Some of you know that I worked in the financial sector in New York right after I graduated from college. Well, here's the whole story. I worked for a British commercial paper brokerage firm called Eurobrokers on the 31st floor of Tower One. We traded commercial paper and foreign currency and arbitrage and swaps. We didn't trade stocks or bonds or commodities. Basically, we did a lot of trading that the average person don't know exists.
This is how it worked. All of our customers were banks. Not small banks like the place you probably have your checking account, but big international players like Société General and the Royal Bank of Scotland. The only bank I'd ever heard of before I went to work there was Citibank, and it wasn't the biggest. We didn't deal with the little guys. I remember one day PNB (Pennsylvania National Bank) tried to trade with us and their offer sat on the far left of the board. No one would touch it because no one knew their track record.
So basically how we did business was that Soc Gen would call up on the phones (that didn't ring) and say to their rep in our office, "We have 100 to go overnight at 8 and a quarter." This meant that Société General wanted to sell $100 million of risk to a buyer who would pay 8.25% for 24 hours. The risk they were selling was based on loans made by them and by other smaller banks whose risk they bought into.
Most of the loans we made were overnight or 3 months. The occasional 6 month would get done, but the 12 mo, 2 yr and 5 yr sections of the board were almost always dead. This was a fast-moving market and no one wanted to accept risk for the long term.
Flash to two years later when I worked for Iyo Bank on the 79th floor of the same building. Iyo Bank was too small to deal directly with a firm like Eurobrokers, so we bought parts of the risk of banks like Mitsui and Sumitomo. I forget who it was, but one of the big Japanese banks had just made a loan to AMR Corp (the company that owned American Airlines) and my boss and I were trying to decide if Iyo wanted to buy into that loan for $10 million. If we did, then the bank that made the loan would be trading our risk alongside theirs in any commercial paper trading they do.
So you see, all the loans get bundled together as "risk" and no one keeps track of what individual loans banks are trading. They're only doing it for overnight, and the transaction is over before you can think about it, really. It's only a paper transaction anyway. It's not like Sumitomo is suddenly going to send the AMR loan paperwork to Iyo Bank. By the time the paperwork was couriered to our office, the loan term would be over!
In the sub-prime crisis, little local banks and mortgage companies bundled their loans together and sold them to bigger banks and mortgage companies. They in turn sold them to these international banks that tradae in the commercial paper market. When the commercial paper market trades, it does so in a sea of screaming traders with a phone on each ear. It doesn't stop to look at paperwork and investigate what risk they're absorbing. It's not the way it works. These commercial lenders make deals based on the reputation of the banks involved.
Let me say that again because that is what is at the heart of this breakdown in the system: COMMERCIAL LENDERS MAKE DEALS BASED ON THE REPUTATION OF THE BANKS INVOLVED.
When I was working the floor, we would take any loan Soc Gen or RBS had to sell, but we would want a better rate for Japanese banks' loans. This is becuase in the 1980s, Japanese banks were still fairly new to the marketplace. They had lots of money to trade, but they hadn't been around long enough to have a long-term reputation. So we were cautious with them. I remember that I used to market the "Prime" banks on the board in green. They routinely traded more money at lower rates than all the other banks. And I specifically remember one day when my mentor had about $250 million from Soc Gen to trade and everyone in the place went nuts making her offers. She went home that day without about six figures worth of commissions!
I remember another day GMAC popped up on the board with some loans to trade. We kinda looked at them and thought, "Huh?" No one took their trades that day. They were too new. It didn't matter that we all knew who GMAC was. They had no reputation as a player in our market. So we didn't trade with them.
You see? Reputation is what counts and banks are very conservative about making these blind trades with banks they don't know and trust.
So now you understand why banks have no idea how many bad debts they assumed in this sub-prime crisis. Banks traded with other banks that they trusted, having no idea that those banks had bought bad loans. No one knew. Not even the banks who made the loans.
Let me explain something else: it is NOT Wall Street's fault!
It's Main Street's!
Let me explain that. About three years ago, I bought a house. When I went to my mortgage company, they told me that my credit was so good, I could have any amount of mortgage I wanted. So I tested this. I showed them a property in Bucks County -- a horse farm -- that was selling for $2.8 million. They said, "Sure!"
Ten years ago, I had a hard time getting a mortgage on a $114,000 house when both I and my husband had good, permanent jobs aming close to six figures. Now I was applying for a loan with a part-time job, income from a small business, no other assets, and no permanency whatsoever. And they were going to give me $2.8 million?!?!?!!
(I didn't buy the horse farm. I'm not an idiot...)
THIS is the problem. Mortgage companies saw that house prices were increasing rapidly, so they made scketchy loans to whomever had a good credit score. The idea was that, if they couldn't pay the loan in a year, they could refinance. And because the housing market was soaring, the amount of equity in their house would make up the shortcomings of their finances. It was a brilliant scheme as long as the housing market kept going up.
But, of course, it didn't. Last summer, prices started to fall, and by August, mortgage companies had a problem. I remember because we were in a 3-year ARM and we were trying to refinance into a fixed rate. We applied for the new mortgage in April, but our mortgage guy was a complete lazy ass and didn't actually get us bought until July. At that point the value of our home dropped by something like $70,000. The mortgage they offered us would no longer cover the amount of the ARM we wanted to replace. So we were stuck with the old mortgage.
People have been complaining that the sub-prime mortgage thing is the fault of speculators. That's true. But it's not just people who bought more than they could afford who are getting soaked. It's people like me. I bought only as much house as I could handle on my income, and I'm in trouble anyway!
Wall Street didn't come to me and make me a mortgage. The guy at Weichert Realtors did. Then then he sold my loan. And then they sold it again. And again. It was sold three times in the first three months I had the mortgage.
Now GMAC has it and they're trading it on the commercial paper market in NY, in one of those offices like the one I used to work in. Luckily my loan's not in default. But it so easily could have been...
So it's not your big-time Wall Street traders who have created the problem. They trusted GMAC to make good mortgage loans like they always have before. But a lot of homebuyer defaulted. GMAC was too greedy to get their money and wasn't stringent enough in their loan-making practices. And now a good deal of the loans being traded have rot at their center.
Is it the fault of Wall Street that mortgage companies who used to be reputable suddenly started making bad loans? Wall Street doesn't spend months going over every loan in the portfolio they're trading. Someone screams, "I've got $25 to go at 10%!" And someone else screams, "I'll take $5 of that!" And a deal is done in a second. That's how it works.
So now you see the problem. Stop being so provincial and blaming this on these Big Bad Corporate Raiders! Stop blaming the Titans of Wall Street! This was the work of your cousin Joe down at the bank and your friend Margaret at the Realty office. A whole bunch of people made a whole bunch of little loans that were bad. And the mouse roared and shook the pillars of the financial industry.
Now... This bailout package. I am SICK TO DEATH of people making it political. Check your history books. Do you know why the Great Depression of the 1930s happened? BECAUSE OF A REFUSAL TO ENACT POLICY!!! Washington figured that the people who lost money and the business and banks who collapsed deserved what they got, and let them fail. When Roosevelt got in office, the first thing he did was pass the New Deal, which still took ten years and a World War to fix everything.
The problem here is that, as wrong as the failing businesses might have been, you cannot stand by and watch the financial sector collapse. You have to prop it up. You have to throw good money after bad.
What would you prefer? Paying higher taxes or having no job? I'll tell you what: I would prefer to pay half of my income in taxes than have my business go under. If my business goes under, I will literally have nothing. If they take my house, my cars, my printers... they take everything. I have no trust fund, no rich relatives, no one with a big bank account who will let me sleep on their couch. I will be homeless. DO YOU UNDERSTAND?!
And where will you be? Is your company doing so well that they won't lay you off? Will your employer be able to make payroll in a month if the financial sector goes under? What bank issues your paychecks? Will it be there next week?
This is NOT the time for partisan bullshit! This is not the time for whining about "Wall Street versus Main Street". If we don't act quickly (and it's already been a work week's worth of nothing), our economy will collapse. And our economy is the biggest in the world. Do you think that Europe and China and Japan and Australia are going to do just fine without us? Do you think that your job will be secure when your boss can't pay the rent anymore?
Make no mistake. This is huge. And something must be done IMMEDIATELY!!!
The damage is done. We're in the middle of a hurricane and we're sinking! Let's not argue over who put the hole in the boat!
The patient is on the table and his heart has stopped. Is now really the time to discuss treatment options?!?
I've turned commenting on, but if you post ANYTHING remotely political, I will delete your comments and ban you. I am not in the mood for any "The Evil Republicans" "The Wasteful Democrats" bullshit. This is SERIOUS!