Open Writing

American financial institutions are, by and large, a respected and reliable group of enterprises, many of which trace their history back almost to colonial times, though mergers and acquisitions over time have blurred their identities. As an example, The New York Stock Exchange was founded in 1792 amid the budding financial enterprises of lower Wall Street in New York City, and has evolved into one of the world's foremost securities marketplaces.

But despite the veracity of major banks and lending institutions, every so many years a wave of madness pervades their operations that has had serious, negative repercussions among rich and poor alike. As a layperson, it’s hard to understand how it comes about that they follow one another into the dark chasm of fiscal irresponsibility, like the mythical exodus of the Lemmings. In recent memory, one of the worst examples is what has come to be known as the “Savings and Loan (S&L) Debacle.”

Quoting from Wikapedia, “In the 1970’s, many banks, but particularly S&L’s, were experiencing a significant outflow of low-rate deposits, as interest rates were driven up by the high inflation rate of the late 1970’s and as depositors moved their money to the new high-interest money-market funds. At the same time, the institutions had much of their money tied up in long-term mortgage loans that were written at fixed interest rates, and with market rates rising, were worth far less than face value.”

This doesn’t begin to describe the plague of fecklessness that seemed to infect all the S&L’s. Some of the worst cases were S&L banks in Texas, where generous loans and mortgages were provided to borrowers who had little or no colateral. At the time of the S&L’s collapse, I met a man who’s job was to investigate the basis of some of these loans and mortgages. He was incredulous at his findings in that State.

Mortgages had been granted to applicants who’s properties were worthless – some, literally shanties in remote, rural areas. No attempt had been made by the lending intitutuion to verify the worth of the property before the loan was granted. This at a time when overbuilding had exacerbated the drop in housing values. On a visit to Houston at the time, I was dismayed to see streets of boarded-up houses where the owners had just walked away from them.

More recently, it was the dot com phenomenon that defied every tenet of good financial practice and due diligence. Young hot-shots, many not out of college yet, were allowed by the lending instutions to borrow start-up money for business proposals that were often preposterous. Many such start-up companies offered free services on-line that they proposed to pay for with revenue from advertsing that had not yet been sold, and in the majority of cases never materialised.

If making suckers out of the venture capitalists wasn’t bad enough, The New York Stock Exchange also embraced these boy/girl wonders. Stocks were quoted on the Exchange, and share values rose at unprecedented rates. So overnight there were million dollar companies operating out of basements and garages with a half dozen enthusiastic employees drawn from relatives and schoomates, with not even so much as a water cooler as an asset.

It didn’t take a genius to see that these companies were like houses built on sand, but avarice blinded the so called financial experts. Of course, not all the dot coms collapsed. A few, including Amazon.com, Yahoo and Google, went on to bigger and better things, but in short order most of the rest fizzled and died, almost bringing the previously thriving US economy to it’s knees.

The events I have related didn’t happen in the dim past; they are phenomena of the 70’s and 80’s. All the more surprising then that the US is currently in the midst of yet another financial disaster, the “Sub-Prime Mortgage” collapse. “Sub-Prime” mortgages are ostensibly financial instruments designed to make it easier for low income people to purchase a dwelling they would otherwise be unable to afford. The interest rates charged are initially very low, but later revert to much higher rates, bordering on usury. Often no deposit is required.

The motivation for creating and approving such mortgages is not altruistic. The drive is, as always, greed on the part of the vendors. People I know have received as many as six or seven calls a day from mortgage companies, offering such “deals.” The people who have fallen victim are generally home buyers with limited education and no finanacial acumen, or people who’s desire for a home blinded them to the pitfalls of “easy money.”

Now, when the higher interest rates are kicking in, the victims find themselves unable to make the increased monthly payments. This has coincided with the collapse of an over blown housing market, and the resulting drop in house prices. These homeowners then find themselves with a mortgage they cannot afford on a house that is worth considerably less than they paid for it, and that they cannot sell.

As usual, it isn’t the perpetrators of these scams that suffer, it is the poor, ignorant victims. Consuela (not her real name) came from Mexico to the US to start a new life. She works hard in a service industry job, and has four children between 4 and 11 years old. Three years ago, she and her husband bought a house with a sub-prime mortgage. This year she lost it to foreclosure. Her husband lost his job in construction because of the housing turn-down. Now they have to start over.

As I was completeing this column, I was dismayed to read an article in the October 17, 2007, New York Times, written by Brad Stone and Matt Richtel. I quote from the first paragraph:
“Internet companies with funny names, little revenue and few customers are commanding high [stock] prices. And investors, having seemingly forgotten the pain of the first dot com bust, are displaying symptoms of the disorder known as irrational exuberance.” The article goes on to say, “…….Internet start-ups are drawing investment based on their ability to build an audience, not to bring in revenue – the very alchemy that many say led to the inflation and bursting of the dot com bubble.''