Business Ethics be Damned…A Receipe for Disaster Led To This Banking Bailout Bandaid!

October 16, 2008

We ain’t seen nothing yet!  As a business ethics speaker, as I write those words I feel tension building in my shoulders and neck.  Stress for sure.  But unfortunately the worst is yet to come and for many, especially younger adults, it will be the first time you will have witnessed a severe financial correction.  This will not be a mild recession but a full blown catagory 4 storm, if you will.

Recessions:

Let’s first explore a little of the history of recessions.  A great article that is simple to read an understand was written not long ago which outlines the recessions in our past and the depth of their pain in months.  A portion of that article is reprinted here for reference:

The National Bureau of Economic Research, or NBER, is considered the official arbiter of recessions, but it doesn’t define a recessions by the school book measure of two or more consecutive quarters of economic contraction as measured by GDP. It states that “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

The last recession, so declares NBER, was from March 2001 through November 2001.   Now most of us remember that time but not because of a declared recession, but because of 9/11.  The tragedy of 9/11 was so focused that we forgot how the economy felt and where we were before then – assuming that all that happened economically was a direct result of the 9/11 incident.

Now, when a country is in a recession there is a cry from the population to get it over with an get back on the track to economic health.  That is, in essence, just what we attempted to do.  However, we got so caught up in HEALTH that we looked past practical sensible medicine and pushed too hard.

What We Did:

Just like a doctor has skill, training, and tools to help restore health, from an economic perspective so does the government along with the Federal Reserve.  So, Dr. Fed to the rescue.  Surely we could not and would not stay in this ’91 recession long.  Our pride was hurt along with our pocket books and we needed fast action.

#1 – in response to the 9/11 attacks our country went to war.  Now, within reason, up to that point there was a widespread concern about the national deficit.  However, that disappeared from the political scene, as we elected to go to war.  Do not assume I am against this action, I am looking at it, however, from an economic standpoint.  War changes perspectives and allows the government to increase spending and debt without much cry from the populous.   War increases productivity and we all witnessed many companies showing record profits.  Government spending changed dramatically – essentially an economic stimulus.

#2 – the Federal Reserve reached in its bag of goodies and began a systematic dramatic and unprecedented drop in interest rates.  Never in its history had the Fed dropped the interest rate to 1% – NEVER.  Over time it almost became “free” money.  Artificially low interest rates became a powerful economic stimulus.

#3 – not only does the Federal Reserve have the ability to set interest rates, but they also control the flow of money.  In other words, they control the printing press or just how much money is in circulation.  Another powerful tool to fight “recession” – access to money makes economic growth easier.  More money in circulation became an economic stimulus.

#4 – tax law change was also a factor that changed the face of our economic growth.  In the past when a person sold their home, they were taxed on the gain unless it was reinvested into something of equal or higher value.  In the mid nineties, that changed effectively eliminating tax on most home sale gains.  No taxes proved to be another economic stimulator.

How We Responded:

Now, while some would disagree – that is where the breech of ethics occurred. Let me us an example:  If you are a star baseball player and practice everyday – honing your skills and lifting weights, etc. in order to be your best, well that would be ethical.  Agree?  If, however, you do all of those things and take performance enhancing drugs, that would be unethical.  Agree?

How we responded was in a sense like doing all the right things, but too excess and assuming that there would be no consequence.  That assumption is unethical stupidity.

So we:

(1) took our eye off of living with a balanced budget, allowing the government to stimulate the economy through the war effort;

(2) we borrowed at a record pace (after all if there is free money wouldn’t you take it)?  We, as consumers, increased our credit card debt dramatically falling for most ever zero percent offer that was placed before us.  And, with that new found credit, we bought items that in the prior decade we might have postponed.  In fact, we believed that we didn’t have to pay the borrowed money back, all we had to do was “transfer balance” it.; and

(3) we used our homes as a credit card.  Up until then, there were reasonable rules in place for borrowing to buy a home.  But during that time, with lots of money in circulation and low rates, we were encouraged to borrow…borrow…borrow believing that our home was safe.

(4) now the straw that broke the camels back was unrealistic appreciation.  In many (not all) parts of the country we saw home prices skyrocket.  Heretofore, home prices increase at a steady 1% to 3% per year.  Our home was sacred.  Now, with double digit increases, homeowners and builders began to believe that with no taxes on the gain, there could not be a better investment.

Every choice has a consequence:

The example of the ball player up above ties into this perfectly.  If he/she had done the right things in moderation, they would have an outstanding career and perhaps make it in the baseball hall of fame.  But, once discovered for performance enhancing drugs, they would likely be banned from the sport or suffer some humiliating consequence that would cost them dearly.

That is just where we are today.  Ethically, the Fed knew better.  The economy needed to be stimulated only so much.  Those are sharp folks and I don’t believe for a minute that they could not have seen this coming.  Fairly enough, they did begin to raise rates several years ago, but by then the bubble was set to pop.  And pop it did!

Likewise, our financial institutions knew better.  You don’t make loans to people that you honestly know can’t repay them, just to turn a quick profit in order to meet analystists expectations on Wall Street.  That, to me, is unethical.  Nonetheless, it was done – DAILY!

Builders, gorged with profit, continued to build knowing that the supply was outstripping the demand based on any reasonable demographic study.  In one area in NC near Raleigh, on average 1.5 homes were sold per month, yet 6 new builders flocked to the area and began building multiple spec homes.  There were no buyers and today they sit on them – some having been on the market well over 600 days.  That is greed outstripping ethical sense.

What Now?

#1 – the government is scrambling to figure out what to do.  My prediction is the $700 Billion dollar bailout is more like $2 Trillion.  The US Government will use our money (wrong borrowed money) to buy up bad loans (doesn’t give me the warm and fuzzies inside) and they will buy equity interests into our banks.  To me that is historic – it appears almost like a nationalization of the banks -scarry…!

#2 – the Federal Reserve, will once again, lower interest rates in hopes that they will stimulate BORROWING so the economy will again move forward.  Sorry, but I don’t think we need more debt!

#3 – the housing market will see double digit declines in home prices.  What goes up must come down (at least to reasonable levels) and many home owners who bought at the top will find themselves foreclosed on and have ruined credit.

#4 – builders will go belly up and banks will be in the physical real estate business – something they no little about.

#5 – credit will freeze.  No longer will you see the “free money” ads from your credit card company.  In fact, when you pay your card off…they may reduce your credit limit – taking a more conservative approach.

#6 – Consumers faced with increased medical costs, gas costs and utility cost, will spend less and this Christmas buying season will be dismal.  Retailers will be forced out of business and the pain will be heard world wide.

#7 – many smaller banks will shut their doors with the FDIC taking them over; and

#8 – the market will go much lower than it is today.  There will be minor up turns, but the down will outweigh the up and we will see another loss of 20% before it is over.  As a result, we will be less wealthy as our retirement funds decrease.

Conclusion:

Every choice has a consequence.  We chose the route of performance enhancing programs to stimulate our economy (an unethical choice in my opinion) and today and for the near term we will face the consequences – painful as they may be.


Government Bail Out! $200 billion – now $500 Billion – Oops now $700 Billion – Is it too little too late?

September 20, 2008

The first paragraph from Yahoo news reads:

A half-trillion dollar bailout that the Bush administration and Congress are negotiating this weekend for faltering financial institutions could unload their bad debt on the government, and in turn the taxpayer.

So let me get this right … financial institutions made bad loans that are either delinquent or in default to people who should not have received them in the first place and now in order to keep the CREDIT markets afloat the government is going to do a massive bail out so that these same institutions can continue to loan.

Do not get me wrong I agree with the statement made by Treasury Secretary Paulson…”I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.  The financial security of all Americans … depends on our ability to restore our financial institutions to a sound footing.”

His statement is accurate, but the whole concept is that the economy is based on consumer spending and borrowing.  In fact, whether we wish to admit it or not, the entire US system is based on borrowing.  The government is the biggest borrower of all.  And unless somehow history does not repeat itself – eventually there is a day of reckoning when you are expected to pay back what you owe.  What happens when the government and/or the taxpayers can’t repay what the government has borrowed?

But enough of the big picture…what about now and the impact?  First, most of us have no idea how close we have come to a major depression.  In fact, while I am no doomsayer, rarely is reality what is stated by the government.  More times than not the outcome is far more costly than what is predicted.  So we very well may not have seen the end of this financial mess.

According to CNN: The plan: The federal government would buy up “hundreds of billions of dollars” of illiquid mortgage assets at a deep discount from banks. The Treasury Department is likely to run the program directly, unlike the savings and loan crisis of the 1990s that led to the creation of the Resolution Trust Company.

“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” said Paulson.

Now what is clear about this plan is that financial institutions get to clean up their balance sheets so that they can continue to stay in business and LOAN. 

Question: Wonder what consequences, if any, the bank or financial institutions will incur?  Any penalties for making stupid loans to unqualified individuals in the first place?

Question: As inefficient as the government is how will they be any better at collecting on what is due than the financial institutions are?  Bet, they won’t be…rather either one or two things will happen: (1) they will do just what the banks would have done – FORECLOSE and sell the property off at deep discounts; or (2) somehow FORGIVE the debt and allow the property owners to own at less than what they borrowed in the first place.  Either way – people who have played by the rules PAY!

According to a CNN article: The plan will help banks shore up their balance sheets by removing hard-to-value assets. This would address the seemingly endless rounds of writedowns and capital raising that have been rocking the financial sector.

Without these bad loans weighing on their books, banks may be more willing to lend. Or at least that’s the goal.

The problem is that the bailout will not automatically make banks profitable, nor will it stop the slide in home values that is wreaking havoc on the economy.

Danger! Without the bad business on the books Banks would find it easier to raise capital and MAKE MORE LOANS.  The question still remains – who or what will make sure that banks don’t repeat (in the interest of big profit) what they did (not that long ago) to get into this mess?

Over the course of two days the price tag has gone from $200 billion to $500 billion and now I see on MSNBC that it is $700 billion.  Now, as Forrest Gump would say…”I’m not a smart man,” but I know that this government bail out will cost each American a lot of money.

WHAT ARE YOUR THOUGHTS?


Foreclosure Fraud – An Interesting Variation of Mortgage Fraud – Comments Ethics Speaker Chuck Gallagher

January 3, 2008

 Chuck Gallagher, Ethics Speaker

Recently I receive an e-mail related to several of my more recent posts on Mortgage Fraud – note this will be one of the hot topics in 2008!  The writer gave permission to share so in the interest of the readers of this post I am reprinting the e-mail content.

The worse factor of the Mortgage Mess is FORECLOSURE FRAUD committed via DEBT COLLECTION abuse and deception.  It is HIGHLY COMMON for a DEBT COLLECTOR attorney to file a foreclosure naming a DEFUNCT mortgage company, or naming a mortgage company which is NO LONGER holder of the promissory note; or file a foreclosure affixing a “ransom” amount (the collector’s fee) far exceeding the “Acceleration Clause.” Even worse, when homeowners sue for “Unfair Debt Collection Practices,” and various damages, the collector gets to make even more $$ through prolonged litigation while leading mortgage companies to believe the homeowner is the reason for those multiplied costs. Irrefutable proof of foreclosure fraud and judicial collusion is posted on www.lawgrace.org

For these very reasons any representation about $$$ billion dollar losses due to people defaulting on mortgages should be weighed against the fact that certain mortgage giants needlessly pay DEBT COLLECTION firms outrageous legal fees for their lawyers to outmaneuver -and even persecute people who file court proceedings in opposition to fraudulent foreclosures.

EXAMPLE:  In one actual situation, for a purported debt of $86,000.00, through use of a non-existent mortgage company, attorneys racked up more than a quarter of a million dollars in legal fees.  Afterward, that property was sold to a 3rd party for $37,000.00. (The dollar amounts are rounded off.)  Thus, Securities Investors realized nothing, and nothing practical was accomplished by evicting the homeowners (except for the collectors). Even property value declined in that neighborhood.  Additionally, some collectors even file in Bankruptcy Court falsified motions To “Lift Stay” pleading for purposes of accomplishing SIMULATED AUCTIONS of real estate properties.  Also, as an added measure to heighten chances of judicial
favor, these collectors propagate that the defaulted property owners are costing their clients all those legal expenses.  But the true culprit is the collectors’ fraud and racketeering conduct. (This has to be the meanest exploitation and malignment against persons faced with becoming homeless!)

Furthermore, this kind of debt collector enables MORTGAGE COMPANIES to ILLEGALLY FLIP property, and thereby  deceive Securities Investors about the real estate market.  Thus, unscrupulous mortgage companies do not care what the collectors do, even when they loose money off the foreclosure. In States such as Louisiana, 2 particular mortgage
companies which benefit from fraudulent foreclosures are Wells Fargo and FREDDIE MAC.

Securities Investors need to become more knowledgeable, responsible and take action about debt collectors as well as mortgage servicers’ misdeeds which hurts borrowers as well as siphons incalculable amounts of money from what Investor profits.  Also, see “Limiting Abuse and Opportunism By Mortgage Servicers,” AND  “Private Property Rights
Deferred: Has Predatory  Mortgage Servicing Destroyed The American Dream” by Rawle Andrews, Jr.,  Esq.,and Leroy Jones, Jr., J.D.  at http://www.msfraud.org/index.html.  In the near future because of negligence, Investors will likely be subject to liabilities for the above-described misdeeds.

While most of the mortgage frauds I follow have similar patterns (many of which mean that those involved end up in prison), I have not seen substantial abuse in foreclosure fraud.  That said, it doesn’t mean it isn’t an issue (likely it is).  It is I don’t find it on my radar screen for review and comment. 

Additional links were provided by the author Barbara Ann Jackson.  Thanks for Barbara for her work and the information contained herein:

Mortgage Mess, Foreclosure Fraud and Impediments to Justice
http://newsblaze.com/story/20071203130614tsop.nb/newsblaze/TOPSTORY/Top-Stories.

“ILLEGAL REAL ESTATE FLIPPING…”
http://www.lawgrace.org/2007/06/21/illegal-real-estate-flipping-unfair-enrichment-etc/

Comment on the Foreclosure of Judge Reginald Badeaux’s Home
http://www.lawgrace.org/2007/12/08/my-december-7-2007-comment-posted-to-the-times-picayune-blog-about-the-news-article-entitled-%e2%80%9cjudge-gets-debt-reprieve-badeaux-has-skipped-mortgage-payments%e2%80%9d-the-foreclosure-of-this-lo/

Casualties From New Orleans Ineptness and Corruption Coming To A City
Near You http://www.lawgrace.org/2006/06/30/casualties-from-corruption/

Federal Judges’ Pay Raise; New Orleans Federal Judiciary Call To
Impeach
http://newsblaze.com/story/20080101084831tsop.nb/newsblaze/TOPSTORY/Top-Stories.html

Business Ethics Speaker http://www.chuckgallagher.com  – Chuck Gallagher – off for now!


Ohio Foreclosure Crisis – We Need Help – Business Ethics Speaker Chuck Gallagher Comments

December 21, 2007

Texas Motivational Speaker, Chuck Gallagher 

According to the Wall Street Journal Law Blog (a wonderful resource), Peter Latman issued the following report:

How bad is the housing crisis in Ohio? So bad that the state’s chief justice is begging lawyers for help, and the state treasurer urges, “To anyone who wants to make a difference in the world, this is a defining issue of our time.”

Foreclosures have spiked in the Buckeye State, clogging the court system. And yesterday, Chief Justice Thomas Moyer urged lawyers to offer pro bono services to distressed homeowners, according to this NLJ story. “This is more than a legal issue; this is a social issue,” Moyer said, according to a news release. “People’s lives are being seriously affected and the legal community must respond with action.”

A group of lawyers met yesterday to discuss the creation of programs to help train lawyers with limited or no foreclosure-law experience. The Legal Aid Society of Southwest Ohio has estimated its attorneys have already helped save as many as 400 homes this year. And the Supreme Court has begun working with local courts to offer mediation services between lenders and homeowners to avoid foreclosures.

Ohio has among the highest foreclosure rates in the country. In 2007, foreclosure filings are up nearly 68% from last year, according to RealtyTrac.

Lawyers, help us out here. We know the great pro bono work lawyers do in areas such as the death penalty, natural disasters and immigration. But does the Chief Justice’s call to action resonate with you? Is the mortgage crisis, as Ohio’s state treasurer says, the defining issue of our time?

The Wall Street Journal asks if this is the defining issue of our time?  Probably not, but it is a crisis.  With mortgage fraud abounding and having been reported in this blog – it is evident that when money is too loose without appropriate controls – consequences will follow. 

Every choice has a consequence.  While, as a country, we enjoyed easy credit and appreciation in equity for homes, that equity can reverse and homes can be lost.  It’s time for reasonable controls to make sure that unsuspecting individuals not fall prey to preditory lending practices.

As a professional speaker, I speak to groups about choices and consequences along with ethics and fraud.  www.chuckgallagher.com

If you feel you’ve been the victim of mortgage fraud…feel free to comment.