The Monster

The MonsterA month ago, Michael Hudson sent me an excerpt from his new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America — and Spawned a Global Crisis. I enjoyed it so much that I requested a review copy. I read it quickly, then mulled over it between engagements to consider how to best present a complicated reaction.

Lest that be taken the wrong way, know up front that I like the book. Hudson possesses excellent writing skill, which is a craft less rewarded than it should be in a world of sound bites and improperly punctuated text messages. Once a Wall Street Journal reporter and occasional contributor to Forbes, Hudson is currently a staff writer at the Center for Public Integrity in Washington, D.C. He knows how to assemble a gripping story. That’s important, especially when weaving a story about part of the world that most people find to be complicated and intimidating. Any dope can see the drama on a football field. It takes great care to present drama in corporate boardrooms planning how to financially rape a nation with complex contracts. Hudson’s book shows in vivid detail the scoundrels behind the subprime mortgage boom, the inept regulators that enabled them to run wild, and the poor victims of the fraud.

It’s the latter that complicate my reaction. Looking at the same financial crisis two years ago, I was struck less by the timeless shenanigans behind the mess than by the stupidity of those duped by them. I’ve spent my career showing people how simple the basic tenets of finance are, yet legions of them continue falling into the same tired traps year after year.

How hard is it to understand, for example, that you never sign a contract you haven’t read? Not very, but we find out when looking closely at many people supposedly “tricked” by the subprime mess that they didn’t even take the time to read and understand what they were signing. That’s why I maintain that if people were financially smarter, the mess never would have happened. More than the failure of regulators to save the day, it was the stupidity of the masses that allowed the day to be lost.

This is not a criticism of The Monster, however. It’s not Hudson’s fault that the only reason the scam could work is that so many people are woefully ignorant of all things financial. Whatever caused the debacle, Hudson just reports it in his book.

Any fault with the book comes from Hudson’s focus on the evil of the perpetrators, and his uncritical sympathy for the victims. That leaves the book incomplete, in my view. He reveals his leanings right away in the book’s dedication: “To anyone who’s ever been broke, busted, ripped off, cleaned out, or drowning in debt.” Readers feel a tinge of Bob Dylan’s world view in that. Who doesn’t want to take down the rich bastards behind the mess and lift up the poor marks left helpless in the streets?

It’s the wrong reaction, though, if our goal is to minimize the number of financial victimes in the future. Feeling sorry for somebody doesn’t help them much. Victims crying out need to turn an honest, critical eye on themselves. Are some bankers evil? Yes. Are some government regulators inept? Yes. Is our society bedeviled by complicity between corporations and politicians, both of whom want as much money from the masses as possible? Yes. Unfortunately, these facts will never change. To expect anything different is childish, and adults need to take time to learn how to survive in such a world. That’s the bad news. The good news is it’s not hard.

The Monster is a worthwhile read for better understanding the dark parts of human urges, specifically the tricksters that lurk on the other side of sales pitches, and offer teaser rates, and aim to confuse their quarry. What I find missing in it is an appeal for readers to take responsibility for their own finances, and to possibly help family members and friends take control of theirs. People need to stop complaining about the treachery that will never go away — rise up and defend against it!

To supply this part of the story that’s missing from The Monster, I show below an excerpt from its pages followed by a complementary excerpt from my book about the crisis, Financially Stupid People Are Everywhere: Don’t Be One of Them.

From The Monster, pages 4-6:

Carolyn Pittman was an easy target. … deluged almost every day, by mail and by phone, with sales pitches offering money to fix up her house or pay off her bills. … [A salesman] said Ameriquest would help her out by lowering her interest rate and her monthly payments.

She signed the papers in August 2001. Only later did she discover that the loan wasn’t what she’d been promised. Her interest rate jumped from a fixed 8.43 percent on the FHA loan to a variable rate that started at nearly 11 percent and could climb much higher. The loan was also packed with more than $7,000 in up-front fees, roughly 10 percent of the loan amount. …

That was just the start of Pittman’s mortgage problems Her new mortgage was a matter of public record, and by taking out a loan from Ameriquest, she’d signaled to other subprime lenders that she was vulnerable — that she was financially unsophisticated and was struggling to pay an unaffordable loan. In 2003, she heard from one of Ameriquest’s competitors, Long Beach Mortgage Company. [It was actually a company created by the same person who created Ameriquest.] …

A salesman from Long Beach Mortgage, Pittman said, told her that he could help her solve the problems created by her Ameriquest loan. Once again, she signed the papers. The new loan from Long Beach cost her thousands in up-front fees and boosted her mortgage payments to $672 a month.

Ameriquest reclaimed her as a customer less than a year later [when another salesman] promised, once again, that refinancing would lower her interest rate and her monthly payments. [Two Ameriquest representatives came to her home.] They brought a stack of documents with them. They told her, she later recalled, that it was preliminary paperwork, simply to get the process started. She could make up her mind later. The men said, “sign here,” “sign here,” “sign here,” as they flipped through the stack. Pittman didn’t understand that these were final loan papers and her signatures were binding her to Ameriquest. “They just said sign some papers and we’ll help you,” she recalled.

[Attorneys alleged that Ameriquest falsified Pittman’s monthly income on the application, boosting it from $1,600 to $3,700.]

For Ameriquest, the fact that Pittman couldn’t afford the payments was of little consequence. Her loan was quickly pooled, with more than fifteen thousand other Ameriquest loans from around the country, into a $2.4 billion “mortgage-backed securities” deal … put together by a trio of the world’s largest investment banks: UBS, JPMorgan, and Citigroup. … Slices of [it] got snapped up by giants such as the insurer MassMutual and Legg Mason, a mutual fund manager with clients in more than seventy-five countries.

The story is sad for Carolyn Pittman and others like her who didn’t understand the traps presented by salespeople, and nobody can be blamed for a bank falsifying their income. However, insisting on reading and understanding every page of the contract, with payment schedule and fees, would have prevented ever applying for a loan that made no sense.

Also, this disaster started long before subprime entered the American landscape. People like Pittman usually carry bloated balances on their credit cards and drive more car than they can afford because America’s culture of debt tricks them on all fronts, and it’s high time they wake up to the pattern and stop it.

From Financially Stupid People Are Everywhere, pages 2-3, 37, and 39-41:

Banks got into trouble by lending money to such borrowers and then transforming the loans into exotic investments that skittered across the earth like locusts. The loans and securities based on them became known in the media as “toxic assets” that the government had to manage. Thing is, those assets didn’t spring from nowhere. They were the prickly green weeds above ground, but they weren’t the roots of the problem. The roots were the borrowers, those who signed on the line to a payment they couldn’t afford. The borrowers, not the loans, were the problem.

Financially stupid people are America’s most toxic asset.

They fail to see the money-trap society around them. They live in a world controlled by corporations seeking to extract as much of their wealth as possible, and the moronic masses open wide for every lure. They trust false promises of bought-off politicians. They sit mesmerized before advertising campaigns telling them to buy trifles they don’t need using debt they can’t repay. They stumble down the path paved by big business that transfers their income to corporate coffers. They don’t realize that the way of the world is not the way they want to live, then they wonder what happened when they end up broke and hopeless. What happened is that they fell for the pattern, the easy route, the stairway to serfdom. They did not take control of their own financial future. They did not guard their wealth-building effort against the flimflammery of a debt-based culture concocted by corporate boardrooms and made into law by puppeteered politicians.

Do companies try to trick people? Of course they do, and always have. …

Financial markets are made up of fallible people plagued by human weaknesses like greed and dishonesty. They will never be clean. Do yourself a favor and stop trusting them.

Does the United States need to better regulate banks and financial markets? Yes, but the government says that after every blow-up. They enact new rules, a few good years go by, banks and other financial institutions say the rules are no longer needed because everything is going so well, the government clowns who don’t know a thing about finance in the first place cave in to pressure from financial lobbyists to relax the rules, the abominable banks and financial fools and sap-headed speculators run wild and inflate yet another bubble, then everybody is surprised and outraged when the bubble bursts. It has always gone like this, and always will. …

Why did mortgage-related assets turn toxic in the first place? Because the mortgage payments weren’t made. Why weren’t they made? Because financial lame-brains couldn’t figure out how much house they could afford. Let’s not beat around the bush. The real toxic asset festers much farther down the mortgage food chain. Initially, it wasn’t the financier who created the mortgage-backed securities; nor the next one who figured out how to slice, dice, and resell them around the world; nor the bank that offered bad terms to the borrower. Nope, ultimately, it was the dipstick holding the signing pen who couldn’t figure out that the deal on paper wasn’t right for him.

“Sorry,” he could have said, “I can’t afford these payments.”

“But they’re small for the first two years,” the broker jerk would have replied.

“I see that,” the smart borrower could have said, “but it’s what happens after those first two years that worries me. I need a steady monthly payment, and I need it smaller than these. I have to pass.”

Hallelujah! Repeated millions of times, that’s all it would have taken to avoid the housing bubble and its aftermath, and the bad loan deals would have died out quickly. You know why? Because as soon as banks realized people weren’t going to fall for terrible terms, they’d have stopped offering. They only offered these terms because idiots accepted them, again, and again, and again.

Gosh, how could the poor unwashed masses have ever avoided being duped by unscrupulous mortgage brokers and bad banks? How could they have seen through the sales pitches and the smoke and mirrors and arrived at any semblance of a good decision? “What should I do?” calls out the babe in swaddling clothes holding trembling pen to paper.

Um, read the contract?

I’d start there. Signing something used to mean that you’d read and agreed to it. These days, it apparently means only that the paper was slid across the desk to a poised pen. “Where do I sign?” is all anybody knows how to say anymore. Again, not too hard to grasp: first read, then sign. Say it with me, “First read, then sign.”

How about a mnemonic device? When somebody says, “Sign here,” think of your signature as a sign that you read the darned thing. Haven’t read it yet? Then don’t leave a sign that you have.

For subprime rubes, it probably would have been a good idea to calculate not just the ability to pay the first 24 payments, but all the rest after that. Whaddaya think? Had subprime rubes taken a moment — or two, or however many needed — to read the contracts in front of them, they would have noticed their payments being laughably low for two years, then suddenly increasing after that.

“Say, honey,” a rube could have mumbled to a nearby spouse upon discovering the ramp-up in the interest rate. “These first 24 payments look like a slam dunk. It’s payments from 25 and on that worry me. Lookee here.”

The spouse leans over to behold the jump from payment 24 to payment 25.

“My, my, you’re right. We can’t afford those.”

Even if the payment schedule wasn’t that explicit, surely the word “adjustable” or “variable” in front of “interest rate” should have aroused curiosity. What if, just what if, the rate were to adjust or vary its way upward? Might have been worth thinking about.

The no-longer-a-rube could have then put down the dangerous pen, looked across the desk at the smiling poison vendor, and said, “Sorry, this won’t work for us. We can handle the first two years, but not the years after that, so I can’t sign. We’re out.”

Didn’t happen. One rube after another signed on the line, and a catastrophe was born. They called themselves victims, but we know better. They were too stupid or lazy to read the contract into which they entered voluntarily, and then unable to honor their side of the bargain. Did they deserve the house of their dreams? Puh-lease. They barely deserved the pen they signed with.

Harsh? Maybe. I’ve never met Carolyn Pittman or the many other people profiled in The Monster. I’m sure if I did I would feel sympathy for them. What I wish more than anything is that Pittman and the others had somebody like me or Michael Hudson or another financially savvy person around to help them. You can be sure that my mother would never sign on to such awful mortgages. It’s possible that Pittman has no such financially savvy people in her life, and that she’s just plain incapable of grasping the terms of a mortgage contract. There are such people, and the tricksters are vile to the core for fleecing them. We can all agree on that.

However, I’ve met firsthand people who are capable of understanding the terrible way they’re managing their credit cards, the expensive car they buy or lease every three years, and the usurious terms of some subprime mortgage contracts. Yet, they live their lives as debt-society suckers anyway.

Do I expect Hudson’s book or mine to change America? No. The people who really need the information don’t read financial books, or maybe any books for that matter. It’s a lesson I’ve learned the hard way. Writing about personal finance is largely an exercise in preaching to the choir. Those who need the info aren’t paying attention. Those who are paying attention already have the basics of money management down. They’re not hard, after all:

  • First Rule of Finance: Spend no more than 80 percent of your take-home pay.
  • Credit cards: Never carry a balance.
  • Cars: Don’t finance. Pay cash for your vehicles.
  • Castles: Put at least 20 percent down on your house, and keep the mortgage payment below 40 percent of your take-home pay.

That’s about it, yet so many Americans come nowhere near it. Instead of never carrying a balance on credit cards, they always carry a balance. Instead of paying cash for a car they can afford, they become chain borrowers taking on new car debt before paying off old car debt. Instead of putting 20 percent down on a house they can afford, they put down as little as possible on the biggest house they can get away with. When their fraudulent finances don’t work out, they complain that the system is stacked against them. “It’s unfair,” they cry. “I can’t get ahead. Nobody’s looking out for me!”

Right, there’s only our own good judgment to look out for us. The recent crisis made that plain, and I thought maybe it would finally be the event that could smack people upside the head and make them manage their affairs right. No such luck, it seems.

That’s why the backdrop will never change, and we need to just get used to seeing the cycles play out as new generations of the tuned-out show up to fall into the age-old traps they’d be able to avoid if they’d just take a little time to understand them. Ugh.

For an exciting look at what went wrong, pick up The Monster. Just remember as you read it that it didn’t have to happen that way, that the villains will always lurk among us, and that awareness and self-reliance form the best defense against swindlers.

On that note, here’s part of the conclusion from Financially Stupid People Are Everywhere:

Banks are predators. Government is incompetent at best, complicit at worst. Companies want to sell you this year’s trifles by saying they’re better than last year’s — though not as good as next year’s, mind you. Most of your neighbors, relatives, and coworkers long ago fell into the trap of borrowing and spending. They’re all lost causes. There’s nobody to look out for you, except…you, my friend. There’s only you.

The good news is, you’re enough.

You can do it. Your own two feet are the best you’ll ever find for standing tall and walking proud through the forest of billboards, blinking online ads, flashing TVs, blaring radios, and chattering dunderheads all telling you to buy, buy, buy. You’ll smile as the cacophony of a society in debt turns to meaningless banter because you hear your own clear tone. It’s the ring of a bell at first light. You’ll buy what you want to buy when you want to buy it with money you’ve saved from your income. That’s all. Nothing more. Nobody will ever tell you what or when or how to buy, ever again.

You read at the beginning of this book that the nature of your whole life comes down to how you answer one question: Will I live in debt or will I live free? I hope you live free.

To read how predators take advantage of those living the wrong way, read the introduction to The Monster.

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  1. Pat Cooper
    Posted November 21, 2010 at 1:52 pm | Permalink

    Zack got it close to right. A friend told me of the problems his daughter and her husband faced because they could no longer afford the mortgage payment that just kept rising and
    rising, but he had told me a few years earlier just how smart the kids had been to get a beautiful home for very “easy” payments. (They had also purchased two new cars on big credit about the same time.) Finally, even all the odd jobs they both lined up wouldn’t cover the monthly debts. Of course they lost the house and one of the cars, but they lived “high” while it lasted. Maybe they played the bank, too. It’s called GREED, and it’s not limited to bankers.

  2. Posted November 21, 2010 at 4:08 pm | Permalink

    Spot on, Jason! That’s one reason your quote appears on the home page of my personal site:

    “Financially stupid people are America’s most toxic asset.”
    — Jason Kelly, The Kelly Letter

    I may need to make room for more quotes from you.

    And I’m REALLY tired of people defending the stupidity or ignorance of people who got duped in the housing bubble. If it takes a super-high IQ to be able to say NO to a salesperson, then we’re on a path to decay and deserve as a culture, civilization, or species to die off.

    As one anecdote, when I sat down to sign the papers for the first car I ever bought (cash, by the way, Jason… per your Rule #3), I asked the salesman and sales manager if I could take a few minutes to “see what I was signing.” They agreed, and I perused the paperwork for five or ten minutes, at the end of which I called them over and said, “ya know, if I’ve read this right, there’s NOTHING in this contract that says you’re SELLING ME A CAR, right?”

    They nodded, I signed the appropriate lines and enjoyed my first car for over 42,000 miles.

    Mom taught me to stay out of debt and avoid mortgages and credit card balances. The only credit card I use is paid off automatically from our savings/checking/credit card account with ONE bank. Our Costco/AmEx card is paid off automatically every month by direct transfer, we paid off our mortgage as quickly as we could and don’t buy any cars we can’t pay for by writing a check.

    Thanks, Mom. Thanks, Jason.

    • Posted November 21, 2010 at 6:14 pm | Permalink

      You’re welcome, Alan. If more Americans lived the way you do, we’d enjoy a healthy economy resistant to bubbles and busts because nobody would fall for anything anymore, and the financial sector would figure out an honest way to make a living.

  3. Posted November 22, 2010 at 3:47 am | Permalink

    It all comes down to being able to take care of yourself. If you cannot understand finances, then you need someone you can ask for advise. I dont understand law, but I know where to go to get good legal suggestions. I owned a house throughout this time period and I was bombarded with offers for loans against my house… I replied to none of them. There is no Santa Claus and no free lunch… and when you get an offer too good to be true… just say “no” and walk away. Your parents were supposed to teach you this by 8th grade.

    If you allow yourself to be fooled and taken advantage of, don’t expect the gov’t or anyone else to save you. I can tell you that many furniture stores and car dealers take advantage of customers on a daily basis. Big fish eat the little fish… welcome to Earth.

  4. Gaby A.
    Posted November 22, 2010 at 5:14 am | Permalink

    I know I’m not the first to suggest this, but I think they should start teaching personal finance courses of some sort, not just in high school, but at least one or two years elementary and middle school, and make it a MANDATORY course for graduation from university (okay, that last one may be a bit idealistic). I hate to admit I have fallen into the trap of financial stupidity but have almost finished digging myself out of it (last CC payment done middle of next year). So I’ve learned the hard way on this front and wish I had some sort of personal finance course in university when I was thrown credit card offers left and right.

    • Zack
      Posted November 22, 2010 at 12:28 pm | Permalink

      Gaby, I would have to disagree with putting this additional burden on the taxpayers. Taxpayers pay public education and the current system is already over burdened and under funded. I believe that parents should have the responsibility to teach personal finance to their children. Here’s a radical idea: lets make it mandatory for potential parents to take classes on raising children into adulthood with a little financial common sense. I will never understand why people have to get a license to fish but no license required to procreate. I am being slightly facetious here.
      I do agree with most of the other comments from previous posts.

    • Posted November 23, 2010 at 7:28 pm | Permalink

      Financial education would be a worthwhile taxpayer expense because it would prevent the need to spend tax funds on bailouts, and would reduce the burdens of welfare once more citizens learned how to take care of themselves.

      However, we’ll never get decent financial education because politicians and corporations are in cahoots to fleece the populace, not educate it.

      That, too, is covered in great detail in my book. Many readers and reviewers consider those parts of the book to be off topic or superfluous — I consider them to be the heart of the matter because if more people understood what they’re up against and grasped the ignominy of failing to protect themselves, we’d see fewer victims.

      I can’t stress enough that hoping for improvement is a waste of energy. The forces allied against the wisening up of the populace are too great and the masses already too far gone to warrant any bright-eyed forecasts. Most victims don’t even know what hit them, even this far into the crisis! Which is why, by the way, we can’t expect parents to teach their children proper financial management. How can parents up their eyeballs in debt show their children how to live debt-free?

      Nope, there’s nothing ahead but the great reset.

  5. Frank Y.
    Posted November 23, 2010 at 6:48 am | Permalink

    You make an excellent statement regarding todays “trinket capitalism.” Personally, I view today’s culture of rampant consumerism as a result of a generation, or several generations, that have engaged in the simple-minded trading away of their personal wealth for beads and mirrors and shiny objects, very similar to how Europeans conquered the third world centuries ago.

    I believe the opposition to your book may have to do with your apparent refusal to label the “financially stupid” as victims. Victimhood is the ultimate dismissal of personal responsibility.

    If you had called them the “financially inept who have been taken advantage of,” you would have received less opposition. After all, calling yourself a “victim” is a comfort mechanism that exists to keep people from feeling personally inadequate and to externalize the causes of their unhappiness.

  6. Posted January 1, 2011 at 1:18 pm | Permalink

    I totally agree with this. We shouldn’t be spending more than what we earn. Let’s live within our means. Clean off our debts.

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