Part Four: Epilogue

Unfortunately, rate gouging to maintain margins is common practice for finance-based companies. They hold everyone hostage by controlling the money, charging for doing it, and penalizing you past your means if you get behind.

I don’t know, that sounds like extortion without the broken limbs, to me.

And that “new deal at the table” thing sounds like fraud.

Holding my deposit and bouncing a check against it, then charging $35?

Sounds like embezzlement, at least.

Raising interest rates and charging fees at will, pushing a debt to unpayable limits? Isn’t that loansharking?

And yet, Detroit automakers, their sales killed by these factors ruining their client base financially, are assailed for their gall in asking the government for 1/7th of what AIG has already received and blown.

GM and Chrysler make something we use. Many of us like their cars. AIG just charges premiums and bets it all on Wall Street. Which one is useful and which is self-serving? And which is being criticized for needing help while the other gets Pentagon-level funding with no strings attached?

Why not give all of AIG’s dough to Detroit? Tell them to have 50 miles per gallon alternative fuel cars and an average new car price of $10,000 in 7 years. They would do it, I’m sure. Ford would even pony up to the trough to stay up with the rest.

$180 billion is an obscenely huge amount of money. Almost any manufacturing industry on earth, short of military suppliers, could advance exponentially with that kind of funding from the government. Give it to World Health Organization and the whole planet is up to it’s knees in food. Give it to aids or cancer research and we see cures in our lifetimes. Give it to NASA and we’re practically on Mars.

Or, offer it as a refund incentive to mortgage companies that willingly reduce principle and interest to insure that homeowners can make their payments.

If “Mary’s” mortgagor was getting $50-100,000 of that $180 billion in return for adjusting her loan down to $180,000 at 4%/40 years, that would be just fine with people and “Mary” would be just fine, too.

The Fed could have said “Ok, folks – everyone who drops to 4% fixed APR and absorbs principle on upside-down loans and interest from payment arrears can claim those losses from this fund”.

There would be no foreclosure crisis and little complaint from most folks if the ‘bailout’ was based on saving people’s homes and livelihoods by capping interest rates and re-imbursing lenders for the lost principle.

That’s not what the bailout accomplished.

It’s company’s margins and share prices that were restored. Their value at – where? The Wall Street Casino.

It would not be unfair, un-American or communist to suggest a temporary federal hold on interest rates. All lenders and credit companies could be limited to 4 or 5% interest for a specific period of time. That would allow people to catch up and stabilize themselves financially. Then interest rates could start with a clean slate and rise or fall more naturally with the economy as it recovers.

Thus, helping the companies that we live on further reduce the cost of living for everyone by increasing quality and lowering prices. If everyone can afford to live, it’s likelier they can spend, too. If people can work things out to stay on track with their debts and expenses when times get rough, they’ll make it through to the next good time, and be all caught up.

And, when times get bad for the market, it’s those top-level execs and shareholders who own the business, like any small business owner, who owe it to the company to eat the margin if they have to in order to maintain stability.

But this isn’t about stability. This profit margining behemoth is motivated only by immediate gain and has little or no concern about longevity.

What about this current recession/depression does not stem from these financial practices?

We’re talking about a free market economy, right? Capitalism? Supply and demand? Fair market value? Free and fair trade? Is this really the way that’s supposed to work?

Strong-arming us with price hikes, penalties and fees, paying huge salaries and bonuses, and claiming billions in losses as they do it.

Getting their hooks into us with a small legitimate debt, and turning the screw as soon as we mess up.

No, not a scene from the “Sopranos”.

The epitome of organized crime – crime for sheer profit above all else, with no regard for human life or welfare, is not a bunch of mobsters.

It’s the money guys in the black silk ties.

You can see them. There’s a tour.

It’s called the Wall Street Casino.

Open 9:30am-4:00pm ET Monday through Friday.

 
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Return to the beginning – Part One: Genesis
 

Part Three: They Get Us Where We Live

In the housing industry, it all comes together – every form of margining, gouging, and fee wrangling takes place in the cavalcade of paperwork and fine print the unwary homebuyer faces.

Here’s how it works.

“Ed” watches some house-flipping show on TV.

He’s fascinated and thinks he can easily pull it off. The housing market is hot, and he’s sure he can fix up and sell a house in a couple months or less. Big dollars!!!

Ed has $50,000 in the bank. He finds a fixer-upper for $150,000. He has to put down 20% to get his loan at 6% and 3 points ($4500), and puts $10,000 into making it sellable. That climbs to $25,000 as the infirmities in the house are discovered.

Now Ed is $9500 in debt and has a mortgage payment on the spec house. He puts it on the market at $275,000, the same price range as other houses in the area. He wants his margin. But, a glut of houses for sale in his neighborhood drive the price down near $200,000 and his is not selling. So he decides to drop the price to $250,000 and rent it in the meantime for market value, almost double his mortgage payment. Tenant after tenant gets behind on the $1400 rent and has to be evicted, often leaving damage in their wake.

It goes on for like this for 6 months.

“Mary” wants to buy a house in Ed’s neighborhood. His is “just right” for her, but she can’t afford it. He was looking for something around $150,000. But she really loves it. Her bank won’t come up, and she only has $20,000 to put down. She can’t afford more than $1000 a month payment, tax and insurance included.

She’s talked to several real estate agents. Many told her there won’t be anything she wants in her price range – that she should lower her sights. One, though, insists that she can afford Ed’s house, even though her bank won’t touch it. He tells her he can recommend someone.

He insists – “we will get you into the house”.

Mary goes to the agent’s chosen mortgage broker, who also assures her that she will get her dream house. The sale price is the full $250,000. She is offered a typical 30 year mortgage at 5% fixed with 1/2 point loan fee. He quotes her $1200 without T/I. She says it’s too much. He says he’ll “come up with something”.

Weeks later, he calls Mary with a solution. He can get the principle down to under $1000 if she puts $70,000 down. She reminds him she only has $20,000 to put down. He says she can borrow the rest of the down payment for an extra $75 dollars a month.

And, he chimes, “you’ll be in your dream house.”

Mary agrees and he puts the loan in to the bank. He sets a closing day for July 1st. Her lease is up at the end of June, and the landlord won’t budge, so she has to move into storage anyway.

The paperwork takes longer than expected, so with her things in storage, Mary has to live in a motel for a 8 days waiting to close on her dreamhouse. When she gets to the pre-closing meeting, she suddenly finds herself in the Twilight Zone, beset with a mountain of new, horrifying contracts and numbers.

She is now looking at 8% interest variable up to 17%, $1320 PI per month, with 3 points down – $7,500, and a second mortgage for the downpayment – 20 years at 9% for $400 a month. Her combined payments with tax and insurance top $2000 a month, and she has to pay almost $29,000 at closing.

So, she has to take it because she works out of her home and can’t do business from a motel room. She rationalizes that she can rent a room, make some cutbacks – she still has $10,000 in the bank. She’ll just have to make it work. She will surely go broke being unable to work and paying for hotels and storage while looking for another house.

You see, Mary had only a $40,000 inheritance in the bank. She was counting on getting a mortgage lower than her current rent, and still having $20,000 security in the bank.

But, the mortgage company required Mary to show them that bank balance, as well as her credit and income. They decided after seeing the $40,000, her income of $30,000 a year, and a good credit score that Mary would be an ideal target for the maximum margin – she could be expected to somehow make the payments at that rate – at least until the $40,000 ran out.

All this time, Ed has seen his debt escalate as his maintenance of the house and tenants continues to worsen. Finally, he’s so far in debt and tied up maintaining the renters that he gets behind on the mortgage.

In the 7 months it’s taken Mary to figure her finances, decide to buy, find a neighborhood, find Ed’s house, apply for the loans and close, Ed has lost it to the bank. They foreclosed on the $120,000 loan and that’s who Mary is buying it from now.

For $250,000.

The agent makes 7%, $17,500, and the bank that foreclosed on Ed nets over $150,000.

Neither the agent nor the mortgage broker suggested offering less money for the house. They both wanted their maximum return.

So, in a years time -

Ed lost his entire $30,000 down payment, spent the other $20,000 and rang up an additional $12,000 in credit debt over the course of the project. Eventually it put him behind in his own home mortgage, and when he was laid-off from his job, he ended up losing his home.

Mary held on until the savings ran out and business slumped. A roommate could only be expected to pay about $500 a month including utilities. Making matters worse, house prices in her neighborhood plummeted farther, below $200,000, leaving her seriously “upside down” at $230,000 in total loans. Losing the house was inevitable.

Well, it shouldn’t have been. This is the kind of mess you end up with when margining rules every step of the way. Had Ed been offered and willing to take $200,000 and the bank willing to give Mary 5% @40 years with a 1 point loan fee, she could easily have made it and Ed would’ve collected $65,000, even after paying the agent. And he wouldn’t be in severe debt causing him to lose his own home.

But, everyone had to have the biggest piece they could along every step. From the mortgage companies to the title brokers to Ed’s credit cards, everyone wanted their maximum profit margin, right now.

Ed was trying to play the casino games, like the big guys on TV. He willingly took the risk, knowing he might lose, but not really believing it. Like many people, he was attracted to the golden apple of big money, portrayed all too often on TV as easy pickings. He got in over his head by rushing in as soon as his bank said “yes”. So many doing it – it must be a sure thing. Turns out, it’s not always so.

Only one person was margining for the right reason. Mary. The consumer. She was budgeting. She tried to increase her chance of maintaining cashflow by reducing her cost without having to charge more for her services. She was trying to obey the marketing rules. This is normal, healthy margining.

But the money monsters had both of their numbers all along. If you want it, you gotta pay for it.

Everyone involved marginalized Ed and Mary to the limit for the sake of immediately collecting cash that “we know you have”.

Gotta keep that margin up.

Ooh! Gotta run. The Casino’s open!

 
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Read Part 4: Epilogue
 

Part Two: The Monster Grows

So, all of our financial companies hit the Wall Street Casino with our collective cash from all our monthly payments, and it’s not going well. There’re way too many people betting on the same things and driving up the bets. Everyone has to raise their rates to make sure they keep their value and salaries and still have enough to play with. Their increased values force big companies that make the stuff we all use to raise their prices to keep their stock values competitive.

Higher financial prices propel rents higher and higher, pushing the limits for the majority of the population. The government makes more money to alleviate the pressure, but it backfires. Financiers just raise their rates to take up the slack. So, the Fed lowers the interest banks pay. That should help.

It does. The banks use the increased profit margin to bolster their stock value. More chips for the Casino.

Oh, and rates go up again.

This idiocy has grown into an unfathomable money monster, killing Americans dollar by dollar, day by day.

The sheer fact that an insurance company asked for and got $180 billion dollars from the government says something is horribly awry.

This company’s been paid billions of dollars by customers of their various insurance programs. How do you lose that much money when your only administrative costs are claims, staff, facility, and communications? Surely the nation’s largest insurer would have to see 50% of its customers drop or default to be in this kind of jam.

Um, no.

Remember, they figured out the minimum cash needed to sustain normal claims, expenses, salaries, and bonuses. The rest went – you guessed!

You see, if you have $100, the Wall Street Casino will lend you $500 and you can bet it all. If you win, cool. If not, you deduct your loss from your taxes and add the payments to your rates.

Free money to gamble with!!!

It’s very simple math, folks – if people can’t pay what you charge, you need to lower your rates. You don’t restore cashflow by charging more! You accommodate the market by lowering your rate and expanding your terms if that’s what it takes.

You certainly don’t pay anyone millions of dollars when the company is losing money, do you? And you surely don’t take risks like the stock market when your bottom line is in trouble — But, they did. And they are still. And it all goes on like before except they have $180 billion in free chips for the Casino.

You see, in all these cases, from apples to insurance, the one governing rule of capitalism is that you can’t charge more than the market will bear.

The current foreclosure rate in the US is graphic proof that this rule has been left in the dust.

Lots of people blame consumers for buying past their means, causing prices to go up.

No. Not even close.

There is a real evil at work. The one that wrought its way through the money belt and out into every form of commerce.

Margining.

Maintaining and increasing profit margin is the driving force in modern business. Lowering cost and increasing sales lead to bigger profit. That’s the theory, anyway.

That’s just not good enough for today’s financial honchos. They want more. Not just being profitable. Not just growing as a business, but by growing limitlessly through lower costs, more sales, and higher prices.

Everything is margined to the hilt. You’re supposed to charge double or more what it cost you. Period. You’re supposed to get that margin from everyone, everywhere, all the time.

Why would so many buy into this idea of raising prices and pushing margins to the edge?

It gets the company more chip credits in the Wall Street Casino.

To them, this is how it works. What it’s all about. Being up on the big board, in the game. The rise and fall of the stock prices, the thrill of the deal. The sweet smell of victory.

Sounds more like Vegas than Wall Street, doesn’t it?

This is where the controlling eschelons of finance live. This is how they see the world. Not in terms of how strong the foundation, but how tall the castle. The price per share is what it’s all about. That’s the bottom line to them.

But, the realities of capitalism say “no”.

It’s given public opinion that finance is thought to be in the hands of the richest 5% of the population. While this may or may not be accurate, it’s sure that the rich are a minority and that many wealthy people have gotten there through control of or profit from the Wall Street Casino.

Any market will bear what the bottom 50% can afford, or the controlling top 5% have to eat the balance to maintain stability, or risk assets and equity by losing customers. It’s supposed to be in their best interest to suffer the margin in favor of continued positive cashflow.

Current practices have no patience for bumps in the road. They want the maximum price, the widest margin, right now. They want all the money you have.

And, they get it. Your mortgage straps you and you have to put the refrigerator on a card. So you get one with a 5% introductory interest rate (going up to 17% in 30 days). You buy the fridge and make the minimum payments for 2 months, and suddenly the interest is 23%, and the finance charge has put you over your limit, earning you a $35 fee as well.

While there are people who just spend too much on credit cards when they shouldn’t, or get too many and max them all out frivolously, there are now far more people using credit just to get by. Emergencies like a new fridge or an unexpected dentist bill can be crippling. There are hundreds of new, rising costs facing consumers everyday. It’s common for people to be buying even groceries and gas on credit cards.

And the card companies eat it up. They don’t care if you’re strapped to the limit. They just keep piling it on, increasing your burden in fees and interest far, far past the amount of your purchases, all the while raising those rates and fees.

They want people to spend the max, pay the max interest, go over limit, pay fees, and catch up again – over and over and over.

Their margin-model is based on it.

And what do they do with that huge margin?

Yup.

They hit the Wall Street Casino again.

 
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Read Part 3: They Get Us Where We Live
 

Part One: Genesis

One of the themes of President Obama’s administration that draws controversy is the idea of “redistributing” wealth. Depending on your point of view, this is either nobly responsible or outright larceny. Or if you don’t fancy yourself to be a “liberal” or “conservative” (I don’t like to use the terms – they don’t mean anything anymore), then you know this is all malarkey.

Robin Hood politics is not the answer here. Never going to happen.

The current economic crisis is not the result of too many people being rich, even obscenely so. The problem is in how some of them got that way.

The general, parental culprit is the financial industry itself – its parents, banking and lending, and it’s havoc-reeking progeny, the credit card, insurance, mortgage, and investment businesses.

Now, I, for one, have no problem with the idea of being rich. Not for me or anyone else, for that matter. I do have huge problems with some of the ways to become rich.

For instance, stealing, cheating, lying, committing fraud, selling ripoff deals, extortion, and loansharking are all ways of making money that I believe are just wrong. I’m not big on gambling, but I don’t think it’s criminal unless it’s fixed, and it’s your own business making the bet as long as you’re prepared to suck it up if you lose and stop when you can’t afford it.

So, I have no trouble with Paul McCartney being a billionaire. Or Steve Wynn or Mike Ilitch.
Really. If you make, create, or build something; provide a skill; build a business; improve or fix or refurbish or sell something – any way to earn money by providing a service or skill or taking the bet and facing the risk fairly. In other words, tangibly honest.

Banking starts out that way. It provides the service of safeguarding your money. Likely, it began as simply as holding accounts and charging a fee for it. I’m sure one of the very first bankers immediately saw the possibilities from having a whole village worth of money at once. So, lending money and charging interest on the payments quickly became a principle function of banks in general. Along with public knowledge of the bank’s profit came the payment of interest to the account holders – essentially their share of the profits from loans on their money.

But, this is just the tip of the financial iceberg that we have crashed into. It didn’t take very long at all for bankers to realize that the more ways you could raise large capital, the more you could invest in loans, the more profit you make in interest.

So simple.

Soon everyone is borrowing something somewhere – governments, businesses, individuals, other banks – all generating huge cashflow in monthly payments.

Then the brilliant idea that changed everything.

Let’s sell shares of it!

Let’s let people buy a piece of the cashflow by putting up cash in return for a dividend from the profits. Just a small extension of the original interest bearing account technique, right?

Oh. no. Much more than that.
We’re looking at every kind of mutual fund, investment accounts, insurance, and the mother of all financial goldmines – The Stock Exchange.

Now, selling shares of your business to generate capital is a pretty normal way to make a business work. The basic idea is for investors is to reap the rewards through dividends. If the company increases its earnings, the dividends go up, and this is, after all, why you put up the money in the first place.

Financial tools don’t work that way. They aren’t based on real cashflow. They’re based on a company’s total value of assets, capital investments, estimated cashflow, and the resulting stock market value.

With stock trading came the reality of values going up or down and shares being bought or sold on that alone. Along comes the caginess of the stock broker, gauging the profitability of the different companies and their potential.

From a capitalist view, there is still nothing wrong here yet. As long as people know what they’re getting – guaranteed interest or potential dividend, this works fine.

But, along comes the insurance industry, again, with humble, sensible beginnings. The idea of paying premiums to a company who agrees to pay on your behalf for damage, loss, or injury beyond normal means is practical and in many cases, prudent. At the front end, handling accounts, the agent’s office is no different from the local banker, honestly just looking at parameters and figuring out what coverages you’ll buy and premiums you’ll pay. The fact that the salesperson makes a commission from the premiums isn’t out of line, either – it’s a standard retail sales practice.

If all the money from premiums just went into the bank and the insurance company just collected interest, deducted payroll and expenses, and paid out for claims, it would all be fine. Thinking like a normal retailer might, as your bank balance goes up, your
interest earnings increase. As your margin rises, you lower rates to attract more customers, growing by volume rather than individual customer profit.

But, that’s not how it works at the top.

It’s soon realized that the claim payouts are a small percentage of premium revenues collected. Nothing compared to the potential profit from investing this huge sum.

They figured out that they can collect all that cash upfront from the customer, and invest it themselves just like the bank would and keep all the profit. Most of the money just sits there, so let’s make it work for us by investing it in the stock market.

So, they stop keeping much more than enough cash to cover the statistical number of claims per fiscal quarter and expenses, salaries, and of course, bonuses.

The real risk here is that if they have too many claims at once, say, from a natural disaster like “Katrina”, they may not have enough cash on hand to cover everything. They may be forced to sell stocks or shares to raise the cash to satisfy claims. Being margined for investment will leave them short, and they may even have to borrow the money to make good.

It’s no accident that an insurance company is one of the most publicized bailout recipients. By refusing to bend on margins, acquisitions and executive salaries, they pushed their customers to the edge while maintaining excessively large investments and compensations.

But, I’m getting ahead of myself. All of this leads to some pretty large corporate fortunes. Money to burn, so to speak. Insurance, investment, and mortgage companies with lots to lend and running out of new ways to generate that payment-fed cashflow, strike on an idea that solves it all.

Credit cards.

The idea of letting people just buy things on your capital and pay back with interest goes right back to the heart of banking at the local level. A truly useful, even noble idea, taking the burden of running accounts off of the merchants, and letting those with capital to risk make a profit from the interest.

A marvelously capitalist, yet democratic, fair, and humane thing to do.

For approximately 30 seconds.

It couldn’t have taken longer than that for someone to say, “Hey, we don’t have to use our money to cover this – they’ll owe us the money, so we can charge anything we want for everything we do and they have to agree to pay it if they want the card. We can charge a fee just for having it. We can charge a fee if they’re late. We can charge a fee if they go over their limit. We can charge them all at once on top of interest and raise them anytime we want. We don’t have to touch wages, bonuses, and investment funds at all.”

They merely fold all those projected fees and charges into the portfolio. Part of the estimated cashflow.

So, an industry that now COUNTS ON $15 billion just in late fees has a stranglehold on our society.

And worse, this venom has spread backwards through the entire financial family tree. Safeguarding the margin by raising rates and penalties.

Insurance rates, of course, are outrageous – unaffordable for many. Auto insurance is mandatory by law everywhere, so no surprise that rates are through the roof and go up for any reason you provide, from buying a newer car to getting a ticket.

Banks used to pay an average of 5% on savings accounts, which was considered small but not embarrassing. Return fees were reasonable. Overdraft fees as well. Before the credit card era, most people could survive a cashflow crisis without the bank looking to destroy them.

But, along with the newfound “We’ve got you hostage because you owe us” greed came the inevitable banker’s gouging, now common today.

Now, 1% interest tops without buying an investment bond of some sort to get that 5% – sometimes requiring minimums of $5000 or more tied up for 10 years to get that rate.

They all, creditors and banks alike, ply what they believe are “fair charges that encourage timely payments” at $25-$50 a pop. What’s more, even the banks are saying, “if you owe us money, we’ll charge you more”.

So, now, running out of money becomes a very costly thing. Being broke is expensive!!

Let me get this straight. You don’t have any money, so we’re going to charge you more.
You have nothing, so you owe us more. The more you owe us, the more you, um, owe us.

 
Read Part Two: The Monster Grows