Ever since the Global Financial Crisis hit simultaneous to my own personal debt problems, I’ve been interested in business, finance and how money works. Macrobusiness has be an excellent source for my fiscal education and last week, they linked to a reprehensible article entitled Prosecuting the financial crisis: Just who should we be blaming anyway?
By my reading, the author’s thesis is that as the buyers of the mortgage backed securities, the collapsing value of which triggered the sub-prime mortgage meltdown and the ensuing Great Recession, did not do enough due diligence and weren’t as financially savvy as the sellers, this absolves the sellers of any criminal liability caused by their allegedly fraudulent activities.
To begin with, let’s separate those responsible for the sub-prime housing crisis from those who have allegedly committed crimes. Responsibility lies with the greater part of American society. Mortgagees took out loans on houses they could not afford, while others withdrew equity on the premise that housing always goes up in price, most of which was pumped into unproductive consumer goods. Mortgage brokers sold mortgages, knowing that they couldn’t be paid back and that the risk would be offloaded to investment banks. The banks took a cut going both ways, funnelling investors’ money to the brokers and packaging up the loans into securities and passing them back to the investors. Investors were desperately looking for any yield in a near zero interest rate environment while credit rating agencies handed AAA-ratings like candy.
These people were all greedy, stupid and reckless. These unfortunate flaws in human character led to the mess we find ourselves in now where Iceland went bankrupt, the Eurozone is being sorely tested, China, Australia and Canada have built their economies on differing bubbles and most Americans are now poorer compared to the top earners than they have been for the last five decades.
Being stupid or greed, as most people are aware, is not a crime. Fraud is the whitest of white collar crimes. When you come to the negotiating table with a product that you not only know is defective but you are actively betting against the success of, you are not showing good faith, you are not displaying what anyone with a spine would consider ethical behaviour and you are not being honest. These are the basic, if not criminal (like the author, I am not a lawyer), definitions of fraudlent behaviour. To try to excuse this by claiming “[n]o one has any business running money if they do not understand that this is how the game works” is monstrous. Tell the people with foreclosed mortgages that it’s a game.
When investment banks and mortgage brokers come to the negotiating table with any of an alphabet’s soup of hedge and pension funds and sell them what they in their own words describe as “a shitty deal”, then you deserve to be charged with fraud and let what passes for justice these days do its job. Law and order, baby.
The author tries to pass this off as somehow not unethical and not criminal behaviour by virtue of the fact that this is considered normal in financial circles. Had the investors done their due diligence, they could have avoided the shitstorm that followed. Besides conveniently ignoring the fact that sub-prime mortgages were sold in any case, just because a behaviour is normalised is not relevant to whether it is legal or ethical. Think pirating music and movies.
At the end of it all, it wouldn’t infuriate me so much if capitalism had taken it’s course and weeded out the malinvestments and the perpetrators had been required to suffer in some way for endangering the world’s economy. Instead of being obliged to answer for their mistakes to the courts, shareholders and the wider public, the bankers were allowed to keep their jobs, keep the money they made causing the crisis and the insolvent institutions were propped up by the taxpayer. The bankers remain the smug, Gordon Gekko wannabes they were pre-crisis and have the backing of millions of their own dollars and billions of tax payer dollars and it’s time they were made to answer, and pay for, their actions.
Just like the rest of us.