What It Do: The Set-Up

—by , December 18, 2013

During the financial crisis of 2008, a tsunami of home foreclosures—mostly from within the subprime lending market—caused seemingly apocalyptic toil among the financial markets, even causing the venerable investment firm, Lehman Brothers Holdings, to crumble into a cloud of bankruptcy and destroyed wealth.

For those unfamiliar with subprime lending, it involves mortgages which are given to people who, for whatever reason, wouldn’t normally qualify for traditional financing. On a rational planet, it would represent a way for lending institutions to bend the rules on behalf of people who can clearly afford the loan but don’t appear so, on paper.

In the economic funhouse of 21st century capitalism, the subprime market became a Wild West of financing, with loans amounting well into the six figures awarded to people with little-to-no documentation or proof of income. The vast majority of these loans were made under an artificially low “introductory rate,” and after that, an adjustable interest rate took over, amounting to payments that ballooned as much as triple their original amount.

When people who really shouldn’t have been awarded that loan in the first place found themselves facing massively inflated bills, many of them were unable to keep up, and a wave of foreclosures began. Shocking, that.

Acolytes of the Holy Church of the Financial Industry—in which there can be no wrong done in the name of capital gains—take it as a matter of faith that the responsibility for the subprime-fueled crisis of 2008 can be laid at the feet of Jimmy Carter, Bill Clinton, and the hordes of irresponsible poor people looking for a handout from Fannie Mae and Freddie Mac. If only they had known their place and stopped trying to be all inconveniently uppity, the global economy would apparently be sailing along like a vacation yacht in Somali waters right about now.

While the policy changes put forth by the Community Reinvestment Act (signed by Carter and updated by Clinton) appear to have been aimed more at providing the appearance of change through manipulation of statistics than any real type of community investment, the CRA wasn’t what caused the crash, not by a long shot.

It was actually another Clinton-era change in policy that made way for the 2008 crash: the 1999 repeal of the Glass-Steagall Act which prevented lending institutions from selling securities. The law had been enacted in response to the banking practices of the ‘20s which led to the crash of 1929 and subsequent economic depression. Perhaps to secure his spot among the global elite after all that Lewinsky unpleasantness, President Clinton signed the repeal in the waning days of his administration.

This allowed the creation of mortgage-backed securities and credit default swaps, the two main ingredients of the financial crisis. With mortgage-backed securities, thousands of individual mortgages were bundled, split up into bonds, and sold to investors. Because of the complex trickery involved in the creation of these bonds, people and institutions were led to believe they were investing in AAA-rated securities, when they were often throwing their money into a bag of poorly-documented subprime loans.

Credit default swaps were described as what amounted to insurance against losses in the case of default, however—as with the mortgage-backed securities—the actual structure of these so-called “financial instruments” was such that it became another way for firms such as Goldman Sachs to ensure their ability to profit wildly no matter what the market did. In fact, there is no shortage of evidence to point to the idea that some firms (*ahem* Goldman Sachs) pushed securities they knew were on the verge of collapse because of the payday represented by the credit default swap.

If you’re somewhat confused, don’t feel bad. This shit was designed to be confusing. Makes it harder to catch them with their hand in the cookie jar.

And, believe you me, their peanut-buttery hands were definitely all up in the cookie jar. During the heyday of subprime lending, everybody was getting paid on every mortgage signed, from the broker, to the army of middle-men who facilitated the transformation from semi-fraudulent loans to AAA-rated securities, all the way up to the bosses at the top. Straight gangster shit.

These kickbacks were essentially hush money. No one wanted to ask too many questions about the hand that wrote the checks that paid the bills. And then, when it all went bad, everyone pointed the finger at the regular-ass people whose main crime was wanting to live in a regular-ass home and hoping that the future would make a way.

The financial crisis of 2008, represented by the $700 billion TARP payout, along with a literally uncountable avalanche of back-alley Federal Reserve cash—not to mention the cash collected from the poor suckers at the bottom of the scam (the mortgage holders)—was nothing more than a globally executed extortion racket.

But that was just the set-up. The real game is just beginning.

Next week: Dirt Bike Cops.

 

Alex Benson can be reached at alexb@theaquarian.com


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