The Subprime Bailout – the Final Step in the World's Largest Ponzi Scheme

This was dated December 19, 2007

“Morgan Stanley posted its first quarterly loss ever Wednesday after taking an additional $5.7 billion write-down related to subprime mortgages. The investment bank also said it would sell a $5 billion stake to China Investment Corp., a sovereign wealth fund, to shore up its capital.”

This is but one of the many announcements made as investment banking firm after investment banking firm disclosed the losses they are suffering as a result of their participation in one of the biggest ponzi schemes ever created, the subprime lending fiasco. Now the government is proposing we Americans bail out these fat cats with our tax dollars simply because they participated in this insane scheme.

The sub-prime mortgage game was a catastrophe from the very beginning and anyone with half a brain could and did see it. Adjustable rate mortgages (ARM’s) were created to support the inflation real estate investors and mortgage brokers were enjoying. As property prices continued to rise in the late 60’s, it became harder and harder for people to afford to buy property so the ARM was created to allow a person a lower initial rate but with the risk that if interest rates increased, mortgage payments would increase accordingly. Still, this was just a hint at what was to come.

With the introduction of the subprime ARM mortgage, initial payments were even lower so people could buy even further beyond their means with a serious day of reckoning on the horizon. For 30 years, I have been telling anyone who would listen, never ever, ever take an ARM. Insist on a fixed rate. The folly of ARM’s was obvious. Sadly, as usual, greed overwhelmed intelligence and American’s flocked to subprime mortgages fueling a historic real estate bubble. As if that wasn’t bad enough, hungry consumers took advantage of this rise in value in their homes to refinance again and again and to take the money and spend it on more and still more “stuff” ignoring reality and living in total denial of the obvious fact that this ponzi scheme could not go on forever.

The most foolish and greedy of Americans hopelessly buried themselves in debt while investment bankers sat in their vaults counting their profits and paying themselves huge bonuses.

At the same time, some Americans, the smart ones, quit buying homes and/or stuck to their fixed rate mortgages when they did and waited for the market to correct. Consistent with the universal laws of economic gravity, the correction is now underway. The uber-foolish are facing foreclosure, houses are becoming more affordable and the investment bankers, the facilitators of this scheme are taking losses for the first time in history. Imagine that, Morgan Stanley made a profit during the depression but lost money in 2007. You gotta know as huge as they lost it in 2007, they profited from it in previous years.

So why bail anyone out? Did anyone bail you out from the ENRON scheme? The percentage of people who are going to be foreclosed upon is small compared to the whole and the market needs this correction since, like the stock market in 2000 needed a correction, the real estate market is still significantly overvalued. It was inflated based upon a ponzi scheme that created the illusion of wealth where there really was none. It was executed with fiscal smoke and mirrors. Both were over-valued. The stock market worked itself out and, in time, so will the real estate market. Everything will be just fine.

Let me say it again in case you missed my point. A real estate market, overinflated due to a massive ponzi scheme that relied on the greater fool while encouraging everyone to remain in total denial of the apparent.. nay.. obvious consequences, must be allowed to adjust. Let the stupid speculators take their losses and let the conservative investors and serious speculators… the ones who had the presence of mind to sit patiently by and wait for the implosion to have their day in the sun. They will buy the foreclosures.. they will make their profits as the market calms and begins to move up again and the natural laws of selection and survival of the fittest (smartest) will prevail.

But above all, we must not subsidize obscene greed and overt stupidity regardless of how great a campaign move this might be or how deep their “grease the politician” account is. That would be counter to the American way and would corrupt the very principals this great country was founded upon… the free market.

Want to sign up for our alerts? No junk mail, just valuable information about the companies we are following and learn about the new ones before the market does. Click here to subscribe.