The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."
This
Business Week article is pretty good, but I feel the need to take you much deeper down the rabbit hole. Try to get comfortable, it's not going to be pleasant.
I used to work for one of the oldest and largest financial services companies in the world. But you wouldn't have known it from looking at the sign on the outside of the building. You see, the firm kept its name out of public view when it came to this
business: the sub prime mortgage lending racket.
Why?
This Wall Street firm, spoken about in hushed tones around country clubs and cocktail parties, DOES NOT want to have its name associated with the financial services equivalent of a chop shop or a whore house. Oh no. It just wants the money associated with this despicable operation, and none of the press. Questions in the media about the propriety of these activities might cause discomfort for investors. Certain public appearances need to be maintained, after all.
This firm premeditated the exit from the crash unfolding before our eyes, both legally and in terms of public relations, years in advance.
Here's what it did.
The firm's strategy was to acquire fly-by-night companies who were dealing in these dodgy (sub-prime) loans and making impossible to imagine amounts of money at it. The outward public appearances of these acquired companies did not change. Some of the fly-by-night, fast-and-loose, make-it-up-as-you-go and illegal activities were transformed into probably-no-jail-time best-practices. The CFO had a habit of putting me on hold without muting the headset. He always seemed to be talking about "
scratch and dent deals" with someone else in his office. "Oh sh*t.
They're not going to like this. *rhetorical chuckle* What's a few million dollars between friends..."
The Them.Behind the scenes, however, executives who weren't decapitated on the spot as part of the acquisitions, started taking orders from
Them, if you know what I mean. Entirely new computer networks were built that linked the systems of these up-start, sub-prime lending corporations that---if you're fortunate---you've never heard of, to what we called "The Mother Ship" in New York, a firm that just about anyone with a net worth of a million dollars or more would probably recognize.
I was present at one of these 3am infrastructure sessions (getting paid double time), in a machine room with servers stacked floor to ceiling, cooling fans screaming, and black coffee going down by the pot full. We were taking orders from the "global ops center" in New York. The blinking lights on the "big-iron" Cisco routers indicated that roughly US$5 billion in funny money was going to move between the red-headed stepchild operation I worked for and the polished halls of The Mother Ship each month.
US$5 billion per month.
This was just one tiny, fly-fart aspect of just one division of this diabolical corporation. And I was told it was chump change for them, and that it would be cut loose at the drop of a hat, if necessary, should any undue attention start coming their way.
A manager told me something like, "It's not worth the bad PR for them. They'll rake it in for as long as things can be kept quiet. But they won't tolerate any heat in the press."
I noticed that the scam seemed very similar to the way the CIA runs cut outs. Except with this, the firm was only concerned with its public image; it's no secret who owns whom in this game, if you know where to look, and everything had been done according to federal regulations that this firm probably wrote, so it's not a question of legal or illegal. When it comes time to shut down offices and roll up the operations, they want it to go smoothly. And if Joe and Jane Six pack start to wonder who actually sold them their dodgy loan, it won't be immediately apparent. And, if Joe and Jane Six pack read the fine print, they will find that they screwed themselves by signing on the dotted line anyway. When the press interviews these people, they will talk about how "Bob's-Dodgy-Loans-While-You-Wait" screwed them over, and how they didn't know, this, that and the other thing, etc...
But to where do all the fiber paths lead?
"Bob's-Dodgy-Loans-While-You-Wait" was just being used by the firm as insulation from the inevitable bad press, that is now emerging. "Bob's-Dodgy-Loans-While-You-Wait" will be shut down and forgotten after a few days or weeks. Joe and Jane Six Pack will get their clocks cleaned, as usual. They won't even know who was really behind it all. By this time, the Mother Ship will have found other front companies to hide behind and new victims to grind into cash.
The front company I worked for actually changed names twice over the course of a year. Both of them were owned by the firm. The old domain now forwards to some backwater page on the new company's domain that displays a date that is off by a couple of years. Of course, the parent firm is nowhere to be seen!
US$5 billion per month... You'd think they could get the webserver to display the right date. Nope. Too busy generating funny money.
I went through several rounds of layoffs at this place. There would be moments of tension in the office and then these guys wearing black suits, diamond pinky rings and Bluetooth headsets would start walking around. Their ties were cinched up so tightly that the rolls of lard in the necks spilled over onto their collars. These were the goons sent by the Mother Ship to escort terminated employees out of the building.
"What the f*ck is this?" I asked my boss, "The set of
Good Fellas 2?"
HAHAHA, he thought that was funny.
(None of this pissed me off, of course. I'd seen it all before. I knew what I was getting myself into when I accepted this contract. My wife and I needed land and we were going to get it. If I had to crawl through a dark, slimy sewer pipe to get it, like the guy in
Shawshank Redemption, that's what had to be done. If they axed me, I'd just sell myself to some other piece of sh*t outfit until we had enough money to pay off our land. "Play to win," was my mantra though it all. Somehow, though, the axe didn't fall. Month in and month out, I kept showing up, and saving money. But enough about me.)
The firm externalized the financial risks of being in this business by selling all of the paper they generated into the secondary mortgage market at the end of every month. This is an institutional marketplace that trades in commoditized mortgages, "debt paper." In other words, at the end of each month, the firm had none of the impossible-to-payback-negative-amoritization-no-money-down loans on their books!
I handled some issues for the secondary marketing department, even, would you believe, for the person who pulled the trigger on these paper dumps at the end of the month.
"Who buys this stuff?" I asked.
"Oh lots and lots of people. Well, banks and insurance companies mostly. [Large European Bank name deleted] buys a lot of it."
I wonder if [Large European Bank name deleted] knew what I knew or cared about how those loans were generated. (Of course, they knew and didn't care. They'll sell this toilet paper debt to some other sucker down the line.)
See, I also handled issues for the used-car-salesman-type 'account executives'. Just before I left, the company switched loan origination systems. The people writing these loans were pissed because they were no longer able to get loans approved for people with fraudulent social security numbers. They would actually complain because the system was telling them that the would-be borrower was using a false/fake/invalid SSN.
"The old system never gave me these problems. How am I supposed to get any work done?! I hate this new system."
But wait, there's more.
As part of my daily duties, I had to take remote control of the systems that these donkeys were using. Occasionally, (a couple of times per day, at least) I would see the credit summary screens for the loan applicants. The highest credit score I ever saw was something like 615. The lowest was 520. Sprinkled with bankruptcies, unpaid credit cards, default this, late that.
Every once in a while, I'd chuckle and ask the person on the phone, "And this guy can buy a $400,000 house with no money down!?"
Absolutely God damned right!
That's what this company did. All day. Monday through Friday.
Things started to get interesting when They sent a memo to all employees on what to say to anyone who presented themselves as auditors or investigators. We were to refer them to some flunkie.
I thought, "Oh goodie, we're going to get raided by a three-letter agency and guys wearing guns and blue wind-breakers are going to wheel the servers out on dollies!
PHBs are going to be
handcuffed and frog marched into a waiting paddy wagon!"
Sadly, that didn't happen. For me, the icing on the cake moment happened when the firm started offering these criminal loans to their own employees, and at deep discounts, to pad the numbers as business started to slow down! The memo actually said that because we were such valued employees---actually, I wasn't an employee, my title was IT-Outsourced-On-Site---we wouldn't be charged any "junk fees" associated with the origination of the loan.
WOW! No junk fees! Thank you, Master! Thank you, Master!
"Just keep cool," I told myself, "Just keep cool. You're almost out of here."
I smiled, silently farted and answered the next phone call, "This is Kevin, how may I help you?"
A Note to Survivors: To those of you who are out, a tip-of-the-hat and a well-done to you. Now, what are you going to do with the cash? Please see my piece on
Investing Very Close to Home.
Research Credit: Housing Panic
posted by Kevin at 4:22 PM
