Saturday, September 1, 2007

Sub-Prime: in the "that really bothers me" vein again

As a matter of opinion, I think this whole business of the Sub-prime crisis has been brought on for the most idiotic reasons. I saw this coming years ago when the Washington Post would run articles claiming that Lenders were still discriminating against Minorities; the proof that this was happening would be statistics showing that, say, 7% of loans went to Af/A's while they represented 10% of the population. That would be the full extent of the evaluation! There was no thought of saying that Black applicants tended to be less qualified, not in the articles I saw. I guess that would have been racist.

Now, I don't need to be told that Lenders haven't necessarily had the most stellar record when it comes to non-discrimination. I'm sure in the old days a loan officer could reject a qualified minority applicant and just be following some sort of unwritten company policy that maintained such a policy was best. Furthermore, there have been plenty of claims over the years that banks and loan companies would simply red-zone entire districts as off-limits to loan approval. In fact, maybe minorities had been suffering from residual discrimination when these articles were written. But the writers were not proving anything: you don't have to take a course in statistical analysis to see that such arguments are flawed. In fact, I'm sorry, but my opinion has been that such articles have been completely dishonest. I don't believe the editors for one second believed that such lame analysis proved anything.

And, yes, I think there was some sort of agenda the newspapers were following. The ACORN organization [] apparently really pushed this. Now, of course, they are screaming bloody murder. Government must bail these innocent people out! I'm hearing a little grumbling about that, though. How about people who put nothing down? Maybe I wouldn't want to be in their shoes, but at the same time, it hardly makes sense to see them profit from a bail-out, either.

I was aware of some of what was going on. I know somebody who decided to step in and help an employee who was getting himself in trouble. This employee was from South America and really was somebody who was trying to get in on the American Dream. Unfortunately, he was attracting predatory businessmen. One of the things he got talked into was buying a nice new pick-up truck with all the fixings... this on little or no money down and on an interest-only loan! Now this kind of loan is designed for someone else, someone who was waiting to cash out a CD, someone who was expecting to inherit money, etc. Not some working stiff who was going to watch his car loan get upside down on him. And surely someone at the Lending institution was supposed to help make sure this didn't happen. Supposed to unless, hmmmm.

I'm sure the thinking was that Lending institutions could be forced into making some loans that were a bit riskier and that, well, if a little less profit was made out of the billions coming in, so be it. The problem of course is that when you ask businesses to do this sort of thing, they react in the way that is in their nature: they proceed with the profit motive. Wrong method for social engineering. I think it brings out the worst in a business to have some authority lean on it and advise it to do things that have been against the best policies. And to top it off, it greases the chute for the bad apples in management to get an upper hand and take over. In this case:

"Hey, we're being asked to make riskier loans. OK, so be it. First we get rid of the old fuddy-duddies in the company who get in the way. Next we get these shaky applicants to sign up for some zingers: interest-only when it makes no sense, balloon loans when ill advised, etc. In the short term, this kind of stuff has really made the bonuses pour in. Let's get in on it!"

I have in fact heard that one of the problems with bad policies in Banks and other Lenders has been just that: too much of a time-lag between the later ill-effects of bad management and the initiation period of the ill-advised practices. Businesses, and, well, just about everything in general can suffer from this, but for Lenders, it's a case where big bonuses get paid out in the interim, it seems. Another interesting aspect is that in the old days, the current panic would mean a "run on the banks." Nowadays, the panic is slamming certain Hedge Funds and other related markets.

Well, I for one am not ready for the big bail out. I guess it would be hard to totally oppose some kind of help for certain cases, and surely we are going to see something happen by politicians in the matter. It's just too big of a Political Football. I don't have all the answers, either, but one thing I really want to see is some honesty. Thanks again to those sources who have been honest. Let's learn the correct lessons from this.

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