assets, and Wall Street banks were leveraged by 30:1, commercial banks by 10:1, not including their “off-the-balance-sheet” holdings, which could make their leverage ratio significantly higher in many cases.

So… in “Pillage,” Nomi Prins explains in terms anyone can understand that factoring in the leverage at 11:1, we’re looking at a $140 TRILLION economic problem… yes, you read that correctly… that’s trillion, with a ‘T’.  Our Wall Street bankers, through the abuse of the securitization process and excessive amounts of leverage, created a potential tab of $140 TRILLION for the people of this country to pick up.

Securitization is the process of packaging loans into securities that are then be sold to investors, called Asset Backed Securities (or ABS).  Inside a given ABS, you might find 10% real loans and 90% bonds backed by those real loans.  Or there could be only 5% real loans.  The mortgage payments we all make are used to make payments that flow through the securities and to the investors who then invest by buying pieces of the ABSs.

“It takes a Pillage” is a book that’s absolutely jam packed with “Aha!” and “OMG!” moments, but one shines above the rest… What caused the financial crisis were the securities, or the “bonds”… not the loans.

We’re talking about a system that took on $140 trillion in debt on the backs of just $1.4 trillion in real loans.  And it may be much more than $140 trillion, we don’t really know because we’ve allowed the market to remain unregulated.  The $1.4 trillion is based on leverage at 11:1.  It could very well be some multiple of that amount.

Issuers of ABSs, who were Wall Street’s investment banks earned about $300 billion for packaging and selling these “assets,” packaging the CDOs we’ve all heard about paid the best.  Who bought ABSs?  European and the global banks, insurance companies, and pension plans bought a whole lot of them.  And they bought them with borrowed money.

They bought them because Wall Street told them they were safe… triple A rated… and even better they could be insured with Credit Default Swaps, too!  What was not to love?

Hundreds of trillions in “structured assets”, ABSs, MBSs, CDOs, CDOs Squared, and of course synthetic CDOs, which are entirely, made up of credit default swaps, all deriving their value based on $1.4 trillion in mortgages.  All of those structured investments, once demand for them abruptly dried up, are what we came to know as “TOXIC ASSETS.”

Prins makes it very clear that toxic assets are not the same as defaulted sub-prime loans.  The fact is, Nomi says, that every single sub-prime loan in the country could have defaulted and all of the homes attached to those loans devalued to zero… neither of which happened… and the banks in this country would not have become insolvent… not even close.

The toxic assets lost their value starting in the summer of 2007, not because sub-prime loans defaulted, but because no one wanted to buy them anymore.  After Standard & Poors and Moody’s lowered their ratings on just 1% of the MBSs outstanding on July 10, 2007, investors no longer trusted the triple A ratings.  If some bonds were improperly rated, the thinking went, what about all the others?

I’ve read just about every book on the meltdown that’s been published in the last two years.  From “Too Big to Fail,” to more recently, “Crash of the Titans,” which is about Bank of America’s acquisition of Merrill Lynch, and “It takes a Pillage” filled in so many blanks for me I couldn’t possibly count them all.  Nomi is a very down to earth person too, and it makes reading her easy like Sunday morning.  She’s snarky at certain moments, but she delivers it straight most of the time so you won’t get distracted.

I read her book and was on the phone the following morning with my friend in New York, Danny Schechter, who produced the movie, “Plunder – The Crime of Our Time,” which is all about the housing meltdown and foreclosure crisis and if you haven’t see it yet, you really should order a copy on Amazon right away.  Nomi appeared in Danny’s film a, so I knew he could put me in touch with her, and she responded to my email right away.  (She’s even agreed to an interview, so look for a podcast coming soon, I hope.)

Nomi is smart… I mean scary smart.  Like, I’ve always been considered smart too… near the top of my various classes, 1380 SAT scores about a hundred years ago, if that means anything, but Nomi is so far off the charts that I can’t even believe it.  I don’t remember anyone like her in college or graduate school.  Talking to her is like talking to a walking encyclopedia of the financial history of the United States… but one that speaks English like the rest of us.

By the summer of 2006, the housing bubble had popped.  Greenspan had raised interest rates 17 times in a row by then.  But, starting on that July day during the summer of 2007, before most people had any idea what was happening, the bond/credit markets froze solid as money stopped moving… banks started hoarding cash and soon no one would be able to get a mortgage or refinance one… and housing prices started to fall fast.

After that, anyone that had bought a home during the preceding years found himself or herself increasingly underwater.  One couple I know, with an 850 credit score by the way, lost a home to foreclosure and filed for bankruptcy.  He was a very successful dentist and she a hospital administrator.  Their crime?  They got caught buying a home… and selling one at the worst moment in US history.

So, our government pumped $13 trillion into banks, financial institutions and others in this country since the fall of 2008.  We allowed just about any business that wanted to become a “Bank Holding Company,” so they could qualify for the federal bailout programs.  (As an example, did you know that American Express Travel Services became a BHC in order to receive $4 billion in taxpayer dollars?  Why? What do they do?  Arrange vacations for rich people?  Were “they too big to fail,” too?  Nomi covers it in “Pillage.”)

And today, the only mortgage lending in this country comes from the federal government… Fannie Mae, Freddie Mac and the FHA.  So, we’ve already nationalized mortgage lending in this country.  We had no choice but to do that because if we didn’t, there would be no mortgage lending in this country.  Citibank and Bank of America have been nationalized too… I know we don’t call them “nationalized,” but they ARE both nationalized.

(Citibank, for example, has been given over $400 billion in government loans and loan guarantees.  BofA has been received over $200 billion. We still guarantee Goldman Sachs bonds… meaning we are co-signing for their debt.  Want to see the numbers in detail, visit the “Reports” tab on NomiPrins.com… you won’t believe it.)

General Motors had to come to congress for a loan at the end of 2008… why?  Well, for one thing, in 2008, they missed their forecasts by 2.4 million cars… we couldn’t finance one so we couldn’t buy one.  And the bond market was broken, so they couldn’t issue bonds as they normal would.  We lost tens of thousands of jobs when they filed bankruptcy.

Unemployment started rising as we stopped spending.  And we entered a deflationary spiral… the same one we’re in today.  There’s no double dip, it’s the same “dip.  The reason they can say that the recession ended was because of the trillions we were pumping into the system.  Among other programs, the fed bought $1.5 trillion in mortgage-backed securities between 2009 and 2010, but that’s over now, and the downturn is back in the game.

We’re just about at the end of QE2 now, and we don’t have any more stimulus money to artificially stimulate our economic situation… so things are already returning to their downward slide.  Home values nationally have fallen 57 months in a row… and they’ve fallen faster and further than during the Great Depression.

The sooner we face the reality of the situation, the sooner we can start to rebuild our economy.  All we’ve done so far is pump money into insolvent financial institutions, while we’ve let the American middle class sink into an abyss from which we will not recover in my lifetime… and I’m turning 50 on Friday of this week.

You see… all that government spending, as we like to call it… is really US… we ARE the government… it’s OUR money the government is spending.  All those trillions are coming out of OUR pockets, and the pockets of our children and their children.  And a few hundred billion has gone into the pockets of our bankers in the form of bonuses… and no one even seems to care.

And still, all that many people want to talk about is how some homeowner must have been living beyond their means and deserves to lose their home.  Don’t bail out irresponsible sub-prime homeowners, right?

Ridiculous.  We’ve been lied to.  This isn’t a question of wanting the government to take care of everything… they are ready taking care of everything, except the people, America’s middle class.  And we didn’t even ask for much… just a modified loan in order to remain in our homes.  Because millions losing homes benefits no one.

You’re already paying for bonuses at Citibank, Goldman Sachs, and American Express Travel Related Services… and if you can stomach doing that, you can find it in your heart to be in favor of your neighbor getting his loan modified, if for no other reason, so that you don’t lose your own ass in the next few years.  Because don’t kid yourself… none of us is getting out of this one unscathed.

The water is going down in the harbor, are we’re all going down with it.  And as long as we have housing prices falling and no middle class spending going on in this country, we’ll have no recovery… except maybe the recovery that they talk about on T.V. but no one can feel.  And how long do you think people are going to buy into that fairy tale being told by our politicians?

Arizona’s state senate passed a bill 28-2 that would have slowed the foreclosure and given people a chance to remain in their homes by forcing banks to follow the existing laws.  Then the banking lobby made it disappear over weekend.  Another similar amendment was to be proposed, but the banking lobby got that one too.  And last week lobbyist at a meeting of the Arizona Mortgage Lending Association bragged about his success killing the bills I refer to.  Bragged.

“It Takes a Pillage” makes it clear that we need to stop blaming our neighbors because he or she is struggling to keep the family home.  Borrowers didn’t cause this crisis, bankers caused it… but the borrowers are losing their homes while bankers get bigger and bigger bonuses?

Since when is an outcome like that what this country is all about?

There are a lot of great books I wish everyone in this country would read.  But, if you’ve already read other books about the meltdown, or even if you haven’t… whether it’s a starting place or one in a series, I can’t recommend reading “It Takes a Pillage” strongly enough.

What Nomi Prins has to tells us, needs to be heard.

I’ll go ahead and admit something.  I’ve read it once all the way through, and dozens of times in sections… then I bought it on iTunes and I listen to it most nights as I fall asleep… I know… I’m weird… but it’s that good.

(There’s a link below to NOMI’S SITE and then you can get to Amazon from there… and it’s now available in paperback, so it’s only $11.53!  For $11.53 you’ll be so much smarter about the meltdown, you’ll thank me.)

Mandelman out.







“No one takes Wall Street to task like Nomi Prins. But this book is far more than a pointed attack on how greed and bad regulation created a global economic meltdown-it also offers concrete prescriptions for how to prevent the next crisis. Let’s hope Washington is listening.”

James Ledbetter, Editor, The Big Money

“Nomi Prins has applied her unmatched expertise in Wall Street’s arcane methods of turning your money into their bonuses to mapping the recent crisis. In compelling, scathing prose, she shows how the key players escaped being brought to account, and kept their pet officials in power.”

John Dizard, The Financial Times


Some of Nomi’s Bio…

Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.

Her writing has appeared in The New York Times, Fortune, Newsday, Mother Jones, The Daily Beast, Newsweek, Slate.com, The Guardian UK, The Nation, The American Prospect, Alternet, LaVanguardia,  and other publications.

Nomi has appeared on numerous TV programs; internationally on BBC World, BBC and Russian TV,  and nationally on CNN, CNBC, MSNBC, ABC, CSPAN, Democracy Now, Fox and PBS. She has been featured on hundreds of radio shows globally including for CNNRadio, Marketplace, Air America, NPR, regional Pacifica stations, New Zealand, BBC, and Canadian Programming.

Page Rank