Matters Column

Reasons for the financial meltdown spelled out

April 5, 2013
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One of the great advantages of retirement is having the time to pursue an understanding of events that you could not take the time for when you were working.

I recently read “All the Devils Are Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera, and “Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves” by Andrew Ross Sorkin.

The financial meltdown in 2008 has been portrayed as too complicated for average people to understand. It isn't. That's a cover-up. I don't think any of you will have a problem understanding the elements behind these events and their causes.

Greed with self-delusion. I would need a $20 million bonus to satisfy my needs for life. These people on Wall Street could not be satiated by any level of income. It was a feeding frenzy.

Somebody (a genius) came up with the idea of subprime loans: loaning money to people to buy or refinance a home they couldn't afford. All they had to do was bundle these mortgages, get a rating company to give them a good rating, sell them to unsuspecting investors, collect the huge commission and look for a house in the Hamptons.

The greed was not just in Washington and on Wall Street. The appraisers, loan originators, borrowers, etc., on Main Street USA (or Ottawa, 28th Street, etc.) all were contributors to the problem. 

Stupidity. Who could have known that the mortgages would not be paid? The people taking them out had no capacity to pay them. The bad loans had become someone else's problem after the bad mortgages were sold, mixed in with some good mortgages for window dressing. If there was a trillion dollars of these phony assets, eventually it would become everybody’s problem.

They called them toxic assets. No kidding.

Hubris. If you believe you found the holy grail of easy money, you might believe you are really smart. The only problem is that everybody else had the same idea.

Corruption. Money, business and politics mix together generally to the detriment of taxpayers. Supposedly this situation was created in an attempt to provide home ownership to poor people.

When the government wants to raise taxes for education, how many times have you heard that the money is for the children? The biggest financial hurdle facing education is teachers’ pension costs. How does a student benefit from an educator retiring with far superior benefits more than 10 years younger than a private worker is able to retire?

The masters of deceit make simple greed sound honorable.

Testosterone. Mine is bigger than yours. If the guy down the street got a $20 million bonus, I have to get a $21 million bonus.

Leverage. A college freshman in finance understands that leverage accelerates profits and, on the flip side, leverage accelerates losses. They also understand economic cycles. So they understand that the monstrous profits generated in the up cycle are obliterated by the equally monstrous losses high leverage creates in the down cycle.

What they wouldn't understand was why the perpetrators of this mess got to keep the profits when the cycle was up, and the taxpayers paid for the losses when the cycle was down. They don't understand because they have not yet been exposed to money’s corruption of Washington politicians.

An interesting thought. None of these companies made anything — not cars, widgets, food, software, gold or anything. They were not farmers, manufacturers, miners or builders. They were paper shufflers. They shuffled the papers to show mega profits, which they took. The market reshuffled the papers to reality to expose mega losses that, when discovered, were paid by us. And nobody went to jail. Willy Sutton must be smiling. No cops. No bullets. And you quietly leave the scene of the crime in a chauffeured Bentley for a fundraiser at the White House.

So the subprime crisis joins the S&L crisis and dotcom bust as the great unforeseen financial crises in our lifetime.

The next big unforeseen, unknowable event will be the collapse of the financial system due to government debt. Washington will weep and wail about how this happened because of unknowable forces that are just too complicated for Americans to understand. Democrats will wail that it was because the rich refused to pay their fair share. All you have to do is look at Detroit for the Republicans’ culprit. 

Let’s see: Do you know if you spend uncontrollably beyond your income, you will eventually become insolvent? They don't think you know that. And a lot of you don't. Those of you who do know have a major obligation. Vote!

Paul Hense is the retired president of local accounting firm Hense & Associates. He also is past chairman of the Small Business Association of Michigan.

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