“Written to enlighten, guaranteed to offend”
A Publication of Seth J. Frantzman
October 13th, 2008
1) Present at the creation, of the 2008 financial crises: From 2002 to 2004 I was a drug pusher. Not the illicit kind like cocaine. I pushed the legal kind, mortgages, a drug that is no less addictive. A chronicle of my experiences in the mortgage industry and my reflections on who else is to blame for the problems.
2) Hypocrisy and terror: A series of recent stories about sexual harassment in Egypt and Egyptian workers in Dubai shed light on the true story of Islamic immorality and its role in terrorism.
3) Misreading Teddy Roosevelt: A recent article claimed that John McCain was a dangerous new Teddy Roosevelt. But the writer seems to have misread the message of TR and also missed his great contributions to the United States. TR believed in ‘walking softly and carrying a big stick.’ American foreign policy could well learn from this. If John McCain were a new TR he would offer us much, condemning him for being one shows our narrow minded view of history.
Present at the creation, of the 2008 financial crises
October 6th, 2008
Seth J. Frantzman
From 2002 to 2004 I was a drug pusher. Not the illicit kind like cocaine and meth. I pushed the legal kind, mortgages, a drug that is no less addictive. I began as a telemarketer, convincing people to refinance their homes, and graduated to processing those loans and finally selling borrowers loans to buy homes. Along the way I obtained a real estate license and was exposed to that side of the business as well. I was a minor cog in a large organism, a great industry which helped people purchase homes and take equity out of those homes. Today the world’s financial markets are in crises because of these type of activities. For two years I worked in one of the hottest real estate markets in the United States, in Tucson Arizona.
Now the politicians are blaming everyone but themselves for the financial crises. They have lashed out at the ‘fat cats’ and the ‘speculators’. On October 6th disgraced Lehman Brothers CEO Richard Fuld testified before congress about the financial crises, which is now being blamed, partly on the failure of his firm, which filed for Chapter 11 on September 15th, 2008.
In September of 2007 I had an argument with my father about whether or not the dream of every American to own a home is a positive part of the American ethos. I felt at the time, as I still do, that there is nothing more essential to the American tradition than the personal responsibility derived from the ownership of one’s own land. This was an ethos that Thomas Jefferson articulated when he described an Agrarian American nation, who he idealized as a nation of smallholders. Farmers were the “chosen people” of God, a term he used in his Notes on the State of Virginia, published in 1781. Jefferson noted that “those who labor in the earth are the chosen people of God, if ever he had a chosen people, whose breasts he has made his peculiar deposit for substantial and genuine virtue. [In contrast] Dependence begets subservience and venality, suffocates the germ of virtue, and prepares fit tools for the designs of ambition.” Home ownership was ingrained in the tradition even in the earliest days of the American frontier when people escaped the claustrophobia of the east coast to search for their own plots of land. The movement of Americans away from the east coast and towards home ownership has continued to this day and has peaked in places such as Tucson and Prescott Arizona, where rapidly growing cities have opened up formerly dead land to home ownership through the creation of new sub-divisions.
But along the way something happened. Jefferson’s ideal of the personally responsible small holder gave way to the credit addicted home owner of the 1990s and 2000s. By the time that I took a job at Allied Home Mortgage people were taking on 105% loan to value mortgages in order to get into their homes. These mortgages, which sometimes included second and third mortgages as well as seller carry backs covered the closing costs of the borrower so that he was actually paid to get into his new home. These closing costs could be quite substantial and were part of the elaborate system whereby purchasing a home becomes a sort of trough for pigs to feast on. With the endless mantra that “homes appreciate at 12% a year” the borrower was not only encouraged to take on a huge loan-to-value but also to refinance his home as soon as rates dropped. Sometimes people were refinancing two or three times in a ten year period, and this in a state where the average person sold their home every five years. The Jefferson fantasy of a nation of farmers owning their own land certainly could not have included a nation of people living on credit and selling their homes every 5 years, homes whose debt they hadn’t paid down more than a few percent by the time they sold them and due to refinancing probably owed more than they had originally purchased them for. But nevertheless these borrowers were addicted to the drug of ‘equity’. Even if they weren’t saddled with two or three mortgages on the same home and they weren’t refinancing they were taking out ‘home equity loans’, using the home “like a credit card” but one in which the “you only pay 5% interest on.”
Recent revelations show that AIG sold billions of dollars in Credit Default Swaps, a sort of insurance that allowed banks to collect if the loans they guaranteed went bad, out of a London business unit, putting themselves in the hock for more billions in payouts when loans went bad. This shows how the mortgage crises spread like a virus beyond the banking industry. Other revelations show that Daniel Mudd, the CEO of Fannie Mae, was encouraged by Congress and by his own instincts to take on ever more risky loans, providing more and more liquidity to the market to sell more and more loans for which there was little collateral. During his questioning by Congress, Lehman CEO Fuld was accused of being a ‘thief’ for having bundled mortgages that were originated at values above those of the homes they were tied to and thus helped create a mess when those borrowers defaulted. Fuld correctly noted “I don’t know why anyone would knowingly originate a mortgage for more than the value of the home.” But what the questioning revealed was how little congress understands how the mortgage industry works. The very fact that a U.S congressman thought that the CEO of Lehman Brothers was responsible for the fact that loans were given for homes where the value was below the amount of the loan goes to show how removed congressmen must be from the entire industry.
So let’s recall exactly how the system actually works. The process begins with a person who wants to buy a home. He locates a realtor. The realtor tells him that investing in a home is better than renting because the home will appreciate at 12% a year and that mortgage payments are about the same as renting, meaning you make money every year rather than “flushing it down the drain.” The buyer finds a home and makes an offer. The realtor usually runs ‘comps’ for the home before the offer is made. This print out compares other homes that are similar that have recently sold and shows the average price per square foot. This supposedly tells the buyer whether he is making a sound decision. In reality in a wild real estate market where realtors charge 7% commissions this helps to cause the price of homes to rise a minimum of 7% everytime they are sold (because the seller must cover the costs of the realtor), the cost of the home does not always reflect its ‘value’. So the buyer makes an offer and it is accepted by the seller. It is not in the realtors best interest to delay the sale so he works with the listing agent, or sometimes as the only agent on the purchase to facilitate a quick sale. But the buyer must be approved for a mortgage. Sometimes he has been ‘pre-approved’ for a loan. In this case he has already been guided to a mortgage banker. He might be a very sound borrower. In this case the loan he will receive cannot have monthly payments (principle, interest, taxes and insurance payments are bundled together into one monthly payment) that exceed around 35% of his monthly income. But increasingly between 2002 and 2007 borrowers were invited to get involved in more and more exotic products. Sometimes they were encouraged to be involve in ‘interest only’ loans where they only pay interest in the hopes that the house will appreciate so much there is no reason to pay down the principle. Sometimes they chose an ‘Option ARM’ or adjustable rate mortgage where they could choose to pay interest only or principle and interest or payoff the loan in 15 rather than 30 years. Some of these loans adjusted after three or five years, but some even more exotic products allowed the bank to actually increase the principle if the loan adjusted and the borrower only paid the interest. Some of the loans, especially those going to less than perfect credit borrowers included ‘pre-payment penalties’ so that the borrower, who already has bad credit, was given a high interest rate, some 2-5% above the regular one, and then not allowed to pay off the loan in less than five years or so or incur a penalty. In this case the bank thought it was locking in this higher interest rate for these years, but in actuality the bad credit borrower was now forced to pay more and the risk f default increased exponentially. From the bank’s point of view this made sense since the borrower was a higher risk. The borrower could also choose, sometimes, from ‘low doc’ or ‘no doc’ loans and ‘stated income’ loans. In these cases, usually if the borrower had decent credit, he was trusted to state his income (rather than supply tax returns, bank statements and pay stubs) and accept a slightly higher rate for this privilege. Truly risky borrowers were saddled with multiple loans. One bank would provide a loan for some 90% of the value of the home, protecting itself against the higher chance of default by the untrustworthy borrower. Then a second lender would cover another 7% of the value of the home for a higher interest rate, taking on more risk in exchange for more interest. Then a third loan might be tacked on, perhaps by the home seller, as a form of ‘carry back’ loan for another 5%, covering the closing costs of the borrower so that he would actually get some cash back at closing,. But this third loan might be at 12% interest or some outrageous figure. Saddled with three loans for some 102% of the value of the home the bad credit borrower now had an incentive to make his credit worse by defaulting on all three loans. But no matter, he was assured by the realtor that the home would appreciate by 12% in the first year. So for a $100,000 home, although he owed $102,000, it would be worth $112,000 after the first year. When he couldn’t make his payments he could always sell the home, paying the same realtor 7% or $8,500, meaning that he would receive a profit of $1,500 after the first year, having invested not one cent.
My former employer, Washington Mutual, ran itself to the brink of Bankruptcy because of its wild mortgage ways. Allied Home Mortgage, another employer, was sued by countless borrowers who felt they were fleeced in their refinancing. They were told they were lowering their payments, which was true, but they didn’t realize that they were losing thousands of dollars in equity through refinancing.
In this crises one cannot ignore the role of all the other people who benefited from the mortgage binge. Appraisers were at the trough as well. In the cases where houses turned out to be worth less than their perceived values it seems the appraisers were encouraged to stretch their values and underwriters and loan processors never caught on or were in ot it because they too got paid for each loan originated. When Congress claimed that investment banks like Lehman brothers ‘stole’ from Americans by reselling these mortgages they seemed to have missed this entire industry of appraising. There were also ‘home inspectors’ at the trough. This group of people is probably the largest part of the home purchasing scam. They write large reports about the home, claiming to have ‘inspected it’ but they admit they are not experts in plumbing, structural integrity or wiring and that should the buyer truly want to check any of the things in the ‘home inspection’ that they should hire a professional. This is a point realtors also stress. They aren’t responsible in any way for telling how much a home is worth or how much it will appreciate because they are not professionals, but this doesn’t bar them from telling borrowers all sorts of thing. One must not forget that the title company, home warranty seller, termite inspector and numerous other people are at the trough before the home purchase is closed. Literally thousands of dollars are churned out of each home purchase, some from the borrower and some from the seller. When its all over the value of the home is not only increased 7% to cover the realtor fees but also another 3-5% to cover the costs of the mortgage and the other people involved. No wonder homes ‘appreciate’ at 12% a year. That represents precisely the percent of the value of the home that goes into the trough during a closing.
A lot of people got fat during the housing bubble. It wasn’t just Lehman executives. Congress wants a quick fix and an easy scapegoat. But from the highest pashas in Congress who should have pushed better oversight of Fannie and Freddie, down to the borrowers who defaulted, many people were to blame. It wasn’t merely the American dream of home ownership that has been harmed. It is an entire way of life that was built on credit. This is a recent phenomenon. While it may appear that numerous Americans have ‘fulfilled’ the dream of home ownership, the fact that so few of them have paid their homes down means that America may be farther from the Jeffersonian dream today than it ever has been. All the drugs that Fannie Mae peddled over the years, including the scams known as FHA loans and HUD homes and ‘Affordable Housing’ or the scam called ‘ACORN’ provided millions of people with homes who never worked for them and never intended to work to pay them off. The idea that “low income” borrowers deserved to have all the mortgage rules bended for them so that they ended up with monthly payments that equaled some 65% of their monthly income was a recipe for default. And yet, in the name of good intentions, billions of dollars was pumped into the mortgage industry so that ‘low income’ borrowers could have these ‘affordable’ loans.
Only when the addiction to credit is cured can Americans get back to the business of living the Jeffersonian ideal.
Hypocrisy and terror
Seth J. Frantzman
October 13th, 2008
Two stories appeared in the Associated Press on October 5th, 2008. The first concerned a riot in the Egyptian town el Tayaba which was sparked after Muslims were accused of sexually harassing a Christian woman. The next story concerned a concert in Kuwait by an Egyptian singer in which a female spectator rushed the stage and kissed a male performer. The concert was ended because it "defied the conservative traditions" of Kuwait. These stories are related not merely because they both include Egyptian protagonists. They are related because they deal with the common misconception and myth that the world has had to deal with in the wake of September 11th, the idea that the clash of civilizations between Islam and the West is in any way due to the West's 'opulence' and 'immorality' and the Muslim world's 'morality' and 'modesty'. The complaints by the Islamist radicals that they oppose the West because it brings 'immorality' and 'sexuality' to their culture is as much a myth as the idea that the Israeli-Palestinian conflict is to blame for inflaming Islamism. Many people have accepted this myth. Fareed Zakaria in an article published in Newsweek after 9/11 noted, among other reasons, that it was because “we are rich and they envy us.” This is part of the 'western opulence causes Muslim terror' myth. In his recent book, The Enemy At Home: The Cultural Left and Its Responsibility for 9/11, Dinesh D'Souza, an American conservative, argues that “a decadent American culture angers and repulses traditional societies, especially those in the Islamic world that are being overwhelmed with this culture.”
The best place to observe the degree to which this is a myth is in the Persian Gulf Arab states, not only Kuwait, but especially in Dubai in the United Arab Emirates. A recent article in the New York Times entitled 'Young and Arab in land of Mosques and Bars' (Sept. 23, 20098) by Michael Slackman described the story of Rami Galal, Ayman Ibrahim and Hamza Abu Zanad, the former two of Egypt and the latter of Jordan respectively. Galal enjoys drinking alcohol and has a Russian prostitute as a girlfriend. Slackman paints a picture of a Dubai as a utopia; “a vision of what the rest of the Arab world could become-tolerance for cultural diversity…diversity, tolerance end opportunity help breed moderation.” Slackman neglects to mention that 80 percent of the country are immigrants or expats and that none of them or their children have a right to vote. The only other nation where we can recall such a situation was apartheid south Africa where 20% had rights and 80% did not. But no matter, Dubai is a vision of the future. Zanad also describes his life in Dubai as a sort of fantasy world’ “fancy cars…you can have prostitutes.”
Galal and Zanad come from cultures where people are from a “traditional, observant household, where family honor is linked to obeying social norms and respecting religious values.” Both Ibrahim and Galal are engaged to married. And yet they frequent the 'Rattlesnake Bar and Grill' where “many single women line up like merchandise by the front door.” The bar is packed with “single men and prostitutes.” But after a night at the bar with the prostitutes Galal flies home to Egypt where he fasts for Ramadan.
The United States did not bring hypocrisy to the Arab Muslim world. Hypocrisy has always been integral to the culture of the Middle East. Since the 7th century and before it has had this contrast between the Harem, of nude dancing girls to service man’s every sexual desire, and women covered from head to toe in the Abbaya or Chador or veil. In Iran where it is forbidden for men and women who are not related to be in the same room alone the prostitutes engage in 'muta marriage' or short term marriage for the duration of the encounter.
Hypocrisy and terror have gone hand in hand in the past. Many leading communists who also doubled as terrorists spoke about a ‘dictatorship of the proletariat’ but were themselves men of substance and wealth. While they used terror as a weapon to achieve their goals and while they murdered ‘rich bourgeoisie landlords’ they themselves came from leading families and when they finally gained power they surrounded themselves with wealth, feasts, palaces, fancy cars, private planes and posh residences.
We cannot ignore the hypocrisy that dominates in the Arab Muslim world. This hypocrisy has been noted in a variety of texts dealing with the most ‘fundamentalist’ of Muslim regimes: Saudi Arabia. In this regime it is not only typical for men to take four wives but also for them to continually trade up so that the most recent wife is a young woman, even as the man approaches his later years, not so different than the practice in the West where men take ‘trophy wives’. There may be many things that divide the West and Islamic civilization, but wealth, opulence and sexual promiscuity, among men, are not among them. The story of Rami Galal and Ayman Ibrahim only serve to highlight this truth; both men were engaged to be married when they went to Dubai to enjoy their time with prostitutes and bar hopping. It’s not sexuality that brought on 9/11. Those on the right and left, from Dinesh D’Souza to Noam Chomsky are wrong on this point. The West didn’t ‘break down’ the bonds of family in the Muslim world. What bonds that existed were long ago shattered by the practice of polygamy and the harem. The West has only brought such sexuality into the open rather than containing it in a bubble of hypocrisy, as exists in Dubai.
Misreading Teddy Roosevelt
Seth J. Frantzman
October 6th, 2008
On October 3rd an article by Bernd Debusmann appeared in the International Herald Tribune entitled 'McCain Foreign Policy'. He criticized the attempt by John McCain to portray himself as a new incarnation of Teddy Roosevelt’s foreign policy. He portrayed TR as an American buy, remembered mostly for colonizing Latin America. Debusmann complained about McCain’s idea of a League of Democracies and noted that in a recent poll 22,000 people around the world choose Obama over McCain in saying that Obama would “improve” U.S foreign policy. But he neglected to mention that TR was also a well known 'Trust Buster' who helped break up the major U.S corporate monopolies such as Standard Oil. He neglected to mention the central theme of the Roosevelt Corollary of the Monroe Doctrine: It was designed to end European intervention in the affairs of American States, not merely to project American power. In fact the TR corollary was designed to prevent the threatened invasion of several Latin American nations by the UK and Germany due to those nations' inability to pay their international debts to European power. Debusmann forgets that when TR was president in 1904 that the European powers controlled much of the world under the colonial yoke, not America. In fact he seems to have forgotten completely the context of TR and his presidency and his revolutionary ideas about conserving the natural environment and breaking up corporate monopolies. TR was president when America played virtually no role on the world stage and he was one of the first U.S presidents to travel abroad. Debusmann ascribes the America of 2004 to the America of 1904 without noting the great changes in power in the world that have taken place. TR’s notion of 'speak softly and carry a big stick' is in essence the opposite of the Bush foreign policy, something you also neglect to mention and seem to misunderstand. Speaking softly is the opposite of what the U.S does today. If McCain were to actually follow that policy it would represent a great departure from the Bush doctrine. Debusmann confuses the notion of the League of Democracies by claiming, through the words of others, that it is "designed to exclude and probably gang up on all the countries we don't like." Debusmann notes that it might "undermine the United Nations." But he seems to forget that the rise of democracy has been a major theme of the 20th century which has resulted in democratization of South America, Africa and Asia. How exactly a league of democracies 'gangs up' on countries 'we don't like' is beyond me. The world has ganged up on dictatorships such as Burma and Zimbabwe for a long time and one doesn’t see Debusmann defending Burma based on this fact. Since when did democracy become such a negative word? One finds it strange that Debusmann frames the Russia-Georgia role as one in which Russia "struck back" at Georgia as if it were Russia that was a victim of this war rather than the country using disproportionate force. When the U.S invaded Afghanistan or Israel invaded Lebanon, did Debusmann describe these actions as 'striking back'. Why is it when Russia behaves the way the U.S or Israel does its actions are not framed in the same way? When did it become "impetuous" for an elected American politician to offer support to a small democratic country such as Georgia? When the EU offered support I doubt you described it as "impetuous." Offering support for small countries being invaded by their large neighbours should be a positive thing, not a negative.
Lastly Debusmann notes that, based on recent poll in 22 countries that people feel an Obama presidency will "improve [US] foreign relations" with people in the world. But unfortunately Europeans and other foreigners don't vote in American elections. In 1939 most Europeans, who had marched blindly to the fascist lock-step, would have also said that FDR was not 'improving U.S relations' with the continent. Surely, if polled, most of those under the Stalinist boot in 1950 would have said that JFK was not "improving foreign relations" with the USSR. Just because the world's people don't like the American president doesn't mean he is wrong. In the past the world has frequently been wrong, more times than it has been right. Had we Americans followed the way of the European we would have been brutal colonialists at the time of TR, then good monarchists, then Nazis and then Stalinists.
But in the end the editorial proves the degree to which people have completely lost sight of important values in world affairs. Democracy is a positive notion, not a negative. Defending the rights of small nations is a positive notion, not a negative. Walking softly and carrying a big stick is a positive foreign policy. It is better than speaking loudly and carrying a small stick, which seems to be what many world leaders are good at these days. Busting trusts and conserving national treasures such as Yellowstone national park are positive features of the TR legacy, not negatives. For Americans to vote their own interests, in a country that numbers 310 million people, the most diverse country in the world, is a unique and positive feature of one of the world's oldest democracies. For Americans to follow the will of the people of France, Saudi Arabia, Russia and China is not positive. Those people have already had their say on their leaders, or perhaps a lack of say given their undemocratic systems. That is fine. But we Americans also deserve to have our own form of government with out own unique president. We don't need to be a carbon copy of the world, a world that has so often done the most terrible things to its people. The modern intellectual damns America and scoffs at the legacy of TR. But TR was a better man than George Bush and Barack Obama. Those that have forgotten his unique legacy and his many achievements are doomed, unfortunately, to repeat the mistakes that were made before and after him. 20 percent of the world's people think American foreign relations will change for the better under McCain. In the last semi-democratic elections under Hitler it was also just 20 percent of the people who opposed him. But those 20 percent were right. Sometimes the majority is wrong.