I put this here because I am looking for as factual an answer as I can get. A lot of people are saying, “They made a lot of dough off our backs and now we gotta cough up $700 billion. Lynch the bastards!” While it is true that some lenders engaged in predatory lending practices, those weren’t the people involved in the secondary market, or at least not the people that are going belly up. What actual crimes were committed?
Thanks,
Rob
My understanding is that being optimistic to the point of stupidity isn’t a crime.
Happy to be proven wrong.
It is probable that some of the insiders sold their company’s stock based on inside information about how bad things were. I haven’t heard any allegations about criminality contributing anything to the actual meltdown, more likely the opposite.
They violated good business principles by loaning money on mortgages to individuals who would normally be unqualified to borrow that amount of money or were poor risks based on their credit history. As a result the value of a large number of mortgages were worth very little if anything on the market.
mort·gage: 1. a conveyance of an interest in property as security for the repayment of money borrowed.
When I am king, this will be the first oversight I correct.
This is one reason why it will be so hard to “punish” anyone for this. There was no Enron style number cooking (which is illegal) that I’ve heard of. As First Among Daves said it’s not illegal to be stupidly optimistic and short sighted.
It’s probably impossible to enact any legislation against it either. Obviously, you want businesses to take risks within reason. The line where acceptable risk becomes too much is impossibly small, and probably varies from person to person.
It’s not necessarily that they may have done something illegal. It’s this: You invest your money, you are doing it to grow the money, albeit with the understanding that there is risk and that your money may in fact be lost or diminished. Should you lose your shirt, your fault, and the government would say “tough shit” should you ask to be bailed out of your bad investment.
The issue at hand here is that the heads of these companies have contracts that give them severence packages when they leave the company. So not only did they mess up on a grand scale, they are asking the government to bail them out, and they will still get their golden parachute, and the people who were foolish enough to take bad loans will still get foreclosed on.
I guess that’s one thing that would at least remove the sour taste. When the gov’t bails someone out, the parachutes should become like any other unsecured liability. Get in line and don’t hold your breath. It seems like the proper thing.
Still, large though they seem, exec compensation packages are literally nothing in the big picture. Not paying them won’t make any difference financially.
This will be the second.
As I said though, the companies that are blowing up are the ones which were heavily invested in these mortgage-backed securities that were considered AAA-rated bonds. These were not the people engaging in predatory lending because they weren’t the ones originating the mortgages (although I may be wrong about that).
Also, wrt predatory lending, you can make the argument that the lenders were deliberately destroying people by lending them money at impossible terms in order to seize their homes, or you can make the argument that these lenders were trying to give people with poor credit a chance. This isn’t GD, so I won’t go any further with that.
Thanks,
Rob
One issue with some of these firms is the way they handled these bundled mortage instruments when they didn’t sell. Sometimes they handled it by putting them on the firm’s books as assets, valuing them at the same price they wouldn’t sell for. The market has just pretty much declared that those instruments were worth a lot less, yet they counted them as if they were as valuable as they’d been when they were hot.
I don’t think this is illegal, just really poor practice. Unless maybe one would argue that it was being fraudulent about the bank’s assets. Dunno.
If these banks KNOWINGLY sold these instruments (which they knew tobe worthless) then aren’t they guilty of fraud?
They prosecute the CEO and CFO of A.I.G. under the R.I.C.O. Act, I’m first in line to set up a lawn chair and sell Sno-Cones.
You help break the spine of the United States economy and then demand a Golden Parachute on the way out for having done a spankin’ job? Boy.
It is a good question- can any of the banks that are now folding be prosecuted for violations of the R.I.C.O. Act because some but not all of the transactions crossed state lines? If they knowingly granted a huge mortgage to someone unqualified in another state, it’s ill-advised. No idea of laws were broken. But if there is a pattern of this, then what?
No one knew what they were worth. And like I said, they were Triple-A rated.
Thanks,
Rob
Exactly. It would be similar to suing someone who sold you a $200 beanie baby on Ebay in 1998. Was that beanie baby worth $200? Well, not if you add up the cost of the materials used to construct it… But, that was the market price back then. They were considered to be a ‘good’ collectible at the time.
As I understand it, the banks are failing not because of lending to unqualified parties, but because they owned a lot of mortgage-backed debt that they bought on the secondary market and due to a large number of defaults and shrinking home values are worth a lot less than was thought.
If it is a crime to make risky loans, then all credit card companies should be prosecuted.
Thanks,
Rob
The process for insiders to sell shares is complicated.
They can’t just log on to their brokerage account and hit the sell button
If the authorities are looking to nail you, they can probably find something on you.
I’ve read a number of stories that would suggest that some of the mortgage originators did commit fraud when they filled out the mortgage applications for their customers. Whether or not any of them will be prosecuted, who knows.
From the third page. This is the other aspect of them making a killing. Who makes 44% annual return on something and not have anything to show for it?