Eighteen months ago, President Barack Obama tasked the Financial Crisis Inquiry Commission to find out the cause of the financial meltdown, which in turn resulted in the trillions-of-dollars bailout that will be passed on to our children. Phil Angelides, chairman of the commission, was on TV a few days ago and he piqued my curiosity. Excerpts from the report are in quotes.
"In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly. For example, as of 2007, the five major investment banks - Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley - were operating with extraordinarily thin capital. By one measure, their leverage ratios were as high as 40-to-1, meaning for every $40 in assets, there was only $1 in capital to cover losses. Less than a 3-percent drop in asset values could wipe out a firm. To make matters worse, much of their borrowing was short-term, in the overnight market - meaning the borrowing had to be renewed each and every day. For example, at the end of 2007, Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market. It was the equivalent of a small business with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every day."
And it wasn't just the private sector at fault. The Federal National Mortgage Association - nicknamed Fannie Mae - and the Federal Home Mortgage Corporation - nicknamed Freddie Mac - were created in the 1930s as part of Franklin D. Roosevelt's New Deal to deal with the great depression. Although the two companies are privately owned and operated by shareholders, they are protected financially by the support of the federal government.
"By the end of 2007, Fannie's and Freddie's combined leverage ratio, including loans they owned and guaranteed, stood at 75-to-1. They used their political power for decades to ward off effective regulation and oversight - spending $164 million on lobbying from 1999-2008."
Those two blended private/public agencies paid out hundreds of millions in salary to top executives and we still are trying to undo their mess. But not all the blame falls on them.
"From 2001 to 2007, national mortgage debt almost doubled, and the amount of mortgage debt per household rose more than 63 percent from $91,500 to $149,500. Nearly one in 10 mortgage borrowers in 2005 and 2006 took out "option ARM" loans, which meant they could choose to make payments so low that their mortgage balances rose every month." And of course with all that money floating around, you are going to get crooks.
Mortgage fraud grew 20-fold between 1996 and 2005 and more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2009 at $112 billion". (To put that in perspective, the total yearly budget for the whole state of Iowa is $6 billion).
We had safeguards, but they were part of the problem. When all those mortgages were packaged together for resale they were rated by a company called Moody's. "From 2000 to 2007, Moody's rated nearly 45,000 mortgage-related securities as triple-A. This compares with six private-sector companies in the United States that carried this coveted rating in early 2010. In 2006 alone, Moody's put its triple-A stamp of approval on 30 mortgage-related securities every working day. The results were disastrous z- 83 percent of the mortgage securities rated triple-A that year ultimately were downgraded." (One mortgage security may be thousands of home mortgages combined).
I know I tossed out a lot of numbers and it makes it hard to read. Reread it. The size and scope of our nation's debt is immense and I'm afraid it will change our lifestyle. I'm going to close with a final line from report. "It falls to us to make different choices, if we want different results."