Iceberg Right Ahead! The Triple A Rating Being Downgraded Started The 2009 Great Recession
By John Wright
On Tuesday – August 6th, 2013 — the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) filed two separate civil lawsuits against Bank of America. The lawsuits basically allege that Bank of America made misleading statements and filings in disclosing important facts about the mortgages. This would require the DOJ and SEC to file separate lawsuits against Bank of America for what both the DOJ and the SEC regulators said was a “FRAUD ON THE INVESTORS”. The two parallel suits were filed in U.S. District Court in Charlotte last Tuesday on August 6th, 2013.
Both complaints allege that the fraud involved $850 million dollars worth of residential mortgage-backed securities. What does this do for HOMEOWNERS who claim to be a victim of mortgage fraud and are facing foreclosure? It does absolutely nothing. That’s right! The lawsuit is not about the fraud committed against the homeowner — it is about the fraud committed against the INVESTOR. Now this begs the obvious question. Why did the DOJ and U.S. Federal Government seem more interested in filing lawsuits that protect the INVESTOR from fraud – rather than – filing lawsuits that protect the HOMEOWNER from fraud? The answer might lie in the role the INVESTOR played in the Great Depression of 1929. It’s ultimately the reason I thought we would take a walk down memory lane in American history.
The signs of the Great Depression started somewhere around September 4th, 1929 after stock prices began to fall. However – the shot that would be heard around the world – would actually be on the day the stock market crashed on October 29th, 1929. It would be a day that went down in the history books as Black Tuesday.
A stock market crash is basically triggered by a social phenomenon. External economic events — combined with public behavior — and psychology in a positive feedback caused many stock market participants to sell. This sell-off caused a significant loss of paper wealth and a dramatic decline of stock prices. This occurrence spanned over a significant cross-section of the stock market. It would trigger a disastrous chain of events. Practically overnight — the stock market crash of 1929 caused devastating consequences to each industry. Demands plummeted. Then practically every city – state — and country in the world was INSTANTLY affected. The countries hardest hit were the ones most dependent on “primary sector industries” such as cash cropping – mining — and logging. Farming and rural areas suffered catastrophic losses as crop prices fell by approximately 60%. Construction was virtually halted in many of the industrial countries. People lost jobs. Personal income and tax revenue – profits and prices dropped drastically – while international trading plunged by more than 50% percent. The social phenomenon of investors panicking might be better described by the phenomenon that occurs when swarm of locust breaks out in the form of a biblical plague. There are certain conditions that create the phenomenon.
There have been many economic historians that attribute the Great Depression to the sudden collapse of the United States stock market prices. However — many experts disputed this conclusion – because they said that the stock market crash was only a symptom rather than a cause. Other experts concluded that the main contributing factor was the failure of major banks. Sound familiar? They believed the bank failures were a result of the commercial banks’ involvement in investments on Wall Street. These failures would result in the banks not taking the risk to loan money. This was based on the uncertainty of the times. Loaning money simply carried the risk of default if no-one paid their loans back. Therefore – during times like this — the banks began to hoard their money. This was the beginning of a domino effect. This is based on the fact that large and small companies NEED LOANS to survive.
A perfect example is what happened to the automobile industry during that time. The automobile industry usually does not take in any money for the cars they make until they sell them nearly a year later. This means they need loans to make payroll. Sound familiar? Do you remember how the federal government had to bailout the automobile industry in 2009?
The industry’s inability to make loans resulted in massive unemployment and the loss of alternative job resources all at once for most major industries. Production was at a standstill. This created a domino effect; anyone who made money from selling their products to the automobile industries was now also suffering. This would be much the same for other industries that the nation’s economy depended on in 1929.
The entire global financial trade market was frozen the minute the banks stopped loaning money. Unfortunately — in 1929 this led the stock market investors to liquidate and sell their stock before it was worth zero. The problem was that they were all doing it at the same time. This was the breaking point in 1929. The massive sell-off would cause the stock market to crash. It was a dark time in American and world history. The effects of the Great Depression would not subside until after the end World War II.
As a result of the Great Depression — new laws were created to prevent a catastrophe like this from ever happening again. It was a phenomenon that experts would study even until today. This would result in laws being made to perhaps avoid another stock market crash and Great Depression in the future. The federal government and the laws simply needed to make sure the banks were never TOO BIG to cause the American economy to fail in the way it did in 1929.
There was only one problem with these laws and regulations in the future. The problem was that many experts during the Nixon years and after felt that the laws had eventually become outdated. They realized that these laws that were born in the 1930’s did not allow the banks to compete on the global market. This problem would lead up to the United States seeing more legislative and regulatory changes in these laws from the period of 1980 to 1994. It was not a diabolical plan to destroy the American economy though. It seemed to only make sense at the time. That is why both Democrats and Republicans had worked together in seeing more legislative and regulatory changes since the 1930’s.
One of the laws made in the 1930’s made it illegal for the banks to do business over state lines. This would then be repealed during the Reagan administration. Another one of the laws was created to stop the banks from messing with investments on Wall Street. This law was called the Glass-Steagall Act. This law would then by repealed by the Clinton administration in 1999.
After the Glass-Steagall Act was repealed the banks were able to once again mess with Wall Street. Two of these investments created by and now available to the banks on Wall Street were Mortgage-Backed-Securities(MBS) and Collateralized Debt Obligations (CDOs). Mortgage-backed-securities are fixed-income investments that generate interest revenue through pools of home loan mortgages for investors. MBS investors basically own an interest in a pool of mortgages that serves as the underlying asset for the MBS. The commercial banks who originated these home loans turned them into mortgage-backed-securities (MBSs). The mortgage-backed-securities would then be sold to investors around the world. The credit agencies gave these securitization transactions (CDOs and MBSs) triple A (AAA) ratings. The investors were attracted to the AAA rating that basically assured the investors that there was no risk. THE ECONOMY WAS BOOMING!
There was only one problem. The banks were giving loans to people who could not necessarily afford the mortgage payment. They did not care because it would be somebody else’s problem once they sold them on the open market to investors. Consequently — on July 9th, 2007 — the credit agencies downgraded the AAA ratings once many homeowners began to default on paying their mortgage payments . It might have been soon after this that former Treasury Secretary Hank Paulson and current Federal Reserve Chairman Ben Bernanke started yelling out “Iceberg right ahead”for the American economy.
They downgraded the AAA rating after less money streamed into these loan pools that investors in the United States and around the world had invested in. That is why it was what happened on July 9th, 2007 that would be the beginning of what would later be called the Great Mortgage and Great Economic Crisis of 2008.
The Great Economic Recession of 2008 and 2009 was marked by a global economic decline that began in December of 2007. This decline began after the loans were downgraded from the AAA rating. The investors simply felt it was too risky to invest now. This was when practically –overnight — investors stopped buying Mortgage-Backed-Securities. This is where problem starts. The commercial banks no longer had anyone who wanted to buy the loans they originated because of AAA downgrade. The commercial banks were now stuck with the loans they had already originated before the downgrade in the rating of the loans. The investment banks were stuck with the loans they had bought from the commercial banks before the downgrade in the rating. Both the commercial and investment banks no longer had anyone who wanted to buy the loans after the downgrade. The commercial banks had borrowed the money to make the loans to the homeowners while thinking they could sell the loans to the investment banks. They were now stuck with the loans as a loss on their books. The investment banks had borrowed the money to buy the loans from the commercial banks while thinking they could sell them. The investment banks were now stuck with them as a loss on their books when there were no investors. Now there was no money to pay the loans back that the commercial and investment banks had taken out to sell these loans to the investors. They were planning on paying off their debt with the sale of those loans. Now there were no investors. No investors meant that the commercial banks would stop giving loans. It was at this point the game of musical chairs and hot potato had simply stopped. This meant that whoever was standing up when the music stopped playing lost money. In this example the ones who lost money were the homeowner and commercial banks and investment banks and investors and anyone connected to them. That is why in 2008 the American economy was now on its way to what would go down in history as the greatest economic collapse since the Great Depression. It would be called “The Great Recession of 2009.”
Therefore — in September of 2008 — the economy took a particularly sharp downward turn. Now — as mentioned before — investment banks such as Merrill Lynch and Lehman Brothers and Bear Sterns others were stuck with downgraded loans they bought from the commercial banks. This made it to where the investment banks were about to collapse like dominoes. The collapse would make it to where the investor’s money would collapse with it. The problem was that some of those investments were in the form of Retirement Funds for teachers and firemen and things like that.
The commercial banks were frightened. They could see what was coming. THAT IS WHEN THE COMMERCIAL BANKS STOPPED LOANING MONEY IN 2008. Sound familiar? Do you remember that was what happened just before the stock market crashed in 1929? The banks had stopped loaning again in 2008. In 2008 the commercial banks would not loan money to new homeowners nor would they refinance existing loans. This was when the banks began withdrawing equity lines of credit. Do you remember that time? In 2008 many homeowners were confused as to why their equity line of credit had just been pulled. It was not just the homeowners the banks refused to loan money too though. Unfortunately — they also refused to loan to companies like GE or any of the automobile industry companies — even though these companies might have had excellent credit. Once again — the entire global financial market was frozen — just like before the stock market crash of 1929. This was when companies began laying people off. That was why unemployment rose dramatically in 2008.
This all seemed to be taking place during the time George Bush was President in 2008 and 2009. In 2009 former President Bush had just won the war in Iraq. So George Bush had secured the oil that our nation needed to be an economic superpower. Unfortunately – even though George Bush was reassured that America would continue to be an economic superpower on the global stage – he was about to find out that the greatest threat to the American economy was right here in own backyard the entire time. Former President Bush would find this out after Former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke informed him that the United States and the world economy was about to collapse in 72 hours. It was reported later that this was when President Bush was informed that the only way to stop the events of 1929 from being repeated would be to force the commercial banks to take a bailout in the form of a government loan. They had simply learned from the Great Depression of 1929 that early government intervention could have stopped the Great Depression. It was reported that President Bush at this time asked what would happen if they did not give the bailout money to the banks. He was told that he would probably need to call in the military to control the streets of the United States of America once riots broke out. That is when Bush agreed that the banks needed the bailout. Now Bush needed to convince Congress and the American people that the federal government needed to bail out the banks to avoid disaster.
Problem One: They had less than 72 hours to convince both sides of the aisle in Congress to give them a blank check to give to the banks. Congress has not been known to agree on approving money for a toilet seat — let alone — approving a blank check to the banks from the Treasury Department in less than 72 hours.
Problem Two: The banks might not take the bailout money. They are private banks and the government cannot force them to take it. Why would the banks not take the bailout money? The banks were afraid that by taking a bailout they would appear to be weaker than their competitors resulting in loss of investors. This would require every major bank who was sitting at this table that day to accept the bailout money. This way one would not appear to be weaker or stronger than the other. The problem was that if one bank refused to take the bailout money — none of the banks would be given the bailout money. The other problem was that one of the banks at the table needed the money not to collapse. That bank was Citi. This day in 2007 would end up being an uncommon dialog for the banks. That is based on the fact that the banks are not usually in the business of spending time and money on saving their competitor from collapse. That is why the talks between the federal government and bank CEOs that day must have been equivalent to trying to teach a cat to not eat a bird. Not to mention that the federal government was also asking them to buy failing investment banks. That is why the federal government would need to create all sorts of incentives and sweet-heart deals to try and get the commercial banks to take the bailout money. Consequently — this is why banks were given the bailout money with no strings attached. The federal government was simply afraid they would not take the money unless there were no strings attached to the money. The end result would be that the commercial banks agreed to take the bailout money as a loan at 1% interest. Then in 2008 Bank of America bought investment banks such as Merrill Lynch. Wells Fargo bought Wachovia. JPMorgan acquired Washington Mutual and Bear Sterns. The banks bought what they were told to buy to prevent a collapse of the investment banks. However – in the case of Lehman Brothers – the federal government chose not to bail them out. This was based on the fact that Lehman Brothers had no assets to qualify for the bailout loan. The other investment banks did. Lehman Brothers only had those toxic mortgage-backed-security loans that nobody wanted. Lehman Brothers would be forced to file bankruptcy. This was the shot that was heard around the world. The domino effect had begun. The locust-like investors might now instantly start to swarm. The investors began to fear the other investment banks could collapse. That is why it was at this point the United States and the world could now be on a crash collision course with the events that caused the Great Depression over-night in 1929. It was at this point that countries in Europe began to INSTANTLY feel the metaphoric earthquake of their American investments collapsing at Lehman Brothers. The loss in these mortgage-backed-securities investments would result in riots breaking out in Greece. They even started to burn down the banks. They feared this would spread throughout Europe.
The United States of America’s economy in 2008 and 2009 might have been much like being on the Titanic just before it sank for investors. That might be why the Titanic (USA) was now trying to play music for the passengers (investors). This was done in hopes that the investors would not cause a stock market crash with panicking. It was ultimately why the federal government and the banks held closed door sessions about the crisis. They did not want investors to panic. It could deliver in seconds the world to a Great Depression to biblical proportions. It was a very scary time in American history. All it would take would be the investors panicking like they did in 1929. There would simply be no bailout that could save us if that happened. It did not happen though. The United States would instead be delivered into a “Great Recession” instead of a “Great Depression.”
Therefore — like what they did or not — the bailouts would ultimately stop the United States of America from going into a Great Depression. The fact that the banks are now loaning money again could suggest they feel comfortable about the forecast of the future.
The United States of America still had a lot of problems after the bailout. Unfortunately — one of the major problem being – that six million foreclosures were about to hit the market all at same time. This would have made people’s houses practically worth zero. That is based on the fact that — if fewer homes available on the market meant home values went up – then more homes available on the market would mean home values would go down. That is why the federal government needed to stabilize the housing market by preventing six million foreclosures from hitting the market all at the same time. How would they do this? The Obama administration announced the Home Affordable Modification Program (HAMP). The problem with HAMP was that the banks were not ready to accommodate this kind of massive program the federal government forced them to offer. Bank of America only had 5,000 employees in their modification department. They actually needed 50,000 employees to accommodate it. This would result in all sorts of confusion. One of the confusions would be that they lost the paperwork the homeowners sent in. The banks also did not really understand the terms of the HAMP program. They were trying to figure it out while homeowners were sending in their paperwork. They were basically building the ship while the passengers were on it. Now homeowners were pissed off because they were not receiving their loan modification after they did what they were told. They resented getting the runaround. They resented being given false hope. It would result in protests breaking out against large banks such as Bank of America. The failures of HAMP would result in the internet now being filled with homeowners complaining about what the banks did to them during the loan modification process. It would end up giving birth to such protest sites like Piggybankblog.com. Piggybankblog was built to protest against the Bank of America loan modification process. The reality was that the real one at fault was the federal government. They were the ones who made the banks accommodate something they were not ready to accommodate. The failures of HAMP did not seem to matter to the federal government though. This was based on the reality that HAMP DAM was simply created to keep all the water in the lake from flooding the market with six million foreclosures. The federal government would substantiate this theory with saying that HAMP was announced to only create “foam on the runway” for the banks to have a soft landing. How does it feel to be foam on the runway? – Foam on the runway article
However — in the end — the action of the federal government loaning bailout money to the banks slowly brought the investors’ confidence back. Investors were now convinced that the banks might be ‘too big to fail’ and the United States of America could be relied upon to bail the banks out before they would collapse. This made them more of a safe investment. The commercial banks gradually became confident enough to slowly but surely start loaning money again after everything was stabilized. The federal government would do things to continue to bring the confidence of the investors. They might have even convinced Warren Buffet to invest into Bank of America and Wells Fargo. This would result in the investors feeling it was safe enough for them if it was safe enough for Warren Buffett. The federal government would also bring back the confidence of the investor by sending the message that the banks would be held accountable for any fraud that hurt investors.
United States Accuses Bank of America of Mortgage Backed Securities Fraud on Tuesday August 6th, 2013
There might only be one problem for homeowners in litigation. The federal government and judicial system might want to also let the investors know that they will not lose their investment money from homeowners receiving justice in the courts.
The American economy in 2008 and 2009 resembled the Titanic who had just hit an iceberg right ahead. However — with that being said — this brings to question who is responsible for the Titanic (American Economy) hitting that iceberg. Was it the laws and regulations being removed? Was it the banks reacting naturally to an environment the federal government created? Was it the greed of the banks? Was it because the regulators were asleep at the wheel? I don’t know. I only know that we would not have known about those weak rivets in the side of the Titanic if we had never hit that god damn iceberg.
I guess time and history will eventually say what the federal government did was the right thing to avoid another Great Depression.
Then again ….. I guess that depends on who is writing the history books.
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