OTHER VOICES: Wall Street greed brought down Detroit

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8:00 pm, May 17, 2009


OTHER VOICES: Wall Street greed brought down Detroit

Source:http://www.crainsdetroit.com/article/20090517/FREE/305179964/1079


By John Mogk

Detroit has been vanquished by Wall Street greed. The auto companies might have better designed models for market needs, but cars are not selling principally because credit has been frozen, consumer wealth has been obliterated and a large number of jobs were lost nationwide after the banking industry collapse.

The crisis was caused by faulty unregulated financial schemes concocted by a few greedy Wall Street financial houses.

After Sept. 11, the U.S. Treasury flooded the economy with federal funds to dramatically increase national spending to avoid a recession. Enormous sums became available to finance home purchases. Banks lowered credit standards to bring tens of thousands of new subprime buyers into the housing market. These actions greatly increased nationwide housing demand, elevated prices to unsustainable levels and eventually caused the collapse of the housing market, the banking industry, Detroit's auto industry and its local economy.

The working poor were aggressively solicited to buy homes with little or nothing down. Lenders salivated over the fees and interest subprime buyers were required to pay because they were poor credit risks. Those fees often left the subprime buyer little or no equity at closing.

The real estate industry sold the view that housing values would continue to increase, allowing borrowers who defaulted to refinance or sell their homes at a profit. Any refinancing would result in even more exorbitant fees.

At first, Wall Street was left out of collecting large subprime mortgage fees, but beginning in 2002, a handful of firms began to sweep up prime and subprime mortgages and bundle them into unregulated mortgage-backed securities, known as “derivatives.” Respected rating agencies gave these risky derivatives their highest rating and they were sold around the world.

Selling derivatives generated large fees for financial firms and injected a large amount of additional capital into the mortgage market. Some derivative investors would purchase them only with protection against potential defaults by mortgage borrowers. So for yet another fee, a select group of financial and insurance firms, like AIG, issued “credit default swaps” that allowed investors to collect on bets that their derivatives would not be repaid.

One purpose of the Sept. 11 attacks was reportedly to destroy the American economy. The cruel irony is that al-Qaeda received unexpected help from a small group of greedy Wall Street leaders and firms.

With trillions of taxpayer dollars bailing out the banking industry, Americans must be assured that never again will Wall Street be allowed to manipulate American capitalism to the destruction of our working-class families.

John Mogk is a professor of law at Wayne State University.