FacebookTwitterRedditEmail

Subprime Lending and Shady Mortgages

Does anyone remember corporate ethics? This was the big economic issue after the collapse of Enron, WorldCom and other major companies at the beginning of the 21st century. Books were cooked, winks and nods acknowledged.

Enron and WorldCom used a range of fraudulent accounting practices: hiding debts, lying about profits, backdating contracts, understating costs, etc. Ultimately, both the energy and telecommunications sectors each saw one of their largest companies go bankrupt. The WorldCom bankruptcy was the biggest in US history.

We’ve gotten over that. The problem was one of corporate ethics, and it has been fixed some corporate governance legislation, criminal prosecution and moral outrage.

But the bad apples are back, this time in mortgage lending rather than accounting. Financial markets are currently reeling from a meltdown in the mortgage lending market, following shady financial dealings in the so-called subprime market, which serves borrowers with bad credit history.

The story in the mortgage lending sector is largely the same as in the earlier accounting scandals: shysters using opaque, complex financial instruments to conduct transactions, pump up markets, and manipulate hard working people.

The financial instruments in the subprime lending market are numerous and often esoteric. In the category of straight-up manipulation, we have questionable lending tactics that include offering home loans to borrowers who have no down payment, interest rates with low introductory levels that soon shoot to double digits, and prepayment penalties.

As recently reported by the New York Times, the country’s largest mortgage lender, Countrywide Financial, steered subprime borrowers into higher-cost loans — more profitable for Countrywide and more expensive than necessary for homebuyers — by using a computer system that excluded the cash reserves of borrowers.

At Countrywide and many of its competitors, mortgage lenders repackaged these shady loans and used them to back securities sold to investors. These mortgage-backed securities, which contributed to the housing market bubble, have come to wreak havoc in the credit markets. The crisis has intensified in recent weeks as major Wall Street hedge funds that had invested in mortgage-backed securities began to flop.

Questionable lending in the subprime market grew in a context of soaring real estate prices that gave a false sense of security to potential borrowers and homeowners. A steady stream of hot air fueled the housing markets, while seasoned investors happily bet away.

The warning signs were there — the explosion of dubious mortgages followed by increasing bankruptcies — and, indeed, a few hedge fund managers predicted the mortgage market meltdown and accordingly bet against subprime loans. Most investors, however, went along for the ride.

Countrywide was able to continue its subprime-driven strategy in large part because it was backed by banks and investors willing to give it a seemingly endless supply of money. After the contradictions of purely credit-driven growth came to a head, Countrywide’s share prices began to tumble and it had to secure over $11 billion in emergency loans.

What should be made of all this? For starters, consider the recent attempts to privatize social security. The current regime of goons in the White House tried to implement the long-standing conservative goal of taking the retirement security of the majority of the country’s workers and throwing it to the vicissitudes of the market.

The example of the mortgage market is instructive. It reminds of what capitalist markets consist: wild fluctuations, bubbles and drops, caused by extremely complex interdependencies in the political economy that are hard to understand, even for experts.

Schemers and cheaters trying to find opportunities to screw hard working people are an inevitable part of the system. But they distract attention from the economic system’s structural problems.

At an immediate level, the mortgage market crisis provides a reminder that turning social security over to the market is a bad idea.

At a deeper level, we can see that it’s not really the free market after all. Sure, people are exchanging things and the forces of supply and demand are felt.

But many of the forces behind these market fluctuations are institutional: Very complex financial instruments; winks and nods from regulators, analysts and auditors; and a whole range of economic transactions that are based on social conventions, unwritten rules, and long-term relations between key organizations and individuals.

More importantly, a key lesson here is not simply that “the market” is actually constituted at many levels by social institutions. Much of market behavior is driven more by the dynamics of capitalist organizations, rather than supply and demand creating efficient outcomes through price signals.

Why did major capitalist organizations such as Countrywide delve so aggressively into the subprime market? Quite simply, because the profit margins on subprime loans were higher than loans to prime investors. This is why we should expect schemers and cheaters, because at the end of the day, the name of the game is not efficiency-enhancing markets but profit-seeking organizations and individuals.

We are told, over and over, that it’s really all about the market, that this is the governing institution. But as left critics have been saying since Karl Marx, this line is simply part of the bourgeois ideology that works to mystify true workings of the economy.

The action is in organizations (and individuals) competing for profits. And whether these organizations seek their profits in the financial, manufacturing or service sector, they are the building blocks of an economic system that, in its regular workings, leaves not only scandal, but unemployment, underemployment, inequality and poverty in its wake.

MATT VIDAL is pursuing his doctorate at the University of Wisconsin in Madison. He can be reached at: mvidal@ssc.wisc.edu

 

More articles by:

Matt Vidal is Senior Lecturer in Work and Organizations at King’s College London, Department of Management. He is editor-in-chief of Work in Progress, a public sociology blog of American Sociological Association, where this article first ran. You can follow Matt on Twitter @ChukkerV.

bernie-the-sandernistas-cover-344x550
Weekend Edition
December 13, 2019
Friday - Sunday
Melvin Goodman
The FBI: Another Worry in the National Security State
Rob Urie
Establishment Politics are for the Rich
Jeffrey St. Clair
Roaming Charges: That’s Neoliberalism for You
Paul Street
Midnight Ramble: A Fascist Rally in Hershey, Pennsylvania
Joan Roelofs
The Science of Lethality
Joyce Nelson
Buttigieg and McKinsey
Joseph Natoli
Equally Determined: To Impeach/To Support
Charles Pierson
The National Defense Authorization Act Perpetuates the Destruction of Yemen
REZA FIYOUZAT
An Outrageous Proposal: Peace Boats to Iran
Lee Hall
Donald Trump Jr., Mongolian Sheep Killer
Andrew Levine
A Plague on Both Their Houses, Plus a Dozen Poxes on Trump’s
David Rosen
Mortality Rising: Trump and the Death of the “American Dream”
Dave Lindorff
The Perils of Embedded Journalism: ‘Afghan Papers’ Wouldn’t Be Needed If We Had a Real Independent News Media
Brian Cloughley
Human Rights and Humbug in Washington
Stephen Leas
Hungry for a Livable Planet: Why I Went On Hunger Strike and Occupied Pelosi’s Office
Saad Hafiz
Pakistan Must Face Its Past
Lawrence Davidson
Deteriorating Climates: Home and Abroad
Cal Winslow
The End of the Era: Nineteen Nineteen
Louis Proyect
If Time Magazine Celebrates Greta Thunberg, Why Should We?
Thomas Drake
Kafka Down Under: the Threat to Whistleblowers and Press Freedom in Australia
Thomas Knapp
JEDI Mind Tricks: Amazon Versus the Pentagon and Trump
Jesse Jackson
Trump’s War on the Poor
Michael Welton
Seeing the World Without Shadows: the Enlightenment Dream
Ron Jacobs
The Wind That Shook the Barley: the Politics of the IRA
Rivera Sun
Beyond Changing Light Bulbs: 21 Ways You Can Stop the Climate Crisis
Binoy Kampmark
The Bloomberg Factor: Authoritarianism, Money and US Presidential Politics
Nick Pemberton
Ideology Shall Have No Resurrection
Rev. Susan K. Williams Smith
What Trump and the GOP Learned From Obama
Ramzy Baroud
‘Elected by Donors’: the University of Cape Town Fails Palestine, Embraces Israel
Cesar Chelala
Unsuccessful U.S. Policy on Cuba Should End
Harry Blain
The Conservatism of Impeachment
Norman Solomon
Will the Democratic Presidential Nomination Be Bought?
Howard Lisnoff
The One Thing That US Leaders Seem to Do Well is Lie
Jeff Cohen
Warren vs. Buttigieg Clash Offers Contrast with Sanders’ Consistency
Mel Gurtov
The Afghanistan Pentagon Papers
Gaither Stewart
Landslide … to Totalitarianism
Kollibri terre Sonnenblume
How Blaming Nader in 2000 Paved the Way for Today’s Neo-Fascism
Steve Early
In Re-Run Election: LA Times Journalist Wins Presidency of NewsGuild 
David Swanson
If You’re Not Busy Plotting Nonviolent Revolution for Peace and Climate, You’re Busy Dying
Nicky Reid
Sorry Lefties, Your Impeachment is Bullshit
John Kendall Hawkins
The Terror Report You Weren’t Meant to See
Susan Block
Krampus Trumpus Rumpus
Martin Billheimer
Knight Crawlers
David Yearsley
Kanye in the West
Elliot Sperber
Dollar Store 
FacebookTwitterRedditEmail