Friday, April 4, 2008

Armed Robbery with a Loaded Fountain Pen

An article today in the front page of the Sacramento Bee's business section quotes a director of a community development fund it works in low income neighborhoods on the subprime crisis: "I want to know how many people are going to jail."

At the same time, Jeffrey Skilling, late of Enron, judging from what I read in the papers, seems to have a shot at getting out of jail.

I do not know much about the risk that JPMorgan Chase is taking on over and above the first billion dollars. But if the Bear Stearns bailout is not a gift to JPMorgan Chase, then it is certainly very charitable towards the people who let money to Bear Stearns. Were they widows and orphans?

Who is going to jail?

1 comment:

Jack said...

It's good to see the question raised even if its only here and it isn't likely to be answered. There is a huge component of fraud in this credit crisis. Not home buyer fraud, but a scheme played out repeatedly over the past decade by those who initiate the home loan process, especially at the sub-prime end of the spectrum.

This is a comment I hung on the Angry Bear cite. It gets little attention, but, like the S%L scandal of yore, it's the fraud that does everyone else in.
"What I see as missing from the analysis of who did what to whom, and who benefited from the flow is a more detailed review of the role played by the mortgage loan originators, that breed that is referred to as the mortgage broker. Generally they have no real capital of their own. They arrange the loan. They do all the leg work associated with originating the mortgage. For this they get to keep some small piece of the interest rate. It may seem like little, but just start adding up all those small points on big loans. Add some of the typical fees that may be associated with loan originations, all of which are just added to the amount to be financed.

I suppose that in every corner of the business community there is good and bad. In mortgage brokering....let's just say there is much to be desired. You're lead salesman may now be working alternative employment at the local used car lot. But take this business to yet another level. House prices are rising, all sorts of loans are being pushed up the funding line,
as Bruce describes it, above. Well why not get our friends and co-workers to start buying some of these fast appreciating properties. See how much faster they appreciate when we start buying them up using little more than our personal full faith and credit. Now we earn not just the small vig, but the entire excess value of the property. Remember, we've only been buying and reselling within our small circle of friends. Since we never intended to pay the loan for very long anyway, just until the next flip, who cares what the consequences may be.

Multiply such a scenario across the country and we suddenly have a newly enriched group of former mortgage brokers."
Jack | 04.05.08 - 4:36 pm | #