Analysis: What Wall Street bailout?

Talk about a Wall Street bailout makes no sense at all.

Wall Street does not own the things it sells. It simply acts as a broker, similar to a swap meet where people bring the things they want to sell. The broker does not own the things being sold.

If you bought a golf cart at the swap meet and a week later it stopped working because it was defective when you bought it, you wouldn't bring it back to the swap meet to get your money. You would need to go looking for the previous owner. No one would be talking about a Swap Meet bailout. Could you imagine the government reimbursing you? The entire notion is absurd. What follows is a description of what actually took place and why it happened.

In 1977, President Jimmy Carter signed legislation allowing community groups to sue banks and other lenders for not making home loans to racial minorities, residents of blighted neighborhoods, and low income individuals on government programs such as welfare. The legislation required banks and other lending institutions to forgo their fiduciary responsibility to their depositors and investors, the latter of which were primarily workers' retirement accounts, and required them in the name of economic justice to simply give the money to borrowers irrespective of any ability to ever repay it.

At first lenders tried to hold all borrowers to the same standards, but found themselves in court for violating the new lending laws. That allowed community groups like the Association of Community Organizations for Reform Now — ACORN - led by a cadre of attorneys organized by, among others, Barack Obama, to sue lenders that refused to make the giveaway loans.

At first the lenders paid nuisance money to these groups rather than incur the larger cost of going to court, but as the demands became more and more insatiable, the lenders started going to court and winning. Judges found merit in the argument that the money actually belonged to the bank's depositors and workers' retirement accounts — and so, not requiring borrowers show the ability to repay the loans, would itself be a violation of the lenders' responsibility to their depositors and our nation's retirees.

This battle continued for more than a decade until a newly elected President Clinton put teeth into the legislation by adding severe penalties for not making these loans. In addition to being sued, the lenders were suddenly subject to large fines and termination of their lending status by federal agencies, which would essentially put the lenders out of business. Lenders, who for over a decade had fought giving their depositors' money away to those who could never repay it, were suddenly required to make loans to borrowers irrespective of income, length of time on the job and credit history. Lenders gave up when Congress assured them that Fanny Mae and Freddy Mac, two quasi-government agencies, would guarantee the loans.

Before it was over, loans as high as a $100,000 were being given to borrowers who had been on the job for only a few months, often working at or near minimum wage and having had prior purchases repossessed for non-payment less than a year before their loans were being approved. The government bureaucrats who required lenders to make these loans seemed oblivious of the fact that the loans consisted of people's bank accounts, needed to pay current household bills and the retirement savings of over a hundred million American workers.

After more than a quarter century of congressionally legislated malfeasance, banks and other lending institutions saw the writing on the wall. When these government-forced loans defaulted, it would be the banks and lenders who would be held responsible, not the Congress that had forced them to make those loans. Lenders found themselves between a rock and a hard place. If they did not make these loans they would be forced out of business. If they did make the loans and held the notes to maturity, they would lose their depositors' money and the retirement savings of millions of American workers.

As it became clear that Congress's delinquent brats, Fanny and Freddy, did not have the money to guarantee these loans as they said they would, the lenders panicked and went to Wall Street, asking them to get rid of (SELL) the loans. The loans were then repackaged as mortgage-backed securities and sold to countries all over the world so that the lenders could put this money back into people's checking, savings and retirement accounts.

Since the countries that purchased these instruments were expecting to make a 5% return on their investments and essentially all of the loans were in default, those who had purchased the securities made absolutely nothing. Like other countries all around the world, Norway had invested billions and within only a couple of months realized that they were making a return of exactly zero. Suddenly, governments all over the world began demanding their money back — what a surprise.

Since the world had bought the loans from Wall Street they turned to them for their refund. Unfortunately, the big Wall Street banks were only the middlemen, and had taken at most a one half percent sales commission before turning the other 99-plus percent of the money over to the banks and retirement plans that had originally been forced to make those loans. And so of course, Wall Street had no money to give back.

If the savings banks and retirement plans were forced to give the money back, their depositors' checks would bounce and retirees would not get their monthly retirement checks. This left Fanny and Freddy to come to the rescue as Congress had promised they would, but they were not equipped to bail out 30 years' worth of bad loans that Congress had demanded lenders make. Things quickly got ugly.

When the dam broke and the American people began demanding an explanation, the lenders let Congress know that they were not going to take the hit for this mess. At the same time, Congress let the lenders know that it was not about to be held responsible for what it had forced lenders to do. As push came to shove, Congress and the lenders decided that Wall Street should take the hit for this mess even though they had absolutely nothing to do with it, but since the toxic assets had passed through their hands — their fingerprints were on the packaging - it was decided that they would be the fall guys.

Wall Street decided to fight both the lenders and Congress by openly telling the American people that their only involvement was nothing more than packaging the loans for sale, but trying to fight Congress and the organizations that had forced lenders to make those loans turned out to be a losing proposition. Congress announced that Wall Street had to pay back trillions of dollars they did not have and immediately declared the 158-year old Lehman Brothers firm insolvent and quickly put them out of business overnight so that no one could investigate. Bankruptcy for individuals can take weeks or even months. For large corporations the process can take years, but in this one case it was done in only a few hours.

The rest of the Wall Street firms got the message and remained silent when Congress assured them that they would simply print the money and Wall Street could pass it on to those who had bought the toxic assets, a not so subtle offer of hush money. Congress had the printing presses working overtime, printing dollars for Wall Street to hand over to the sovereign nations that had bought the worthless paper. Before it was over, our national debt went to $19 trillion and is still climbing.

The Wall Street firms shook their heads in disgust and stoically passed the money on to the countries that had purchased the toxic assets, and everyone kept quiet about Congress's quarter century of coercion to make improper loans with the life savings of other people's money. That is, until Congress got carried away with its own righteous indignation. In response to growing public anger, and in an effort to assure that anger would not be directed at Congress itself, Senate hearings were called and Wall Street firms were brought in and raked over the coals for "destroying the economy."

On May 1, 2010, Goldman Sachs was the Senate's whipping boy. Then on May 6, only five days later came the Flash Crash, during which­­ ­— for the first time ever, the Dow crashed 1,000 points in an astounding 20 minutes. Wall Street was reminding Congress of the deal that had been made — after forcing banks and retirement funds to make improper loans with other people's money, the government bails them out and Wall Street promises not to tell the American people that it was Congress itself that caused the economic nightmare by forcing lenders to make those loans against their better judgment.

But, if Congress was going to throw Wall Street under the bus when they had absolutely nothing to do with it, then all bets were off. Goldman made it clear that the financial industry could simply step back and allow the market to crash prior to the November election, if Congress really wanted to renege on the "money for silence" agreement.

Congress adjourned the hearings, which were never reconvened. A complicit media gave Congress cover by constantly repeating that "Wall Street did it."

In my assessment, the original reason progressives in Congress forced lenders to make those loans was to atone for past wrongs from hundreds of years ago instead of providing the affected communities with jobs. Trillions of dollars forced out of workers' bank accounts and retirement plans jacked up the price of housing to absurd levels, which everyone in the industry knew would eventually come crashing down.

It may take 50 years, if ever, to dig out of this engineered fiasco. So, as we leave this shameful period behind, we need to stop repeating the lie that taxpayers had to bail out Wall Street, when the taxpayers actually ended up bailing out the progressives in Congress, who forced this mess upon us all — in a feeble attempt to absolve themselves of any guilt, for the sins of their very own slave-owning families.

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Steve Novak, MBA, was an Army Drill Sergeant, a heating and air-conditioning Journeyman, a surveyor in Oslo, Norway and a property appraiser with the Assessor's Office in Las Vegas, during which time I published two articles in the International Property Tax Journal "Fair & Equitable." He was the only property appraiser in Nevada to ever be published in this journal (July 2005 & October 2006).