Mortgage Crisis - Audit Reveals Lenders Covered Up Risky Loans

Sometimes I wish there was a TIVO for the radio. I was listening to NPR this morning as they dissected the mortgage crisis and looked at the root causes as discovered by auditors. As best I can recall the chain of blame goes like this.

Subprime lenders started by making essentially bad loans. People who could not afford the price of the house they bought were given loans assuming that a certain number of these would be “bad”. Why? Well there is a lot of money to be made lending money even if it’s to people who you are pretty sure will default in a few years. Until that time, you can make the commissions and interest and then sell the loans in big bundles to an investment company. When you do that, you pass the bad loans along with the good ones and you the initial lender get out with a bundle of cash!

Next the investment company that bought the paper, bundles it up and sells it to still a larger firm, who accepts that there will be a certain number of loans that are not worth the paper they are written on, but the percentage of good loans makes it an attractive investment. Besides you are not going to keep it for long. Again the loans are bundled and sold and more cash is pocketed.
As many times as this happens the investors and sellers know that some of the loans are worthless, yet because there is so much money to be made they hold their nose and sell them anyway.

There is blame enough to go around. Buyers shouldn’t have gotten in over their head with more house than they could afford. Sellers shouldn’t have sold them more house than they could afford, and investors shouldn’t have bought the worthless paper. But there was so much profit to be made along the way, so why not!

So now Congress is looking at the whole messy debacle and trying to figure out what to do. Meanwhile there is an audit going on to see exactly who knew what and when. So far it looks like the big investment houses were well aware of the problem. Let the lawsuits begin!

The whole thing begins to sound like a deal that would warm the hearts of the Ferengi on Star Trek. For “non-trekies” they are a race of aliens motivated entirely by profit. Their holy book is called the “Rules of Acquisition” and making a fast buck, or whatever currency they have is their sacrament.

Ferengi Rule of Acquisition # 125. A lie isn't a lie until someone else knows the truth .

Sounds a lot like Wall Street doesn’t it?