Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book The scanning, uploading, and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law Please purchase only authorized electronic editions and not participate in or encourage electronic piracy of copyrightable materials Your support of the author’s rights is appreciated Copyright © 2008 Aaron Clarey All rights reserved ISBN: 1-4392-0406-3 ISBN-13: 9781439204061 E-Book ISBN: 978-1-61397-297-7 Visit www.booksurge.com to order additional copies To Eden All the stories contained in this book are true Names, times, locations, numbers and other identifying information have been changed to protect the innocent as well as the guilty Table of Contents TITLE PAGE COPYRIGHT PAGE PART I: TROUBLE STIRS An Economist Too Far The Thin Skinned Economy The Economic Chessboard is Set My Ex Was Sub Prime PART II: BATTLING THE BANKERS 10 11 12 13 14 15 Credit Union Blues – Bob, Bob and Bill Credit Union Blues – Little People Adventures in Inept Management Appraisal Antics Papers Please Failing to Do Their Homework “4” The Sky is Red Glut is a Four Letter Word The Three Musketeers Getting Away with Murder PART III: DESPERATE PEOPLE 16 17 18 19 Desperation Vindication Who’s to Blame What Can Be Done PART I TROUBLE STIRS An Economist Too Far One of my favorite scenes in one of my favorite movies is the scene from “A Bridge Too Far” where a young military intelligence analyst named Fuller has mounting evidence the Germans indeed have armored divisions and tanks in Belgium which would (and did) cause “Operation Market Garden” to be one of the largest Allied failures in WWII In the scene he calls in his commanding officer and shows him aerial photographs of German Panzer tanks in the Dutch countryside in the hopes of convincing his commanding officer to call off the operation Upon seeing the picture of the tanks, the commanding officer, visibly disturbed, rises from his seat, approaches the screen, pointlessly analyzes the tanks and nonchalantly says, “Yes, well I shouldn’t worry about that.” To which Fuller responds in disbelief, “But sir…you see that they are tanks?” Dismissing it, the commanding officer says, “I doubt they’re serviceable.” “But they still have guns,” Fuller points out “So have we!” the commanding officer vehemently responds And despite Fuller’s concern and evidence of German tanks, his commanding officer dismisses it all in one succinct statement that explains the real reason he’s disregarding the tanks; “Now look here… 16 consecutive drops have been cancelled in the past few months for one reason or another But this time the party’s on And no one is going to call it off.” Later in the movie Fuller is approached by an officer who summarily “relieves him of duty” by saying, “You need to rest You are tired.” For Fuller and his pesky intelligence keeps getting in the way of Operation Market Garden Of course in the end Fuller proved to be right The German tanks were not in disrepair Several divisions of veteran German soldiers were in the area And when it was all said and done Operation Market Garden cost the lives of 6,600 Allied soldiers and did not “end the war by Christmas” as proposed it would But today’s Fullers of the world are of a different breed For they are not so much WWII military intelligence analysts as much as they are the scores, if not, hundreds of veteran banking industry insiders, who like Fuller, dared to one thing; Think Though definitely the minority, there are those in the banking industry who had the intellectual veracity and independence to ignore group-think, objectively look at data, objectively look at research or just plain look at what was going on around them and were able to predict the housing crash long before it occurred And not only were they able to predict it, they tried to warn management so that disaster might be avoided But just like Fuller in “A Bridge Too Far” they were told “You need to rest You are tired” and were either lectured, disciplined or “relived of duty.” For they did not conform and play ball, but were getting in the way of what management believed to be perpetual commissions and bonuses You yourself may know somebody in banking or real estate who for the past three years was saying this was coming You may know somebody who works at an actual bank and has regaled you with stories of lax lending standards, loans being made to people who could not afford them and other such unbelievable tales You yourself may be a Fuller and have seen it first hand, trying to toll the bells to warn somebody, anybody about the impending doom But while the media and news focus on how “mortgage brokers” and ignorant, sub prime borrowers were the primary culprits of the housing crash, what they fail to tell is what was happening behind the scenes in the banking industry that created the perfect environment for the crash to germinate in the first place That it wasn’t just a bunch of renegade mortgage brokers and some sub prime borrowers that caused this, but it was an industry wide group-think that forfeited quality and credit in exchange for short term profits, bonuses and commissions that caused a systematic collapse of the housing market, and spread to the larger economy That there are criminals and villains beyond the mortgage broker and sub prime borrower who are to blame That they were fully warned in advance about the potential for a housing bubble And that the Fullers of the world were pressured, silenced, if not fired and disciplined for not playing ball and daring to have the gall to point out the obvious And just as it would be a crime not to have the heads roll for those responsible for 6,600 Allied deaths, so too would it be a crime not to punish those responsible for a housing market crash, a stock market crash, an economy in recession and millions unemployed For I too am a Fuller And I am pissed One, the real estate deals these smaller banks were getting were doomed to fail The market was already oversupplied and other banks had already passed up on these deals If a bank had already turned down the loan, this spoke volumes as other analysts had looked at it and believed it would not be paid back However… Two, despite the impossibility of the deal, bankers were paid on commission So even if the deal was unlikely to be paid back, they would still lobby for it, and more often than not, get it approved Three, these smaller community banks would salivate over multi-million dollar deals simply because they were multi-million dollar deals To a large national bank a $4 million deal is nothing grandiose But to a small town community bank $4 million is a large and coveted piece of business Not because it’s a good loan, but because it’s a big loan The results were predictable Despite the loan being a bad loan, despite it being passed on once, twice or thrice before, these small banks could only see the loan for its size and potential commission check And even though it was practically guaranteed to fail, these banks would approve these loans anyway But in doing these loans the damage these banks caused was disproportionately large for their size, as all they managed to was “hyper”-supply an already gluttonously-supplied level of housing Furthermore, the amount of housing they would bring to the market was not insignificant, for what they lacked in size they made up for in numbers If it was just one small time community bank approving a couple of bad loans then there would be no consequence But if 50 small time banks start approving hand-me-down loans, it was the equivalent of a large commercial bank approving hand-me-down loans With so much “extra-excessive” supply hitting the market, housing prices were disproportionately affected downward as the number of houses a buyer had to choose from went from five to ten But be it large commercial banks flooding the market with condos or small community banks sending the market into hyper-supply, the crux of the problem was an incentive situation similar to the mortgage brokers They were paid on volume, not risk Bankers would get paid on deals completed, not paid back Management would get bonuses based on sales, not loans paid back And so the results were similar Being obsessed with commission and completely disregarding risk, banks financed the construction of millions of homes that would never sell Housing inventories skyrocketed, driving down prices, and the banks did their job in helping contribute to the housing crisis Developers Hand in hand with the bankers were of course the developers And like the bankers, developers also hold some responsibility for the housing crisis However, the level of blame they deserve varies depending on the developer For while not all developers were as pure as the virgin snow, neither were they all evil incarnate The most “innocent” developers can largely claim to be victims of their own profession For these were the developers who were smart enough to conduct absorption studies, their homework and ensure their developments would sell However, the paradox they faced is if they did their homework they would have realized it wasn’t worth embarking on a new development While they would be immeasurably better off than their peers, they are after all “developers.” Meaning they don’t make money if they aren’t developing So even though they were smart enough to have the foresight not to start a new development, it didn’t change the fact they would be out of work for a while Unfortunately I only met one developer who could legitimately claim he fell into that group The vast majority of developers fell into a different category; just plain dumb This was the defining characteristic of most developers They just weren’t thinking Oblivious to anything such as housing supply data, population growth, absorption studies, these developers would just blindly go and build whatever they could And having grown accustomed to the boom years of 2001 to 2005, why wouldn’t they? Their previous developments sold out rapidly; why wouldn’t they continue to so in the future? While such ignorance can largely be explained in that the majority of your small time developers don’t have their doctorates in economics, this does not explain how the large, multi-billion dollar cookie cutter developers built so much housing Presumedly these multi-billion dollar corporations had the financial resources to hire economists and analysts And presumedly they would be very concerned about the status of the housing market and if it was oversupplied or not as it was their business But to this day, I can drive in the metro area and see swathes of their developments, sitting unsold, confirming the billion dollar losses they posted in their annual reports Yet for them to somehow “not know” or “be surprised” that the housing market would crash is inexcusable Rightfully blame the small independent developer as one might, even more blame should be given to these corporate developers The final group of developers are those who were just outright criminal They didn’t care so much about developing real estate, building quality homes or whether the market was oversupplied or not; they used housing as a means by which to enrich themselves And real estate was the perfect tool for this Just as real estate provided an incentive for banks to pass real estate deals, with millions of dollars exchanging hands, real estate was the perfect vehicle to commit fraud and steal millions It was ideally susceptible to being taken advantage of by criminals But here there are varying degrees of criminality Though not technically “criminal,” a fair amount of these developers never intended on producing a profit It wasn’t about running a business, it was about living off of a business And while you can’t go to a bank and say, “Give me $10 million so I can go act and live like I’m a playboy,” you can say, “I’m a busy, important, multi-million dollar real estate developer I need $10 million for my new real estate deal.” And while the cash is flowing around, you buy yourself a Mercedes because “it’s a necessary business expense to keep my image up,” you buy yourself a mansion because “I’m a real estate professional so I need this house,” and you brag to 20-something girls about how you’re a multi-million dollar real estate mogul Of course, in reality the 20-something girl probably has a higher net worth than you do, but then neither of you care about the difference between debt and equity spending So in the end, if you play your cards right you can pull off a Houdini and die owing $50 million in debt Then there are the developers that just outright borrowed money, used artificially inflated property values to borrow more, and not only lived the highlife, but would ship the money offshore, set up strawbuyers or engage in Ponzi schemes It is difficult to even call these people “developers” in that their primary intent was nothing as noble as developing real estate and building homes, but quite literally just using property as a means by which to extract millions from banks Here feigning ignorance or acting “surprised” there was a housing crash is akin to being “shocked, SHOCKED to find gambling is going on here” as they knew full well what they were doing Real estate was nothing but a front, a ruse to their real operations and intent Regardless, even though real estate development was not the primary goal of these “criminal” developers, the fact was they still added supply to the already over-supplied market Additionally, they also wreaked havoc on the banks that did business with them A legitimate developer who fails will actually still have the house and the real estate the money was used to build or develop An illegitimate developer has wasted it on booze, depreciating cars, trips to Europe and vanished investments The bank has little to no collateral to collect upon Look in the Mirror Point the finger at developers, accuse the banks of letting their guard down, and loathe the sub prime deadbeats all you want; it still doesn’t change the fact that on a very small level we all are to blame Not that we have taken specific actions to contribute to the housing crash, or have failed to pay our mortgage, but as a society we have let an unrealistic sense of entitlement permeate our thinking Afraid of insulting people or hurting people’s feelings, we opt to make the wrong decision instead of face conflict or confrontation We prefer to appease and capitulate rather than hold to standards and integrity We give students college degrees who can’t simple math, and pass illiterate kids from high school We want to be our daughter’s “best friend” and not her father We have allowed the Thin Skinned Economy to become reality It is this pervasive mentality that created the environment of unrealistic expectations in which the housing bubble formed With no standards (or a fear of adhering to them) and an entire generation expecting to get whatever they wanted, it was only inevitable there would be trouble as the difference between earning a living and being entitled to one was quickly erased The catalyst that allowed this false reality to come true was real estate This was not by chance as real estate had the qualities and traits that would permit such a reality to exist Most notably the premise that housing is viewed as a right If anything people are entitled to housing and dare you suggest you should have to pay for housing the knee jerk reaction of the Thin Skinned Economy is to berate you as cold and heartless (no matter how truthful that statement is) On top of housing being a “right,” the creation of HELOCs and HELs perpetuated the false reality you didn’t have to work to eat Again, allowing people to use their homes as ATM machines, instead of work, people relied on increasing housing prices to afford their lifestyles Furthermore, the sheer longevity of the housing bubble entrenched this mentality A five year run of exponentially increasing property prices meant if you didn’t have the money now, you just had to wait till next year when your house would appreciate enough to buy that Corvette Furthermore, the fact a housing bubble formed is no coincidence as bubbles are the economic symptom of a society that deems itself entitled It is no accident less than eight years ago a bubble had formed in the stock market Some even say the housing bubble is merely a re-manifestation of the stock market bubble and to a certain extent they are correct But the reason for this frequency of bubbles is perpetually rising asset prices (be they stocks, housing, commodities, etc.) are particularly appealing to human psychology, because it gives the temporary (and false) impression of infinite wealth And not only infinite wealth, but wealth you didn’t have to lift a finger for i.e - bubbles allow the entitlement mentality to become reality by making it possible for people to live in La-La Land where work is an option and consumption is limitless You simply rely on increasing asset prices Of course, this cannot last Be it a stock market bubble or a housing bubble, by definition they burst And not only they burst, they have consequences and costs And these consequences are never worth the temporary benefits we enjoyed during the bubble whilst lying to ourselves The housing market alone is expected to cost at minimum around $200 billion And this says nothing of the million jobs lost thus far, the decaying purchasing power of the dollar, the loss in personal wealth and the specter of recession The pity is such costs are completely inexcusable and unnecessary as there is absolutely no reason for bubbles to exist They are easily preventable and should never occur in the first place The reason why is as humans we have the intellectual capability to read history, study basic economics and look at things like the South Sea Company or the infamous Holland Tulip Bulb Bubble and realize when there is one Furthermore, humans have the ability to be rational It didn’t take an economist to know housing prices were overvalued It took common sense Despite what economic or financial theologians would suggest, bubbles are easily identifiable Regardless, it is not so much a question of intelligence and our ability to identify bubbles, as it is overcoming the irresistible promises a bubble offers The idea of zero work and infinite wealth is all too appealing and our ability to logically think it through and avoid the consequences of a bubble are often overridden with our natural human desires That somehow “this time, it’s real.” That “this time it’s different.” When in reality it is not The solution to preventing bubbles and their consequences in the future is very simple; be adult Be realistic Be rational Do not adhere or succumb to the Thin Skinned Economy To have the spine to say “no” or to deny people their hedonistic desires is not mean, but rather compassionate A “tough, fatherly love” of sorts The quintessential example of this is my former boss with the 50% default rate track record Back then when these people were applying for loans, I was no doubt the “bad cop.” I was getting in the way of their dreams of owning a bar Getting in their way of running a trinket shop But my boss, he was nice He “cared.” He was there to “help the little people.” He was spineless He did not have the ability to hold his ground, adhere to standards and integrity and say no And while at the time I was the “bad guy,” in the end all my boss managed to was impoverish these poor souls by sending them into bankruptcy He ruined them financially by giving them enough rope to hang themselves No doubt to this day these people have a poor opinion of me, but if it were up to me they wouldn’t be in foreclosure or filing for bankruptcy What Can Be Done It Could Have Been Avoided If there is anything that must be stated at the onset, it is the entirety of the housing crisis was completely unnecessary and could have been avoided Not just because we have the intellectual ability to read up on economics and identify bubbles, but because it was no secret there was a bubble Scores, if not hundreds of articles were written, not only speculating about a bubble in the housing market, but outright stating there was one As early as 2002 and 2003, reputable financial periodicals such as The Economist, the Wall Street Journal and the Financial Times churned out hundreds of pages of articles highlighting impossibly high price-to-rents and price-to-income ratios, a burgeoning sub prime market, the ascendancy and abuse of ARMs, HELOCs and negative amortization loans – as well as eerie similarities between the property bubble here and the property bubble in Japan during the 1990s And while your everyday American may not read these publications, those in banking, finance, and real estate did and therefore cannot feign surprise that there was a crash Secondly, there was just as much evidence and research being churned out by Academia that pointed towards a bubble Most notably, work done by the founder of the Case Shiller Index (and appropriately monikered “Bubble Hunter” by The Economist), Dr Robert Shiller of Yale University Using similar valuation techniques he used to identify the stock market bubble of the late 1990s, Dr Shiller easily identified the bubble forming in housing Using price-to-rents and price-to-income ratios (akin to the price to earnings ratios used for stocks), Dr Shiller provided the simplest and most conclusive empirical evidence there was a bubble in real estate But while Dr Shiller was well known in business circles, and such research was no secret to the banking and finance communities, it was apparently ignored as a bubble would not have ensued otherwise But if there was any reason the housing bubble was avoidable it was that one didn’t have to be a renowned Ivy League economist to know housing prices were overvalued You just had to be a regular, average person You just had to be sane While on business in Rapid City, South Dakota, I was at one of the local bars and started conversing with a group of middle-aged farmers, none of whom had any background in economics or finance Yet all of them intuitively knew prices had been appreciating at an abnormal rate They also intuitively knew too much property was being built in this relatively small town Correctly, all of them speculated prices would drop It wasn’t that they were looking up price to rents ratios at the Federal Reserve’s web site They just had enough common sense to know something was fishy when their property was all of a sudden worth 30% more than the year before with no obvious reason for it The point is, be it through financial journals, research from the academic community or just common sense, bubbles and misallocations of capital are typically identified early enough that action can be taken to avoid their consequences It is therefore not so much a question as to whether we can detect bubbles early enough, but whether we have the wherewithal to anything to stop it If we are reminded of the cost and consequences of previous bubbles we can prevent such hangovers by ending the parties early Changes in Compensation Structure Without question, another change that absolutely must be made is to change the compensation or incentive structure in the lending industry The most obvious flaw, and arguably the single biggest contributing factor to the housing crisis, was that people were paid on sales-based commission and not profit-based commission This literally translated into paying them to flood the housing market with real estate that would never sell and buyers who would never pay them back Had bankers’ and brokers’ compensations been tied to profitability and not sales, the housing bubble would have never occurred in the first place Already this is happening to some extent as a few banks are changing their commission structure to base it on profitability and payback instead of volume Various schemes are used, but invariably all of them have some percentage of a banker’s or broker’s compensation tied to repayment Further evidence of sanity permeating the banking community is showing as more and more of the managers’ compensation is tied to profit and not loan volume Additional hope comes from the increasing number of managers and executives getting fired for their role in creating the housing debacle and bringing their former employers to the brink of bankruptcy Regardless, to be truly effective any commission or incentive program based on sales should be eliminated from the entire lending community While volume is certainly an important part of running a growing and profitable business, it is pointless to grow sales exponentially if it only results in losses growing exponentially In tying the salespeople’s compensation to quality, not quantity, a large percentage of the incentive problem that gave rise to the housing crisis would go away Improvements in Underwriting/Credit Another area for drastic improvement would be to overhaul the underwriting or credit department of banks Presumably the gate keepers of credit, most credit departments either had their hands tied or were simply overruled by sales-obsessed management teams This effectively relegated them to nothing more than a formality or a rubber stamp It was only a natural consequence, then, that with impaired or “Vichy” credit departments future losses would mount as all the bad loans went into delinquency or default However, some simple measures can be taken to bring relevancy back into underwriting One of the simplest being to require an independent absorption study of any real estate deal – similar to how appraisals are required of any real estate deal today Just as eliminating the sales-based commission structure would have stopped the housing bubble cold, so too would unbiased, independent absorption studies If it was plainly obvious to the banks as well as the real estate developers their projects would not sell, there would have been less political pressure to approve these loans, if any Second would be to require audited financial statements of anybody interested in doing sizeable real estate deals Financial statements, be they tax returns or balance sheets are all too prone to fabrication Be it Ivar’s personal balance sheet where his “magic property” increased 50% a year in value during the depths of a housing crash, or horribly complex tax returns that were to be disregarded because they were “just trying to lower their tax bill,” none of them were of any use to underwriting as no meaningful information could be gleaned from them However, if these financial statements were audited and given a stamp of approval by a reputable CPA firm, then these financial statements would carry some credibility and could be used by underwriting to gauge the true financial risks of the loan Until then, they can largely be dismissed as mere marketing tools used to trick underwriters into giving them the stamp of approval Third, akin to requiring audited financial statements would be to deny anybody a loan who filed an extension This is just commonsense as if you don’t have the most recent tax return of an individual, then you really have no idea how capable the borrower is of paying back the loan Smooth talk the analyst all you want, tell them “it’s been a great year and you’re just behind on your taxes,” and claim “you’re a good guy,” it doesn’t change the fact that without the most recent tax return it is impossible to measure the likelihood of that person paying you back Furthermore, if you are so irresponsible you can’t get your taxes in on time, chances are you are incapable of repaying a loan in a timely manner It was no coincidence those who filed extensions were the ones most prone to go into delinquency and default If people claim to be responsible enough to demand a loan, then they should be responsible enough to file their taxes on time A fourth item that would be of immense help and really bolster the quality of underwriting and credit control would be to have an economist on staff It was amazing to me just how many banks, that were presumably in the business of finance and economics, had no economists in their ranks Only one job I had was I chartered with being the “in house” economist; the rest of the time the job of analyzing the economy fell into the laps of analysts who were to perhaps make some token mention of the economy, if at all Many report templates of these banks made no provisions for the economy to be addressed, period Any serious level of economic analysis or efforts to hire an economist were nonexistent It should come as no surprise that without an economist, somebody to watch over the markets, interest rates, etc., the larger macro-economic picture of a housing bubble was completely missed Wearing horse-blinders, analysts focused solely on the specifics of the deal and bankers focused solely on clinching the deal Nobody was paying any attention to supply figures, the sub prime market, price to rents, and other economic variables that would have warned them of the danger they were in But be it because economists may have cost too much money or perhaps an economist would be just another Fuller and get in everybody’s way, management of these banks decided against having one But of all the recommendations, the single best thing that can be done to improve underwriting and credit would be to grant them autonomy and independence By making underwriting autonomous and independent from management, bankers or sales, these people can what they best without any political pressure – assess risk This would not be terribly difficult to as underwriting or credit could be treated as an ancillary department within the bank, just like accounting It doesn’t answer to anybody, just itself Furthermore, it’s not like management, bankers, or sales have to like what comes out of underwriting If credit and underwriting were merely an advisory function they could write their reports as they saw fit, submit their findings to management and the bankers, and if the bankers still wanted to approve the loan despite what credit said, so be it Had I or the thousands of other Fullers out there been given such a level of autonomy or independence, we wouldn’t have to kowtow to the desires of the bankers and could instead focus our attentions on assessing risk This may not have stopped the housing bubble from forming as we could have still been overruled, but it would have at least established genuinely independent underwriting Unconventional Ideas To help battle high gas prices I came up with the ingenious idea called “Maximum Telecommute Policy,” simply meaning having as many people as possible telecommute to work instead of drive I got the idea as I realized I hadn’t had one job since 1997 that couldn’t have been done from home And given the advances in faxing, the internet and computer technology, the vast majority of jobs can be done from home; so why force millions of people everyday to pointlessly go to an office? This would bring about a whole bevy of benefits including a drastic reduction in the demand for gas, lower gas prices, less pollution, the elimination of rush hour and traffic jams, not to mention more time with ones’ families Brilliant of an idea as it was, the reaction I got was the typically defeatist and increasingly-American attitude of “that’s unconventional.” “It can’t be done.” “It would never work.” And instead of trying to find a way to make it work, people would find reasons it would fail But if you think about it, it is by being unconventional people and society truly advance and progress It’s not by doing the same things the same way as we always have It’s by being creative, innovative and unconventional a society becomes truly great If we were “conventional” we’d all still be farmers If we were “conventional” neither blacks nor females could vote If we were “conventional” then the United States of America would never exist It is because of this that unconventional ideas are superior ideas, and no matter how “outlandish” they may sound, they should be heeded They are also precisely what is needed to remedy and prevent the problems brought about by the housing crash One such idea would be to punish those who are responsible Not “punish” in terms of the FBI or IRS launching investigations, filing charges and fining companies some token amount, but rather “unconventional punishments” that would be so severe they would actually deter such illegal and unethical behavior in the future Most logically would be to require banks, lenders and other financial institutions to pay for the mess they’ve made depending on how involved they were This could be done several ways, but two of the easiest would be either to tax them or require they contribute money into an “insurance fund” of sorts The proceeds of which would go to ensure that not one penny of taxpayer money would go to bail out either them or the sub prime deadbeats they loaned money to Be it a “tax” or a “mandatory insurance contribution” this would achieve two things One, it would recompense any taxpayers who would have to bail out the financial servicing industry today, and at the same time set aside some funds should another debacle like this occur again in the future Two, it would serve as a great deterrent to banks, lenders and other finance companies to treat the taxpayer like Daddy “Federal Government” Warbucks They would be forced to make sure they made good loans, because if they didn’t it wouldn’t be the taxpayer bailing them out, it would be themselves And should the banking and lending community prove themselves adult enough to go a century without an S&L scandal or a housing crisis, the tax or mandatory insurance payment could be lifted Another unconventional idea that would force banks to be responsible would be to make it possible to go after the personal assets of the bankers and brokers of bad deals, making them personally liable (or at least pay a hefty fine) for any losses arising from bad loans This alone would eliminate the need for underwriting or credit, as bankers would make doubly sure the loans they brought to the table were good ones Go for volume all you want; bankers would insist on audited financial statements, site visits, quarterly reviews, updated tax returns, and so forth The results would be an immediate improvement in the quality of loans being made, and it would guarantee a bubble or scandal such as the housing crisis would never happen again Of course many would claim this is too “severe” a punishment on par with violating bankers’ th Amendment rights However, it is the severity that would make it such a rarely used punishment as it would deter even the thought of making bad loans Banker Baseball Cards A not so severe, yet very unconventional idea that would achieve the same objective would be “banker baseball cards.” Since banks are backed up by various government agencies, even if the banks are privately held, their financial statements are made available to the public Furthermore since the taxpayer is on the hook if these banks need bailing out, the public has a right to know what kind of financial position these banks are in But while this speaks to the banks, it says nothing of the individual bankers that constitute the bank Since it is their mistakes that are ultimately guaranteed by the taxpayer, then their track record and ability to make good (or bad) loans should be made available to the public as well A web site such as the FDIC’s bank institution directory could post statistics and figures on individual bankers just as it does banks However, a more colorful and effective method might be to make actual “banker baseball cards.” These would substitute for their modern day “business cards.” On one side would be the standard contact information, name, fax, etc., and on the back you’d have a bevy of statistics testifying to the quality and caliber of the banker Statistics such as; Percent of loans paid back Percent of loans in default/delinquency Taxpayer money spent on bailing this banker’s bad deals out Loans closed per year Average loan amount Number of complaints filed against banker Number of investigations by the authorities And so forth Knowing that it wasn’t just the bank under the public eye, but their performance as an individual banker as well, bankers would have the incentive to conduct good, moral and ethical business Not just for reputation’s sake, but if they ever wanted to get hired by another bank or be “traded to another team” they would have to keep their statistics up Such public scrutiny would also help prevent against bubbles and scandals in the future Let Them Fail Fun as it may be to opine of banker baseball cards, or “hunting down” individual bankers for their personal assets, or forcing banks to pay a punitive “bank tax,” such drastic punishments may not be necessary, for another unconventional idea could achieve the same objectives but far more simply; let them fail Tax them all you want, make them contribute to a mandatory insurance scheme, tie bankers’ and brokers’ personal assets to the loans they make, and create all the new regulations you desire, all of it would require legislation – legislation that would take years to implement and would only be butchered to impotence by lobbying, and rendered toothless by congressmen too addicted to special interest money However, in letting banks fail, in letting them go under, no matter how vital banks may be to the rest of the economy, it sends the signal to the banks they are on their own The purse strings have been cut The taxpayer, no matter how bad the short term consequences are, is not going to be perpetually fleeced every time the banks and the finance industry get themselves in over their heads It would send the opposite signal the S&L bailout did in the 1990s, and is the precise signal that must be sent to undo the moral hazard that has infected parts of the finance industry And while some firms are inextricably entrenched in the US or world financial systems, and unless bailed out would trigger a massive recession, many of the banks are not Many of the banks are completely unnecessary and unneeded and deserve to go under Simply letting them is threat enough to the rest to get their act together and ensure they never engage in such unscrupulous behavior again Besides, there is another major advantage in having free market forces be the regulators of the banking or any other industry – they are infinitely cheaper than government paid ones Truth Another foreign concept would be the concept of “truth.” Or more specifically, incorporating truth into the everyday operations of the firm, especially when it comes to dealing with clients I got this idea in that though I was not a banker, occasionally I would get a new potential client looking for a loan This was good since the banker hadn’t gotten to them first, building up unrealistic expectations and demands If I was able to sit down with a brand new client, I would be able to convey, very clearly, yet politely what was to be expected of them and what we could or could not And though I was not as “nice” or “schmoozing” as the bankers, my “clients” would be more likely to get a loan, more likely to furnish us with adequate documentation and less likely to go into default because I had clearly set forth the expectations and demands we would need to provide them a loan This was better customer service than what most other bankers were providing, because it allowed for a more functional and efficient business relationship with the client The reason why is it was based on truth I didn’t promise they’d be approved for a $10 million loan with no collateral and no tax returns I didn’t promise them we’d disregard their credit score and see what we could And, if they were too high of a credit risk, or their business plan was bound to fail, I would be forthright with them and say they weren’t going to get approved and should drop the idea Ergo, truth, even if it is not the “flowers and puppies and ice cream” sales mentality where the customer is never wrong, is an immensely powerful and beneficial “unconventional idea,” because it guides customer’s expectations into reality, not dream land It also prevents them from making a mistake and ending up financially ruined like half of my previous boss’ clients It is truth which allows you to more good for that customer over the life of the business relationship, and should be incorporated into every corporate culture Had something as simple as “truth” been adhered to, again the housing crash would have never occurred Education But of all the recommended courses of action, the single best thing to prevent another housing crash or any other economic catastrophe from happening ever again is quite simply education People not realize how powerful and what the potential is for a nation that adequately educates its population in finance and economics Not only would such debacles like the housing crisis be avoided, but bankruptcies would dramatically decline, debt levels would drop, crime would plummet, unemployment would be perpetually low, standards of living would jump to levels never dreamed possible, and recessions, just like Polio or the measles, would be eradicated It is merely a question of whether we care to eradicate the ignorance that causes these ills It is a question of whether a society is willing to be intellectually honest enough to abandon the Thin Skinned Economy, take the time to study economics and live in the real world Not that we don’t make some effort to educate ourselves when it comes to economics and finance, but it is an absolute disgrace the poor job today’s education system does If at all, economics is a token requirement usually taught by a history teacher with no real background or understanding in economics and finance Worse still, anybody with real world experience is prohibited from teaching in the public schools on the flimsy grounds they don’t have a “teacher’s license” (Alan Greenspan himself could not teach economics at the majority of our schools) Furthermore, as no doubt have been the majority of people’s experiences, economics was such a boring class that instead of embracing it, it was loathed and feared by millions of high school students It is no coincidence Ben Stein’s accurate depiction of an economics teacher in “Ferris Bueller’s Day Off” resonates so well with society This is just as much a tragedy as the housing crisis itself, for in failing to educate the masses in finance and economics, we have failed to educate ourselves on one of the most important, if not the most important aspect of our lives Furthermore, it is almost criminal because the costs of such ignorance are so severe Had personal financial management been taught in the schools, would the sub prime market even exist? Would most 25 year olds have credit card bills larger than their student loans? Would there even be a housing crisis? Would the Baby Boomer generation be so woefully unprepared for retirement? Blame the bankers, blame the brokers; the utter failure of the education system to instill any semblance of fiscal discipline is just as much to blame Therefore, it is not even debatable whether there is a need for education; it is a mandate The costs are too great to have a nation so financially retarded, but more importantly the benefits are too unfathomable in having a nation so financially literate But to realize these benefits changes must be made in two areas of financial and economic education The first would be in the realm of personal financial management While it is conventional to teach a token class in economics, economics in itself is more theoretical than practical Instead of economics, more emphasis should be placed on personal financial management Everything ranging from simple budgeting and balancing the checkbook to more advanced topics such a 401ks, IRAs, etc Courses that would handhold the student through every major and minor financial issue they’ll run into over the course of one’s life Housing, education, financing children, financing college, insurance and retirement planning The benefits of such an education would be immense At minimum people would learn to spend within their means, eschew debt, and be self-supporting But more importantly people would be given the “road map” or “how to manual” to attain personal financial success throughout their lives Imagine how much better off you’d be if you had such a class when you were 18 To know at that age you should major in computer engineering rather than art history To have known to contribute to an IRA account at 23 instead of blowing it at the bar To have saved up your money for some rental property instead of a fancy sports car To elope instead of having a wedding and invest the savings in 529 plans for your children Chances are you would be immeasurably better off today And though it may have been interesting (or as is often mandated in high school) to study “fluff” subjects such as psychology, physical education or a foreign language, the education received from these classes pales in comparison to the practical and real world benefits that would be realized through a thorough education in personal financial management Resources should be diverted from these classes and channeled instead to financial management The second area for improvement would be in economics itself Here a world of improvements could be made While teaching economics at the local community college, I was amazed at the preconceived notions my students had about economics They loathed it They feared it And this is truly a shame because economics is one of the most amazing and interesting studies And to fail to instill excitement, let alone relevance or pertinence in your students is the most unforgivable sin in the economics profession Here you have the key to financial success, the ability to convey to your students the secrets to making nations and a people great, and you make them fall asleep It is in letting go of the formulas and showing your students the immense amount of good and greatness that can be achieved through economics that your students will naturally become intrigued and energized Therefore, functional as calculating “producer surplus” is, it pales in comparison of what can be learned by watching “American Gangster.” And textbook as it is to explain the concept of the “market mechanism,” it takes absolutely nothing to set up a fake “stock market” with fake currency and get your students into a screaming bidding frenzy It is by instilling this passion in your students that the important and pertinent lessons of economics can be taught and more importantly heeded But most important of these lessons is the aspect of “why.” Specifically, why people should engage in certain economic behaviors Tell people to balance their checkbooks and contribute to a 401k plan all you want; unless they know why, there is no impetus to such things Economics provides this impetus by showing them the costs, consequences as well as benefits to taking certain actions, making certain decisions and therefore provides the guidance by which a person can make their own decisions Secondly is the moral lesson one learns from economics as it pertains to personal financial behavior Namely that one has an obligation to the rest of society to support oneself This is another primary benefit of having an improved education in economics – the realization of stewardship Not because it’s “nice” or because it’s “noble.” But because being a steward of society is not optional If people not know why it is important to adhere to good fiscal discipline, to pay back their debts, to work instead of live off the dole, then society and the economy will collapse In instilling this moral purpose of production, work ethic, as well as shame should one be an economic “free loader,” you not only provide a moral economic compass to guide individual economic behavior, but you also instill pride in an individual This strong sense of work ethic and economic stewardship is what gives rise to great nations, envied standards of living, and national pride Finally, it is not just stewardship to society, but if it’s a democracy then economics is a mandate For if you live in a democracy, you not only have an obligation to be on top of your own personal finances, but you have just as much of an obligation to be aware of your government’s finances, as the people are ultimately responsible for those finances This is just as important as personal finances, as even if you make all the right individual decisions, if the country as a whole is mismanaged economically, everybody will suffer Furthermore, the potential for a democracy where its population is thoroughly educated in economics would be unlimited Government policy would be more effective Unemployment would be perpetually low Economic growth would naturally be higher Plus, politicians would be less able to deceive the people with outlandish promises they could never deliver on Regardless, the more educated people are about their economy, their government and the country’s finances, then the better fiscal stewards they will become of their nation Regardless, be it making personal financial management a standard mandatory high school class or breathing life into the economics profession to give it some semblance of sexiness or pertinence to the masses, education is the key to preventing such disasters like the housing crash from happening again It is the vaccine against such ignorance that not only caused the housing bubble, but any bubble, misallocation, and recession in our economic past However, education should not just be looked at in terms of a vaccine in preventing “bad things” like the housing crash from happening, but as a means to realize all the unlimited potential if a nation as a whole practiced good personal financial discipline as well as took a vested interest in their nation’s finances As mentioned before lower unemployment, unimaginable standards of living, less crime, the eradication of recessions and a whole slew of other socio-economic benefits would result At minimum a housing crisis would never happen again But then again, such an idea is unconventional Special thanks to: My Mom, Brian, Eden, Jennelle, and John Bucktowndusty and the crew at fromthepen.com Kate over at Smalldeadanimals.com and her motley crew of Canadians Carol over at Dr Shiller’s office The fine men and women at the MAAR Excellent research and excellent charts Roberto and Vinny, your names are kept secret with me Natasha…you sexy little minx, you The intellectual Aussie titan known as Frank at Franksemails.com Marty Andrade at martinandrade.wordpress.com Dr King Banaian, whose name took me a while to learn how to spell Dr Robert Shiller at Yale University Dr Mark Perry at mjperry.blogspot.com Dr McClelland at the University of Colorado The fine men and women at The Economist and their outstanding research and writing And of course, a special hat tip to all the aspiring, junior, deputy, official or otherwise economists at captaincapitalism.blogspot.com This book would not have been possible without you ... However, Alan Greenspan could not have single-handedly caused the housing bubble if it were not for the help of another group of people; brokers and bankers For brokers and bankers furnished the second... homes to buy the things they always wanted Want a flat panel TV? Just take it out of your home Want that brand new SUV? Just get a home equity loan and write off the interest And did you want to take... it; there was no way There was no way these people would ever pay back their loans We’d be doing them a favor by telling them no and thereby preventing them from inevitably having to file for bankruptcy