stevenlmeyer

"It is very hard to prove they did anything illegal for the simple reason that they probably did not."

The only reason that predatory lending might not be strictly illegal in today's financial environment is that the banks' previous lobbying and donating to government had succeeded in removing the regulation that once prevented such practice.

Illegal?

Maybe not.

Immoral, unethical, deceptive, fraudulent, dishonest, underhand, greedy, predatory, callous, reckless?

Yes.

Bronwyn,

It may well be all of the above.

However even if, say, predatory lending practises were to be made illegal, proving a particular lending practice was predatory would be difficult.

Sub-prime mortgages are a case in point. In the US sub-prime mortgages are simply mortgages for people whose credit history and income is such that they do not qualify for Federal mortgage insurance.

A number of mortgage brokers convinced banks that they would be able to select people who could service their loans even though they did not qualify for Federal mortgage insurance.

Guess what Bronwyn?

For many years it worked. Many people today own their own homes because of the operation of the sub-prime market. If you believe home ownership is a good thing than the development of the sub-prime market was a good thing.

Then everybody got greedy. The careful selection of candidates for sub-prime mortgages went out the window and we had a free for all. In addition the originating banks were able to unload their sub-prime problems through the aggressive sale of CDOs

So at what point does a regulator intervene?

It's not easy. Intervene too soon and you kill a market that enables poor people to own their homes. Intervene too late and catastrophe.

I have no sympathy for banks but these are difficult issues.

Just saying the banks are evil does not solve it. We need a banking system.

stevenlmeyer

"In the US sub-prime mortgages are simply mortgages for people whose credit history and income is such that they do not qualify for Federal mortgage insurance."

Unfortunately, the reality is that those in question were far less innocuous than that. They were marketed to be affordable to begin with, but contained a sharp jump in rates after two or three years. This crucial information was buried in the fine print of the contract and rarely, if ever, revealed by the agents operating on commission to the banks who sold these loans.

"For many years it worked. Many people today own their own homes because of the operation of the sub-prime market. If you believe home ownership is a good thing than the development of the sub-prime market was a good thing."

The sub-prime lending was always going to "work" for a limited time. The smart operators you referred to earlier knew they had time to jump ship before the proverbial hit the fan. (Sorry about mixing metaphors and inadvertently creating messy tongue twisters but the descriptions are very apt.) Once the number of loan defaults reached a critical mass and triggered a downturn in house prices, the whole elaborate scheme came unstuck as it was always bound to.

"Just saying the banks are evil does not solve it. We need a banking system."

Of course we need banks. We need a return to a banking system which is monitored by well considered regulation, not the current free-for-all, where there are not enough checks and balances to curb the excesses of human greed and cunning which will always be part and parcel of the industry.

Well said Bronwyn.

Of particular annoyance is the knee-jerk response that when an institution such as banks is deservedly criticised; "Just saying the banks are evil does not solve it. We need a banking system."

Well, state the bleeding obvious. Of course we need a banking system, one that is fully accountable. All deregulation has achieved is a top-down power relationship with its customers, that is neither sustainable (greed) or beneficial (people losing their homes).

Yet as soon as the word 'regulation' is uttered out come the self interested who see communism under any system that benefits the majority of people rather than the wealthy elite.

Extract from: http://www.alternet.org/workplace/80581/economic_meltdown%3A_the_consequences_of_legal_bribery/

"The problem began in the 1980s, when -- under political pressure from the banking industry -- the Reagan administration and Congress stopped regulating the nation's financial institutions. Commercial banks and savings-and-loans used their political clout -- especially campaign contributions -- to get Congress to loosen restrictions on the kinds of loans they could make.

One of government's important roles is to establish ground-rules, and to regulate companies and industries, to save them from their own short-sighted greed. Government is necessary to make business act responsibly.

Without it, capitalism becomes anarchy."

Bronwyn, Fractelle

Despite the jump in rates, most people who originally obtained sub-prime mortgages kept their homes.

I agree, though, that the impending jump in payments should have been made more prominent.

You are correct that mortgage brokers and others made huge profits out of the system. See my posts of Saturday, 23 August 2008 12:57:58 PM and Saturday, 23 August 2008 3:44:12 PM on this thread.

In fact it is these PERVERSE INCENTIVES that are at the heart of the banking crisis. Unless these are addressed no amount of regulation will help.

While we may all agree that more regulation is necessary, try and get agreement on the details. I've been there, done that, it's difficult.

We also need to remember, frustrating as this may be to contemplate, that Australia is a bit player. We cannot move our banking regulation too far from internationally accepted norms without paying a heavy price. Many people don't like this reality but it won't go away.

For my part I think that regulation of INCENTIVES, rather than banking practices per se, are the best option for ensuring more responsible banking. The idea that you should be able to take the money and run before your errors of judgment, foolishness or recklessness comes to light is the root cause of most of the problems in the banking system.

One way of doing this is to pay all incentives, including director's fees, two or three years in arrears. By 2010 or 2011 we should be able to judge whether decisions made in 2008 were a one year wonder or really in the interests of the stakeholders.

The best part of attacking incentives is that it is something Australia actually can do on its own. The only people who will lose out big-time are inadequate directors who may see their fees docked

An address to the golden door
I was strumming on a stone again
Pulling teeth from the pimps of gore when hatched
A tragic opera in my mind...
And it told of a new design
In which every soul is duty bound
To uphold all the statues of boredom therein lies
The fatal flaw of the red age

Because it was nothing like we'd ever dremt
Our lust for life had gone away with the rent we hated
And because it made no money nobody saved no one's life.

So we burned all our uniforms
And let nature take its course again
And the big ones just eat all the little ones
That sent us back to the drawing board.

In our darkest hours
We have all asked for some
Angel to come
Sprinkle his dust all around
But all our crying voices they can't turn it around
And you've had some crazy conversations of your own.

We've got rules and maps and guns in our backs
But we still can't just behave ourselves
Even if to save our own lives so, says I, WE ARE A BRUTAL KIND.

Cuz this is nothing like we'd ever dremt
Tell Sir Thomas More we've got another failed attempt
Cuz if it makes them money they might just give you life this time.