Enemies At Home

[Sandra]

Enemies At Home
by Colonel Bob Pappas, USMC, Retired

Investing in the stock market has always carried a level of risk. But risk, whether intentional or otherwise was transformed into gambling and formalized by Phil Gramm, a Republican, and Bill Clinton during the Clinton Administration. It provided broad deregulation of the financial markets and caps on Executive salaries, but did not cap other forms of compensation. The result was compensation for CEOs being paid in stock options. CEOs who are generally as bright as any bulb in the house, took actions to drive up the price of publically traded stock that was totally unrelated to actual company performance, in order to increase their “take.” Opportunists rode the wave to an all time high before the bubble burst along with the housing bubble in the fall of 2008.

 

The collapse of the stock market was directly attributable to the following factors and although the list is not comprehensive, it is a start: CEO equity greed, overinflated stock prices, margin accounts (Margin trading is a means of leveraging funds to buy more stock than there is money available in a particular trader's account.) to facilitate trading otherwise known as “gambling,” the spike in oil prices at $150/barrel, hedge funds, sub-prime lending, and the banking crisis which grew out of the foregoing.

 

During the Carter Administration a piece of legislation entitled the "Community Reinvestment Act" (CRA) was signed into law. Its purpose was to force lending institutions to loan money in communities that has previously be "redlined," that is, where little or no lending activity took place because of socio-economic factors. In point of fact "disqualifying" socio-economic factors were primarily within black neighborhoods. The CRA made "redlining" illegal and "encouraged," that is, forced banks to make loans that were risky, basing a bank's quality ratings for future growth on lending activity within the "redlined" communities.

 

Over time there were a number of changes to the law whose ultimate and I might add, laudable objective was to improve house ownership opportunities within the black community. Fannie Mae and Freddie Mac bought loans that were offered under the auspices of the CRA and combined or bundled them with other loans, those “bundles” were call “derivatives.” Generally, non-performance of CRA loans, that is, poor repayment history was higher than non-CRA loans. Enter the Sub-Prime loan era. Senator Christopher Dodd and Congressman Barney Frank literally forced banks to make Sub-Prime loans under the aegis of the CRA so that as the housing bubble inflated at which speculators saw an opportunity to make easy money and proceeded to engage in “house flipping” which took the cooperation of appraisers to provide values that made it possible for the “flipper” to make large profits in short order. Dodd/Frank coercion of banks was then joined by greedy banks to make tons of money since they knew that Fannie and Freddie would buy up the “toxic” loans whose intent was to benefit members of minority, in particular the black community by making it possible for them to exercise the same “flipping” opportunities, but without the underlying resource base to pay respective mortgages, i.e. a steady job that paid enough to make house payments and sustain life.

 

Generally, banks structured sub-prime loans as adjustable rate mortgages. The initial rate was below the prime rate set by the Federal Reserve, thus "sub-prime," where a loan payment might be very attractive for a long enough time to afford borrowers the opportunity in the inflating housing market to "flip" a house for profit. It is noteworthy that the bulk of sub-prime adjustable rate mortgages were scheduled to mature to higher rates during the spring and summer of 2008.

 

Following hurricanes Erin, Dennis, Katrina, Gustav and Ike, the price of oil began to rise and soon speculators jumped on. Seeing the opportunity to gouge the U.S., OPEC even threatened production cutbacks. Speculators had a "field-day" driving the price of oil from under $30 dollars a barrel in 2001 to $60 a barrel in 2007 and it reached $150/barrel in the spring and summer of 2008.

 

The price of gasoline rose from about $2.00 per gallon to over $4.00 per gallon beginning in January 2007 peaking in July 2008 at over $4.00/gallon. So, a commuter who had been paying $200.00 a month for gasoline was confronted with a jump to $400.00 a month at exactly the same time that his/her house payments went from sub-prime hundreds of dollars per month to over a thousand dollars/month because of the rate adjustment previously negotiated sub-prime mortgage loans. That combination resulted in defaults followed by cascading foreclosures.

 

With millions of loan payments late or non-existent that were underwritten by Fannie Mae and Freddie Mac, those agencies were unable to meet their own toxic mountain of financial obligations and had to be rescued by taxpayers or stated another way, the Federal Government. The mortgage tsunami began because banks purchased bundled (toxic) loans from Fannie and Freddie while also lending to stock traders/gamblers who were using borrowed money for among other things, margin trading. Once a trade is settled, ostensibly at a profit, the money is paid back to the lending institution (bank) with interest. In a margin account whenever a stock’s price goes down below the purchased price, the margin is immediately called by the lender and the stock trader has to repay the original amount borrowed plus interest.

 

Since the stock market, which has in fact become a regulated gambling operation, had become hyper-inflated in relation to a given company’s book value, banks began drawing back lending for margin accounts or as noted began calling the margins for those stocks that declined in value. Trading firms' liquid assets ran dry over night and "voila!" we witnessed the collapse of Bear Sterns due primarily to its holdings of toxic sub-prime mortgage assets and later Lehman Brothers. Bear Sterns received government help ostensibly because of Stearns sub-prime involvement and Lehman was allowed to collapse and was bought out by various US and overseas entities.

 

Obama doesn't have a clue how the U.S. economy works nor does he want to know, any more than he knows how national security, or virtually the entire gamut of U.S. government functions work. Government is not the solution, it is the problem. Government bureaucrats are empire builders and creation of four hundred thousand new bureaucratic jobs does not boost the economy, it burdens it. Government does not create economies, it may regulate them, it can harm them, and central planning czars are reminiscent of Soviet central economic planning.

 

Message to Obama, socialism/communism doesn't work, and another attempt, this time in the US will only damage the US, including those to whom you want to "spread the wealth." Think about it and put on the brakes because your "gallows humor" is called that for a reason.

 

Semper Fidelis.
Bob Pappas

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