September 2018 marked the 10-year anniversary of the Lehman Brothers bank collapse. At the time, was the fourth largest investment bank in America. But it had almost as much debt ($619 billion) as it had in assets ($639 billion). Dubbed, the “Lehman Weekend”, the world witnessed the largest bankruptcy in US history. It led to a huge Recession and a near meltdown of the global economy. In its wake, millions of ignored victims. Everyone remembers the housing market crash of 2008. It was the biggest US economic crisis in nearly 70 years. Like all such man made disasters, the root causes are greed and fraud. It was never investigated as such. It was simply too big a fraud event for that.
In the early 2000’s the US housing market was booming. More people were owning homes than ever before due to “subprime mortgages.” A subprime mortgage is a loan given to people with low credit scores and incomes. These are individuals would not normally qualify for standard “prime” loans. Subprime mortgages carry more risk so typically there are unfavorable interest rates attached to these loans. During the housing boom, banks were giving out mortgages left and right with very low requirements. This is because it brought in quick and easy money. Anyone and everyone could get a mortgage.
Lots of mortgages meant that banks bundled them into lots of bonds. A bond is a long-term loan agreement. Money from homeowners’ monthly mortgage payments gathered and paid to the investors who bought the bonds. Subprime mortgages more than doubled during this time. The problem is that there was no transparency or accountability. These mortgage-secured bonds were a mix of risky subprime and less-risky prime mortgages. That meant that investors weren’t aware of the risk of their bonds. When a bond is mortgage-backed its supposed to make the loan more secure and protected. But investors were never told that their bonds contained many risky mortgages as securities.
When those adjustable interest rates kicked in on the subprime mortgages, the inevitable happened. Homeowners were unable to keep up with the rising monthly payments. Refinance wasn’t an option either because housing prices had fallen drastically. The housing boom went bust. Now mortgage lenders were in a tough situation. Banks became inundated with serious debt. But due to lack of transparency, the banks didn’t know the value of their portfolios. So when audits revealed some bonds containing as much as 45% of subprime loans, banks were in trouble. Instead of being truthful with investors, the banks lied and created a fraud opportunity. Journalist Felix Simon writes,
…the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors. Here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.
That’s mortgage-securities fraud. By the end of 2007, at least 100 mortgage companies had declared bankruptcy or were sold. This spelled doom for the major banks. First it was Bear Stearns, the fifth largest investment bank. It was near bankruptcy but was saved by a government loan and purchase by JP Morgan Chase. It was considered “too big to fail.” Then came the 187 million bailout of Fannie Mae and Freddie Mac. By the time the Lehman bank needed rescuing it was too late for the 150-year old firm. The bank went bankrupt and the world would never be the same.
The aftermath highlighted a dreadful inequality in America. Many investment banks got bailed out while lower income Americans were left out in the cold. 10 million American families lost their homes. African American and Latino families were hit harder than other ethnic demographics. The message to those groups was that they did not matter. The crisis drove a bigger wedge into the systemic inequality faced by people of color in America. An impact that can still be felt today. These people were the victims of mortgage fraud. Their lives changed for the worse and they were completely ignored and then forgotten.
Two major frauds: mortgage-securitization fraud and mortgage lending fraud. One impacts the rich, the other the poor. One received several bailouts. The other got nothing. For the losers, it felt like the criminal was given the life jacket while the victims were left to drown. After all, the banks knew that subprime mortgage recipients would have a hard time paying them back. They also profited off of those bad loans without informing investors. Very few were called to account or brought before the courts.
All of this has led to a deep public distrust of Wall Street, banking generally, a distrust the home investment process, and a disappointment in the government who turned its back on the people. Many say we are on the verge of another economic collapse. What industry will be affected next? This time, will the people accept being defrauded by the financial institutions and even the government? How often do people need to be so blatantly scammed before they inform themselves about fraud and how it functions? Is this the best that American capitalism can offer consumers? If people took a little time and effort to become fraud aware, such epic misery can be avoided.