I was talking to S. Wednesday night during a commercial break, while we were waiting for Screaming Sean Hannity, who was oddly subdued, to resume interviewing Sarah Palin. I'd just come in from smoking a cigar and reading the New York Times - well, I'd smoked the cigar, but I hadn't gotten very far in the paper, not after I'd read in more detail what had happened at AIG.
The first commercial was for Pacific Life, the insurance company with the trademark scene they show of the whale diving into the ocean, its massive tail flipping over as it disappeared beneath the surface. I was instantly hot, not at Palin, but at the snow job I was smelling from the press about the AIG situation.
"You know, I'm no economist, no insurance company analyst, but when was the last time you heard of a major insurance company going under?"
S. had been on conference calls all day. She didn't answer at first, patting the dog beside her, with a look on her face that said "negro, I am through thinking for the day". When I opened my mouth to continue, I guess she figured I wasn't going to shut up about it unless she gave some kind of response. "Can't think of any."
"EXACTLY!", I said. "'Cause insurance companies have to have a certain amount of reserves to cover the losses their policyholders could have."
"But they do more than just insurance. They're all over the world doing all kinds of stuff."
"So what? Those are subsidiaries. Separate books."
"But don't they invest the reserves?"
"Yeah, but they can't put them into just anything. Insurance companies are some of the most boring investors out there. Even Warren Buffet doesn't screw around with that shit."
I may not have had a degree in economics, but I'd taken the Series 7 test enough times to know that the insurance industry's obligation to its clients required it to keep enough capital in reserve to cover claims - what the ratio was I had no idea, but I knew that for a company that size it should have been substantial.
Karl Rove's fat face popped up on the screen after the interview, looking like the cat who ate the canary that was George Bush's presidency. He proceeded to carry water for McCain, smirking as he lambasted Obama for taking contributions from Fannie Mae and Freddie Mac, the two institutions that were now high on each candidates reform list. When he then sat his fat ass up there at blamed the ENTIRE financial crisis on the alleged shortcomings of the underwriting process, I had to get up and walk away.
You couldn't even get Desktop Underwriter, the proprietary underwriting system we use to determine whether or not a loan could even qualify to be sold to Fannie or Freddie, to take a sub-prime borrower. Alt-A products were as exotic as they got outside of FHA, and nobody was even doing any volume in FHA until last year, when there was no where else to take credit challenged (broke with low credit score) borrowers.
Blaming the government sponsored entities (GSE's) for the mortgage crisis was like blaming the U.S. Mint for your gambling losses in Vegas because they printed up the money. Subprime lenders went under because the default rate on the paper they were holding was ten times higher than the GSE's.
I fumed over this all that night and into yesterday, until I saw THIS headline at one of the sites I frequent:
Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
By the time I'd gotten through the second paragraph:
"The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults."
I started to get my equilibrium back. I knew damn well you couldn't have a collapse of this magnitude just because a few more loans than usual were late (default in mortgage biz lingo isn't the same as an actual foreclosure - it can also mean the loan is in technical default because the mortgagor is way behind). Over 95% of all mortgages purchased by the GSE's were still being paid on time.
I read a little further. A smile crept across my face:
"The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. The net capital rule requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower."
"Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount."
Only five companies were eligible for this program when it was rolled out in 2004. Guess who these five firms were?
Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley.
The first thing that came to my mind when I read this was a quote I'd created as a part of a series of quotes that were sprinkled throughout a fictional story I'd published a couple of years back called The Black Folks Guide To Survival:
"White folks, and white men in particular, have always found ways to alter, bend, or just totally ignore the rules they've made up when something doesn't suit them."
While you were on the internet at work, scrolling past ads extolling the wisdom, foresight and prudence of the companies managing your retirement money, your SEC chairman was waving his magic money wand over the capital accounts of these companies, effectively doubling or tripling their buying power without the addition of one red cent of actual money to their coffers.
He turned the cash they had into supercurrency.
If you've been in the financial services game long enough, even on the retail side, like I have, you had to learn the "Four C's" of a lending transaction - character, capacity, credit, and collateral. Ignoring any one of these items means you can't properly qualify the risk in front of you. In this case, the argument was and will continue to be that the track record and the reputation these companies possessed was the deciding factor in making a decision like this. THIS was the same criteria we used to make stated income loans.
Which made reading this morning's latest SEC announcement on The New York Times website temporarily banning short selling of financial stocks all the more ironic. The quotes from the chairman got me so jacked up I didn't even need any coffee this morning:
"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets"
Market manipulation is now the enemy, after you manipulated the make-sense rules that were already in place? Are these motherfuckers smoking crack?
The phrase "alter, bend, or just totally ignore the rules they've made up" will be reverberating through my head for the next few days as I watch these politicians and industry regulators who know better continue to point fingers at Fannie Mae, Freddie Mac, and the subprime mortgage lenders who have closed down.
What do they think we are, idiots?