A Detailed Analysis on How The Big Banks Destroyed America

After reading countless articles and points of view on the big bad banks, I feel that there are pieces that
aren't properly explained, especially after reading Matt Taibbi's book, Griftopia: Bubble Machines, Vampire
Squids, and the Long Con That Is Breaking America by Matt Taibbi, who is an amazing writer and blogger at
Rolling Stone, I think I'm finally at the point to put it all down on paper.

It's amazing to think of the sheer scope of what has happened to our country, what the banks have done,
truly. I say this, not to just talk about banks being villains and boogie-men, but it is just horrific in my mind.

It is commonly known that banks lent irresponsibly which caused a lot of people to go into foreclosure. Those
same people think that the banks were just a piece of the puzzle, which is true, but their role shaped America
as we know it, for our eternal detriment. Their actions creep into everything we know, every aspect of our
lives and will affect us for a long time to come.

For a little background to someone that might not be so knowledgeable on the subject, the banks originally
offered traditional loan products, 30 year fixed mortgages that they kept and collected the payments on over
those 30 years. Due to greed and, admittedly, governmental pressure to give the "dream of homeownership"
to everyone, banks couldn't lend countless billions because they didn't have countless billions, especially with
their leverage restrictions.

So, in comes Fannie Mae and Freddie Mac who buy mortgages from primary lenders like Bank of America or
Chase. Then they began securitizing the loans to sell to investors and since, that would require the loans to
be quality (or who would buy them),they came up with the idea of creating CDO's or CMO's, also known as
Collateralized Debt Obligations. These instruments split these pools of loans into income tranches which
divorced the end-investor from the actual mortgage. If I bought a mortgage today, I could foreclose on that
borrower myself if that borrower defaulted. If you bought a CDO, you can't do anything except hope that the
money kept coming in. Within that CDO, your level of risk and is proportionate to your return. Now we have
the co-conspirators, the ratings agencies like Moody's. Here is an example; they came in and gave triple-A
rating on a mortgage pool with an average loan-to-value or LTV of 99.5%, AVERAGE, and a majority of those
loans were stated income! Stated income loans started out to help people that were self-employed who
wrote off a lot of their income under business expenses but did make much more money than what would
show up on the adjusted gross income of their tax return. These 'stated loans' morphed into stated loans for
WAGE EARNERS which made things much worse.

So now we have this stew or bomb made up of thousands of triple-A rated, stated wage earner mortgages at
a 99.5% average LTV. Sounds ugly, huh? This is just one of many such pools. So the banks had the system to
write bad loans safely, while making piles of cash in the process. What was their next step? To REALLY ramp
things up and lend to every minimum wage immigrant they could find, creating these mortgage pools to sell
them off to unwitting investors at massive profits. Things started to get real ugly at this point.

To offer some balance to this story, there is a lot of blame put on brokers, appraisers, and other pieces of this
puzzle. Since I, personally, am in the financial industry, I think there are some specifics that need to be
discussed. First off, admittedly, there was a lot of fraud perpetrated by dishonest brokers, conduit lenders (I'll
go into that shortly), and appraisers. Prior to stated loans, your average honest broker sat in his office quietly
originating loans for the various banks that he was approved with. Then the banks, in all their wisdom,
created specialty loan products like Option ARM's and Hybrid ARM's who then hired hosts of Account
Executives and Underwriters and Processors. Account executives were charged with going out into the field
and soliciting brokers for their business while the Processors took in the loans and the Underwriters prepared
them to be sold on the secondary market.

Now back to your average honest broker, in walks an Account Executive who tells the broker that they have a
new product for his clients. Back then, that broker was probably turning down clients left and right due to the
lack of products that would fit them, either a credit score, income, or other similar issues. Then the Account
Executive leaves and shortly thereafter, a client walks into the office or calls that broker. That client takes the
application and the broker shortly realizes that this borrower won't fit into the banks traditional program but
it will fit into the new product that he was just introduced to. Should that broker turn away the business for
them to just go find another broker who will offer him the same thing? Someone might say yes, but I
disagree. Back to the fraud or dishonest behavior perpetrated by brokers, just to clarify. If that broker
knowingly puts that borrower into a loan that he has a strong inclination that foreclosure might be the result,
then that is, dishonest.

Back to our story; the bank now had products to sell and brokers to peddle them. They even set up large
retail operations to work directly with clients, but that wasn't enough. The banks needed more loans! They
had to keep their bottom line intact, you can see my blog, link below, as to why the stock market can never
go down and why the almighty stock price is so important. A bank cannot make a billion dollars this month,
but only make nine-hundred million next month, what would happen to their stock price?! So, in order to get
more loans to securitize, break up, and sell to hungry, unwitting, back-end investors; banks set up
Correspondent Lenders, sometimes called Conduit Lenders or Warehouse Lenders.

The bank would set up a credit line for "institutions" that weren't institutions, but just companies, sometimes
brokers-turned-lenders into full fledged lending institutions. If you search "mortgage lender implode" on your
browser, you will find a list of over 350 "correspondent lenders" that went under. Start at the bottom. Almost
all of those lenders were correspondent lenders, not banks or real lending institutions. These Correspondent
Lenders would end up funding the loans themselves in their name, most of them being presold to the real
lending institutions (Bank of America, Chase, Wells Fargo) and ultimately to even bigger investors like
Lehman and Goldman Sachs. There is even talk of deeper fraud where the loans were actually Note
Purchases (a security), where you cannot actually foreclose on a transaction like that. So, the big banks set up
hundreds of the Correspondent Lenders to solicit the very same brokers that they were soliciting, offering
better customer service (the big banks were so busy at this point) and generating untold billions of dollars in
mortgages, and everyone was living large.

Again, back to the story, the banks had the system perfectly set up for them to enrich themselves at almost
no risk until the bottom dropped out in 2008. They were in deep trouble, we all know, and they were bailed
out. Now that that happened, they REALLY have no risk. Since the big banks are ALL "systemic risks", if they
were in trouble, they would be bailed out again.

Now this is what really galls me. Everything I've outlined sounds bad, but to every person not in trouble on
their house, they think "at least it's not me." Statistically, a majority of the loans are NOT in default and 90%
of the population IS employed, so there are a lot of those people. This is how it creeps into everything.
People on social security get a Cost of Living Adjustment and that is where we all pay no matter what,
forever.

Recently, when speaking with a lady at the supermarket, she ended up telling me that she was trying to rent
her home for $3700/month. We talked further and I found out that she had no mortgage on her property
either. Why was she renting her home out for $3700 when 10 years ago it would've rented for 1/3 of that
price? "Because that's what the other homes in the neighborhood are renting for," she tells me.
In the last 10 years, have prices tripled or quadrupled? I can buy the same.99 cent hamburger, the same pair
of shoes, and the same computer program, all for very similar prices. There is inflation of course, restaurants
are more expensive (I'll get into that shortly), etc., but almost nothing has tripled or quadrupled, at least in
the last 10 years, so why?

In 1998, the average home price in California was around $200,000 and it went up and up until it peaked in
2007 at $558,100. During that time, people refinanced over and over again, pulling cash out, spending
money, of course, aided by the biggest scumbag in the world, Alan Greenspan (I could write a whole blog
post about that at another time). The huge amount of money, seemingly out of nowhere, put people into
cars they couldn't afford, lifestyles they couldn't afford, houses they couldn't afford, and the list goes on and
on.

With values in properties going up, it was a madhouse for everyone. There were people buying apartment
complexes at a 2% Capitalization Rate!!! To give some explanation to the layman, the Capitalization Rate is
the NET income divided by the purchase price. To illustrate the lunacy of that, here is an example:

$100,000 NET income (Gross Income - taxes - insurance - maintenance- management - vacancy factor)

2% Capitalization rate would give a purchase price of $5,000,000!!! Even with 20% down, 1 million dollars
down, and a great interest rate at 5%, amortized over 30 years (which isn't common for commercial loans),
you'd have a monthly mortgage payment of $21,472 a month!!!

That mortgage isn't even possible due to the fact that commercial lenders require properties to be able to
pay for themselves, but whether the borrower is getting it from a bank, or is just putting a lot of cash down,
there is a cost to having that money sit there. Now, why would anyone in their right might buy an apartment
complex that is generating a NET income of $8,333/month with a mortgage payment of over $21k/month?
The answer is appreciation and the hope of a quick buck. It was just crazy.

Back to the ugly part of this story; with purchase prices going higher, the new owners need to rent out an
apartment for $1200 where 5 -10 years before, it only needed to be rented out for $600 or less. Why did it
"need" to be rented for that much? Because of the mortgage payment. That doesn't seem so bad, does it? It
gets worse. When your rent is $1200 instead of $600, you lose $600 worth of expendable income and, since
the average income in the United States is $36,000 a year, $3,000 a month, $600 is a lot. So that person
doesn't buy as many items which hurt businesses of all sizes.

What's worse are the commercial loans out there, specifically retail or office space. Properties are magically
appreciating and with new owners at higher purchase prices, you must rent the property for more to ensure
that you can pay for your mortgage and eventually refinance. Your typical commercial loan is a 5 - 10 year
balloon which means that that borrower has to refinance every 5 - 10 years. To get a commercial loan,
typically a lender wants to see $1.25 come in for EVERY $1 that goes out. If you lower the rent, you can't pay
for the mortgage and if you can from other income sources, then you can't refinance which then becomes a
problem. Also, why would anyone purchase a property that doesn't make them money? Why would they be
OK with a loss? Now, they're forced to rent out their space for more money. Let's evaluate the result.

If you run a clothing boutique store with 900 square feet and your rent is $2 per square foot, you would have
to sell X amount of clothes for X price to at least break even, not to mention your personal bills. Human
psychology is interesting. If you're a business owner and your overhead is $10,000/month, if somehow you
cut that down to $5,000, do you think that that business owner would now truly have $5,000 extra? No.
They're likely to generate less income now that their expenses are lower. So, to pay the $2 per square foot,
you have to set your prices at X price in order to do that. If your rent was $1 per square foot or less then you
would be likely to sell your clothes for less. This goes all the way up the chain, from the importer or
manufacturer to every step in the process. Like I said earlier, the actions perpetrated by the irresponsible
banks have led us to this. The rent that you pay as a business owner or at your home directly interacts with
how much you sell your products for, how much you spend at other businesses, and so on. This affects
everyone. If you don't own a home or a business, you pay the price in how much it costs you for a t-shirt. The
Federal Reserve fights and fights against inflation, going so far as to buy debt from itself to keep the prices
up. Now, I am not for deflation necessarily as I know that there are consequences that go beyond this, similar
consequences though. If prices of a particular product go down, that can have a ripple effects just the same
way the banks' irresponsibility IS having ripple effects.

I'm not an economist but there is a lot of writing on the subject. If you took the time to read the article about
why the stock market can never go down, you'll see similarities. Once you reach a certain profit, your stock
price will move accordingly. If you don't make that same profit again, no less, only more, then the stock will
be affected which will affect the investors and cause other problems for the company.

So, prices cannot go down, only up. The banks hyper inflated EVERYTHING and it surrounds rents which are
directly proportional to mortgage payments and we come full circle to the banks. I'll go back briefly to the
lady I met in the super market, she has no mortgage and she is renting a property for $3700 a month because
that is what other homes are renting for the area. Do you blame her?

Only with defaulting on mortgages does this problem get fixed. Right now, investors are buying properties
under market and values are real, based on income, as it always should be. The banks have fraudulently
destroyed everything, literally. We are a country with no savings, relying HEAVILY on debt. We are a debtor
nation and it used to be the other way around. What is the solution? It's very hard to say.

In closing, I could go much further with this line of thinking. With money flowing like rain, people's life styles
go up and when your income and life style doesn't jive, what do you do? You get credit cards and more debt.
Then, after you're foreclosed on, your credit card company (likely the same company that foreclosed on you)
will sue you for defaulting on your credit card, AFTER they got bailed out by, coincidentally, YOU.

Nicholas Lekas
Vice President
FK Capital Fund
215 Avenida Del Mar, Suite C
San Clemente, CA 92672
(949) 940-0114
http://www.fkcapitalfund.com