Did Bethany McLean Misspeak When She Wrote About UK Banking And The GSE's?

This article was originally published to my personal blog at Talkmarkets:

www.talkmarkets.com/contributor/gary-anderson/blog/financial/did-bethany-mclean-misspeak-when-she-wrote-about-uk-banking-and-the-gses?post=73494&uid=4798

Bethany McLean's misstatements about UK banking and our GSE's is troubling. Now, it is possible that she is not aware of the information I have linked to and that she wrote her comments out of lack of knowledge. But she is in a position where she could have known more about the subject. After all, she is the author of 'The Smartest Guys In The Room, is a Reuters/Vanity Fair contributing editor,and has been an editor at large for Fortune Magazine and a contributor to Slate.  She should explain her reason for the misstatements.

It would be great if she would clear all that up for us.

In her recent Linkedin article,  I've written books about Enron and the financial crisis. But Fannie Mae is the scariest of them all, she quotes Bank of England Mervyn King:

“Most countries have socialized health care and a free market for mortgages. You in the United States do exactly the opposite.”
Of course, the UK did not have free markets for mortgages, they had a bubble based on manipulated liar loans just as we did. I wrote about it on Business Insider. I wrote:

The smoking gun is that the liar loans, which were central to the most intense part of the housing bubble, were imported from the UK, not just to the United States, but to PIIGS nations in Europe as well. The liar loans may have been different slightly in make up from country to country. For example in the UK you had to put money down. In the US you could have a no down, interest only, liar loan!

But, it is pretty clear that the financial system the world over was interested in liar loans for one reason. That reason was to get folks to buy investments in risky CDO's that made banks large profits through origination fees. This was all about the banks, thought up by the banks, and encouraged by the banks. The banks had an ulterior motive for this behavior. Main street had no clue. One banker said you just needed to fog a mirror to be eligible for a liar loan in the UK.

The truth is, the UK had been allowing these loans for years, in the early turn of the 21st century, before they were deliberately introduced to America in mid 2003. This was not just the behavior of rogue institutions in the UK. Most of the lenders, the brokers of the shadow banking system, encouraged liar loans. Only there they were called self certified mortgages.

The Royal Bank of Scotland, the biggest lender, by far, in the UK, encouraged the loans. These were not rogue groups.

The manipulation of loans in the UK was no different than the manipulation of toxic loans in the United States.

So, in the Linkedin article, Bethany makes an additional misstatement. She says that the GSE's argued that the big banks wanted to take away their business but that it was just an unproven conspiracy. Considering she wrote this at such a late date, this year, it is hard to justify her continuing to believe this was just a conspiracy. There is just too much evidence to the contrary. Again, her influential position as a best seller makes it important that she clarify her position and give reasons why she still holds onto that erroneous belief.

Clearly, the big banks have wanted to replace the GSE's for some time. And a New York Times article confirms this fact. The article quotes Michael Barr, law professor at the University of Michigan at the time:

“I don’t think that private shareholder-owned entities should issue federal government guarantees., I think that creates the same conflict we had in the past.”

So, that article was published in 2011. I would be interested to know if Bethany McLean actually saw that article or understands that it is not a just a conspiracy the GSE's were talking about. The NY Times has proof that this is clearly the desire of the big banks. 

Now, here is the deal, the private banks, no longer able to fool investors with failed AAA mortgages, want to control the entire securitization process, in place of Fannie and Freddie.There is simply no other conclusion one can take from the New York Times article.

They want the power to issue government guarantees. Private companies issuing government guarantees on loans that they originate? Do they think we are fools? But when you see a timely article and published book by a woman who dismisses this real truth as simply being an unproven conspiracy, you wonder what her motives are and who is backing her or if she is simply misinformed.

Back to the first misinformed claim, about the UK mortgages. She quotes Mervyn King regarding the free market that the UK supposedly has regarding mortgages, she gets that wrong as well! With permission of the Crown Corporation, I can make this known publicly:



3. Help to Buy: mortgage guarantees

Mortgage guarantees helps you buy a home with a deposit of 5% of the purchase price. It’s open to both first-time buyers and home movers for new-build and older homes in the UK with a purchase price up to £600,000.
The guarantee is provided to your mortgage lender by the government - not to you.

Eligibility

To qualify for a mortgage guarantee, the home you want to buy must:
  • have a purchase price of £600,000 or less
  • not be a shared ownership or shared equity purchase
  • not be a second home
  • not be rented out after you buy it
The property doesn’t have to be newly built.
You don’t have to be a first-time buyer and there’s no limit on your level of income. But you can’t use Help to Buy with any other publicly funded mortgage scheme, or an interest-only mortgage.
So much for the free market in UK mortgages. The article says you can only use this mortgage scheme alone, and not with other mortgage schemes. It is a scheme alright, and Bethany McLean seems to want to give the illusion that the mortgage market is a free market in the UK.

Perhaps she would answer whether she thinks having the big banks taking over the GSE business has anything remotely to do with a free market! Indeed, both of her misstatements are deeply intertwined, as private companies in the UK have public power, yet lead bankers like King deny it and pretend only a free market exists in the UK.

You can know this, the big banks, Wells Fargo, JP Morgan, and the other big banks want the GSE business and they want to pose as private organizations creating a free market, sort of like the illusion created by the UK! But they want that ability to guarantee loans from your taxpayer paid funds.

This placing of government power into the hands of the private sector is a form of totalitarianism, where private enterprise controls government in an unwholesome manner. There is massive power in private banks determining government loan guarantees.

We cannot let the big banks guarantee any mortgages they want to, for securitization purposes. While it is likely that they will operate under guidelines that are stricter than in the Great Recession housing bubble, they would still have the power to guarantee bad mortgages if they felt pressed to do so. That could result in a continuing attack on the stability of house prices. The middle class depends upon that stability, but bankers make money on volatility of house prices, as they do on the movements of other commodities. We know that other markets could be manipulated. And we know that housing was manipulated prior to the crash and Great Recession.

In that housing bubble, so many easy money loans were made, that the easy money itself pushed up housing prices, and it was a form of QE. This occurred in the UK and in the USA. Bidding wars brought on by people who had been approved for bigger and bigger loans drove the price of houses up. Even the Wall Street Journal admitted it!

The Journal says that in the current housing market, supply is low, and that is causing a new reason for bidding wars. This is not necessarily a national inflation of prices brought on by very easy money to the unqualified, but inventory now is definitely is pushing prices up in the West and in other places.
So, banks may have more power to control inventory now. They don't need the marginal borrowers anymore. But that does not mean the banks can be trusted to maintain this discipline forever. They have proven their willingness to lend money to anyone with a pulse, when their backs are against the wall.
For that reason, they should not be permitted to make decisions on who gets government guaranteed loans and who don't get those loans.

Comments

Popular posts from this blog

Gary Anderson's Talkmarkets Articles by Subject

John Mauldin Discusses What Could Go Wrong

My Gedmatch Jewish Roots Force AntiIsrael Stance: Palestinian DNA