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Friday, February 13, 2009

U.S. defrauded billions from the world

"Let's hope we are all wealthy and retired by the time this house of cards falters." - internet e-mail, Wall Street, 12/15/06

On February 12th, 2009, CNBC aired their documentary called House of Cards, which explained the origins of the global economic crisis and how the US defrauded billions of dollars from Europe, Asia and Canada to buy houses.

Typically, when a lender lends money to a borrower, the lender cares about the borrowers ability to pay back. Hence, a bank typically wants a borrower to prove that he has income and for him to put in a down payment and sometimes collateral.

It did not work this way in the US. Lenders in the US did not care about the borrowers' ability to pay back. This is because:
  • The people lending the money were not the true lenders. Home buyers got the mortgage money from mortgage brokers, who got the money from Wall Street, who got the money from American and foreign investors.
  • The true lenders were the investors. However, they did not know who they were lending their money to, nor that the borrowers had no way of paying back.
Wall Street got the money from investors by slicing up the mortgages, packaging them up as mortgage-backed securities, or CDOs (Collateralized Debt Obligations), fraudulently rating them as AAA and sold them to investors as high quality, low risk investments.

AAA rating is usually given to the top quality debts, such as bonds from the government or huge, profitable Fortune 500 companies that make billions, not to John and Jane Doe who average $40K/year in income, took out a mortgage that is much bigger than they can service and did not give a down-payment.  Sometimes large Fortune 500 companies with audited and proven income of billions of dollars, do not get AAA rating.  According to CNBC: "The credit rating agencies [Fitch Rating, Moody's and Standards and Poor] had an incentive to award a security the best possible ratings.  That's because the agencies were paid for their appraisals by the very banks that issued the securities."

Canadian banks are amongst the biggest companies in Canada and safest banks in the world.  Yet, only two of the five Canadian banks are AAA rated.  Even though many Fortune 500 companies with billions of dollars of revenue and profit cannot get AAA ratings, Wall Street was paying rating agencies to give AAA ratings to home-buyers with a tiny fraction of the revenue and assets, many of whom took out NINJA mortgages (No Income, No Job, No Assets and no down payment).

Furthermore, Wall Street knew that mortgages were given to borrowers who did not have to prove income, net worth or put in down payment.  According to CNBC, Michael Francis spent years at a major Wall Street bank that ramped up its business in mortgage-back securities.  His bank was so eager that it dropped many requirements for the mortgages it was willing to sell.  Francis: "We removed the litmus test.  No income, no asset.  Not verifying income... breathe on a mirror and if there's fog you sort of get a loan."

Yes, the CDOs were complicated and investors should not invest in anything they do not understand.  However, most of these investors bought them because they were rated AAA.  If the CDOs were not fraudulently rated AAA, the investors would not have bought them. 50% of these CDOs were sold to countries outside the U.S.

[Below was added on August 24, 2011]

According to this Vanity Fair article, Wall Street really took advantage of Germany:
"...German bankers … lent money ... $60 billion in various U.S. subprime-backed bonds..." 
"Extremely smart traders inside Wall Street investment banks devise deeply unfair, diabolically complicated bets, and then send their sales forces out to scour the world for some idiot who will take the other side of those bets." 
"...a New York investment banker [would] say, ‘No one is going to buy this crap. Oh. Wait.  The Landesbanks will!’ ”  When Morgan Stanley designed extremely complicated credit-default swaps all but certain to fail so that their own proprietary traders could bet against them, the main buyers were German.  When Goldman Sachs helped the New York hedge-fund manager John Paulson design a bond to bet against—a bond that Paulson hoped would fail—the buyer on the other side was a German bank called IKB."
Wall Street traders made a killing while bankrupting their firms, and walked away free.  German bankers made far less and were treated as crooks:
"The former C.E.O. of IKB, Stefan Ortseifen, received a 10-month suspended sentence and has been asked by the bank to return his salary: eight hundred and five thousand euros." 
"Others do not behave as Germans do: others lie. In this financial world of deceit, Germans are natives on a protected island who have not been inoculated against the virus carried by visitors.  The same instincts that allowed them to trust the Wall Street bond salesmen..."
[End of August 24, 2011 addition]

American home buyers lied about their income to get mortgages.  In fact, mortgage brokers encouraged this fraud because they were motivated to sell as many mortgages as possible and to anybody.  The brokers made fees by selling the mortgages.  They did not care if the borrower ever paid back, because these brokers were not the true lenders.  They did not care if the borrower was an "Arsonist with no income".  As long as the home buyer had a pulse, the mortgage broker wanted to give him a mortgage and collect the fee from Wall Street.  According to one example on CNBC, a mortgage broker "lied and exaggerated" the borrower's income without her knowledge.

Consequently, Americans bought houses that they could not afford and should never had the luxury of living in them.  In CNBC's documentary, a family whose bread-winner made $46K per year, bought a $584K house.  Another family, which used to live in the slums of Compton, California, bought a house in one of the richest neighbourhoods in the country, Yorba Linda. Everybody felt entitled to live the "American dream".

When the price of their homes went up, thousands of Americans re-financed their homes to pull out money so that they can pay off car loans and credit cards, and pay for kitchen and bathroom renovations and swimming pools.  One loan officer on CNBC's documentary was refinancing some home owners every year.  These home owners used their homes as ATMs to buy everything in sight. According to CNBC:  "In 2004 homeowners withdrew an estimated $900 billion dollars by refinancing and spent the money on whatever they could buy.  Homes had turned into ATM machines and the economy flourished."

Ultimately, these houses, renovations, cars and swimming pools were paid for by defrauded investors, many of them in Asia, Europe and even Canada.

The city of Narvik, Norway, a town of 18,000, were defrauded into buying $200 million of CDOs.  Now the town has closed a school, slashed services for the elderly and spend 25% of their budget paying for this loss.  CNBC goes on to say that Narvik's next generation will have to continue paying for it.

Almost nobody in China lives in a 2,000 square feet house with a swimming pool.  Yet, they were defrauded into paying for these in the US.

Canadians were also defrauded into paying for houses in the US.  Wall Street defrauded Canadian Banks into buying $32 Billion of Asset Backed Commercial Paper (or CDOs).

All of these new or big houses with renovations and new swimming pools are sitting in the US.  Even though the prices are coming down now and causing foreclosures, it will be the Americans who will eventually and ultimately get to live in them and enjoy them, not defrauded foreign investors.  Instead of paying $500K, other Americans will pay something reasonable, such as $200K.  However, the investors, many of whom are in Asia, Europe and Canada, will never see their money again, nor will most of them ever get to live in 2,000 square feet houses.

Also, thousands of Americans made millions or billions from the housing boom from 2001 to 2006:
  • Home Builders
  • House Flippers
  • Real Estate Agents,
    most of whom made more than $100K per year.
  • Mortgage Brokers, such as:
    • Daniel Sadek of Quick Loans, who made $5 million per month
    • Loan Officers (sales reps), who made $20K per month. Some of these people used to deliver pizza before selling loans.
  • Employees of Wall Street firms, many of whom made millions.
This money is still sitting in their pockets.  It will never be returned to the investors.

Therefore, despite the recession in the US, their overall wealth has increased at the expense of foreign and American investors.  Billions or trillions of dollars of homes, cars, renovations and new swimming pools, which are the biggest ticket items for most people, are sitting in the US, paid for by defrauded investors.

This is one of the biggest heists in the history of mankind.  Like other white collar crimes, such as insider trading, it is almost a perfect crime.  Many of the victims blame themselves for not understanding the CDOs sufficiently or for being gullible. In the case of insider trading, most victims do not even know that they were stolen from.

Now that the home prices are dropping and causing foreclosures, many of these American home owners, who should never have moved into homes that they could not afford, are complaining and adamant that they should stay.

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