Quantitative Easing Explained

You may not know whether to laugh or cry when you watch and hear this video. Gotta love a computer voice saying things like "shit hit the fan."  

This video covers a lot of territory about what the Federal Reserve is up to and why.  And who benefits most.   Clue: it's not you and me.

Here's the video.

Banks Are Not Your Friend

Anyone who is interested in hearing about how Big Banks are only interested in making money, not in benefiting customers or society, may want to listen/read to this article on Marketplace last week (8/6/09).

Up front, I want to say that it seems like a lot of people who have mortgage problems right now have no one to blame but themselves. Some never read contracts. Some should never have tried to buy any house, based on their income and past credit status. Some should never have bought houses that were far beyond their means. That said, some were mislead by bankers, brokers, and realtors.

The Marketplace story deals with the Federal government's attempts to get the banking industry to modify the mortgages of people who are struggling to hang on to homes in this recession. The Obama Administration recently released some statistics on how the mortgage modification efforts are going, and while some Big Banks are having some successes, some others are not. So if you're looking for another Big Bank to despise, you might want to add Wells Fargo to your list.

It seems that one of the obstacles to modifying mortgages is the same thing that some say started the entire mortgage meltdown and Big Recession: mortgage backed securities. These were loans that were bundled together with other mortgages and sold to investors. Unfortunately, many of these bundles contained less than stellar loans, and when people began defaulting, well, the rest is history. Since many of these Big Banks didn't retain the loans they made, but sold them off as fast as possible, some might say that they had relatively less incentive to make solid loans from the outset.

When the banks bundled these loans together and sold them off to investors, some banks, like Wells Fargo, remained as the loan "servicer." So while the homeowner sends his/her check off to Wells Fargo each month, the bank technically doesn't own the mortgage any more.

"...Wells Fargo sold the loan to Goldman Sachs. Goldman then bundled it with nearly 3,000 other loans, and sold off that package of loans to investors as a mortgage-backed security. It kept Wells Fargo on to collect payments from homeowners."

You may recall Goldman Sachs. Those are the investment bankers that reported record earnings for the second quarter of 2009.

At any rate, when homeowners now ask for lenders to modify their mortgages so they can keep their heads above water and keep their homes, some are being told they can't modify them because the "investors" won't allow it. In one particular case covered in this article, the reporter investigated the contract covering the mortgage bundle to the investors and it contained no restriction at all on the loan servicer's (Wells Fargo) ability to change virtually any aspect of the mortgage.

The situation seems to be such that once again, the bankers and their lawyers are mostly covering their backsides. If a contract is even slightly vague about what the loan servicer can do, the Big Bank will do nothing in order to avoid getting sued. The homeowner is left holding the bag.

However, in the case that's highlighted in the article, the reporter examined the contract sold the mortgage in question to investors, and it contains no limitations on Wells Fargo's right to modify the mortgages. In essence, this means that if it wanted to help the homeowner, it could. What was Wells Fargo willing to do? They offered to reduce the interest rate from over 12% to a little more than 4% (this mortgage had started out at about 7.5%). That sounds promising, but they also insisted on adding about $80,000 to the amount of the loan. The extra was an accumulation of unpaid fees, accrued interest, late fees, and what the reporter called "numerous other fees." That's $80,000 added to a $235,000 mortgage. The reporter also said that the contract did not require adding the "overdue debt" to modified mortgages. Predictably, Wells Fargo refused to answer the reporter's questions and insisted the new monthly payment offer was "reasonable." So we are free to reach our own conclusions and mine is that if Wells Fargo wanted to help these homeowners, it could. However, it appears that it is more interested in maximizing its own profit. This isn't a big surprise; after all, "the business of business is business." However, in the midst of the Biggest Recession since the Great Depression, wouldn't it be patriotic and symbolic if Big Banks acted like they cared? They don't have to actually care, just the appearance of caring would be nice.

So remember, Big Banks are not your friend and the only thing that they're interested in is separating you from your money. If a Big Bank (or any other Big Corporation for that matter) says they have your interest at heart, grab your wallet and head for the door as fast as you can. Perhaps it would also be reasonable to patronize a bank other than Wells Fargo for your banking needs.

I think my next post might be about why we need to bring back usury laws.... :-)

A "Marketplace" Home Run

These days, I find myself getting more of my news from the American Public Media program Marketplace, on National Public Radio, than from anywhere else. The show is self-described as "a program which looks at the entire world through the lenses of business, economics and finance." It's not just about money. I pride myself for being a liberal arts major, and I think I managed to take just a single economics course in college way back when. Marketplace puts all those "business" topics into easily understood terms, even for liberal arts majors.

IMO, Marketplace hit a home run on Monday 6/29/09. The entire program was filled with worthwhile, and in some cases, uplifting stories. Even if you don't normally listen to this program, if you have any interest in history or what's going on around us these days, I urge you to either download the podcast or read the text of the stories for 6/29; it will be a half hour well-spent. The link for the show is here. The stories include:

• Victims of Madoff react to his sentence of 150 years in prison
• Toxic assets are still looming in the murk (and some banks don't want to sell them per the Fed plan)
• Fee hikes rise for debit cards
• Nigerian oil production disruptions due to rebel attacks (and why they're not affecting our gas prices very much)
  
• Fireworks shows and how many communities can't afford them this year (this is the uplifting one)
• Michael Lewis on the fall of Wall Street (the author mentions that government watchdogs still haven't actually spoken with the people at AIG who caused much of the chaos)
• Debt wasn't always the enemy (how the GI bill after WWII helped expand the middle class and home ownership in the US)

The article about fee hikes might cause some people to complain once again about those damn banks, but this one is a little different. Seems some folks over the years have treated debit cards less like checkbooks and more like credit cards. Since debit cards are linked directly to your checking account, you're not supposed to use it if you don't have the cash to cover it, and banks weren't supposed to let you use it if you lacked the cash. Seems the rules changed several years ago, and many banks now let you use the debit card even if you don't have the bucks to back up the transaction. Who woulda thunk?! Now, with looming limits on credit card interest, banks are imposing higher fees on those "overdraft" debit transactions. First thought: if you're nuts enough to not keep track of how much cash you have in your checking account, you deserve whatever fees the bank may impose on the privilege of overdrafting with a debit card. I don't have the same kind of sympathy for these people as I do for those being charged 20-30% interest on credit card debt.

The interview with Michael Lewis and what's still wrong with Wall Street includes the assertion that we still have not actually dealt with much of the underlying problem, and that there will be a "greater reckoning down the road" (i.e., more economic collapse before we're done with the Depression/Recession). One of Lewis' main observations is that when he went to interview people, like at AIG (the people who "actually know what happened") he's the first person they've talked to. That is, no one from Treasury or the NYS insurance regulators had "showed." He calls that amazing, I call it nonfeasance at best, and malfeasance at worst.

The 6/29/09 program is here. You can read the segments or listen to the podcast. Either way, these stories are eye-openers.