Nothing to Add

I’m going to write about this topic because I feel somehow required to; I don’t know how many people this blog is actually reaching, but even if the only people reading it are immediate family and friends, this still needs to be repeated as often as possible. It also picks up and confirms several of the themes I’ve been talking about for the past year or so, which makes it a good addition to this blog. But I really don’t have much to add beyond the facts of the matter…

A story in the New York Times this week details a lawsuit being brought against Wells Fargo by the City of Baltimore, alleging that the bank was systematically steering African-American customers towards sub-prime loans, at a rate 5 to 8 times higher than that experience by white people. As you probably recall, the sub-prime loans were generally much more expensive than regular loan programs would have been; often as much as 3 to 4 percent higher, resulting in huge increases in profit for the institutions making them, which was the primary motivation for doing so. The possibility of foreclosing on the mortgage, seizing the property, and selling it for even greater profits, while certainly attractive during the housing boom, was never more than icing on the cake…

Now, I don’t mean to imply that there was ever anything inherently wrong with sub-prime loans; I had one myself, back when I was single, because at the time I was “employed” as a partner in the consulting firm, and thus could not demonstrate a regular stream of income. There was no real risk involved – the mortgage was for less than half of the purchase price, and probably less than a third of what the property would have been worth at the height of the real estate bubble in California – but since I couldn’t qualify for a regular loan, I was willing to put up with the 1.25% higher interest on the mortgage I could get. What made these “Predatory Loans” was when banks offered them to people who DID qualify for better rates, specifically for the purpose of bilking inexperienced customers out of their money. Which, according to the former Wells Fargo loan officers quoted in the article above, is precisely what they were doing…

Not all of the people who were caught up in this scam were innocents, either; I’m already on record pointing out that a fair number of people who came into the real estate boom during the last few years were themselves motivated by greed and handicapped by inexperience (if not outright stupidity), falling into perhaps the largest “bigger idiot” event in all of history. For that matter, most of the lending institutions involved were not actively trying to cheat anybody, let alone send the national economy down the crapper; selling the most lucrative products available to people who tell you that they want to buy those products isn’t illegal, or even unethical. But all through the boom years there were a small number of advocates claiming that unscrupulous banks were using the situation to screw money out of unsophisticated customers, particularly in the various minority communities, and now we seem to have been presented with the smoking gun…

I don’t have much to add to this; there’s no handy lesson here about business, management or ethics. Just keep in mind that sometimes the advocates are right; sometimes big companies are going to behave like irresponsible, racist idiots; sometimes people will get so wrapped up in their visions of easy money that even those who should have known better will ignore the risks, forget about the future, and march right off the cliff while protesting their innocence…

Let’s all try not to be those people…