Bernie Madoff, whose name will live in infamy in the annals of Wall Street scam lore, has been sentenced to jail for a very long time. His offense was running a $50 billion Ponzi scheme stealing wealthy investors’ money instead of performing the investment services his customers thought they were buying. While his scheme is not directly related to the economic tragedy of our lifetime that is the mortgage meltdown/Wall Street washout/derivative disaster in which we have become enveloped, he has become the poster child of greed that has become the center of blame of this worldwide financial nightmare.
It is no surprise that this global goober of a mess we are in started in the capital of greed where in many circles it is considered a virtue instead of one of the seven deadly sins, the United States. It is with this backdrop that the story of Marvene Halterman serves as a symbol of the smoking gun for the worst economic collapse since the Great Depression.
Marvene Halterman’s story has been told in the Wall Street Journal, the Washington Post, and the Dallas Morning News. Who is she? Ms. Halterman is a poor, unemployed, disability recipient in Arizona. How does this make her newsworthy? She was the recipient of a $103,000 mortgage which she had not a prayer of being able to pay off. The value of the house that the mortgage financed was about $18,000. Was this part of some special government program? No it wasn’t. This was just another example of the tens of thousands of such mortgages that were extended to individuals who really had no business going into such legally binding financial contracts. Ms. Halterman’s mortgage, like so many others, ended up being sold and bundled into a pool of mortgages which then earned the highest triple A rating and, therefore, the interest of many investors.
Who’s to blame? While it has been the mantra of the mainstream media that we are all to blame for the excesses that have led to this collapse, I beg to differ. Mortgage companies like those that approved Ms. Halterman’s mortgage are no better than Bernie Madoff. They were conducting a Ponzie scheme of their own. But this one had no risk for them. Once they sold such loans to investors they were free and clear of any responsibility. They could do so very quickly as well, sometimes even before closing on the loan.
Are the people who accepted a mortgage that they suspected they couldn’t pay off to be blamed for doing so? Absolutely; but they are in no way more to blame than the investors who unknowingly lined Bernie Madoff’s pockets with their cash when they believed that he could provide them with returns that seemed too good to be true.
I own a small business. When developing internal controls over cash I always say that I have the responsibility to “keep honest people honest” by not unnecessarily tempting them with weak controls. Many mortgage companies and banks in American have been unnecessarily tempting otherwise honest people to take loan proceeds that they knew, or at least suspected, they could not pay back.
How could this happen? It was all a legalized Ponzie scheme for the mortgage companies. There were no regulatory requirements to ensure that mortgage companies were acting in the best interests of the borrower. Once they found an interested borrower they could then sell it to a government agency that pools such mortgages together into large investment securities known as “mortgage backed securities” or “collaterized debt obligations”. Then the rating agencies could slap “triple A” ratings on those securities so they could be easily sold on the market. All this was done with little or no oversight.
Thus the mortgage industry and the government conspired, knowingly or not, to build the proverbial deck of cards that has come crashing down on us all. The wave of deregulation that swept the nation for the last twenty eight years since Reagan took office in 1981 facilitated by a compliant opposition party was the fuel. The natural tendency of humans to let greed guide their actions provided the ignition. The resulting inferno that consumed trillions of dollars of investment and retirement savings has also led to the elimination of millions of jobs. But when people are getting very rich fundamental principles and a sense of responsibility go out the window and greed takes over.
We’ve probably seen the worst of the economic collapse but clearly we are far from a recovery. Let’s hope that the same voices that encouraged little or no regulation and lax enforcement of the scant regulation that was in existence will not be the same voices that steer the course of our national ship out of this storm. Those voices of greed ignored some very well placed warnings that what they were doing was too risky and lacking in sound fundamental financial principles.
So, if Bernie Madoff deserves a long jail sentence why don’t those who were getting rich from seducing ill-qualified borrowers with ill-advised loan terms and then selling off the resulting loan to wash their hands of their dastardly deeds. Probably because it was the entire system of lending, pooling, and rating those mortgages that defrauded the American public.
Regardless, it sure seems like someone ought to be arrested.