Monday, May 5, 2008

Subprime Mortgage Loans: No Money, No Credit Rating, No Problem Service?

Ever since the subprime mortgage debacle became headline news in the latter part of 2007 that resulted to a massive slowdown of our credit driven global economy, economists are now formulating cures and future preventives. Will it work?

By: Vanessa Uy

Ever since President John F. Kennedy’s speech about sending a man to the Moon, political rhetoric has become the latest selling point of the American industry. If sending man to the Moon made the US Military-Industrial Complex rich beyond their wildest dreams, shouldn’t other political rhetoric – if exploited right – could – in theory - benefit other industries as well? Like the proverbial “American Dream” of home ownership. One of the latest proponents of the home ownership rhetoric is the current American President George W. Bush whose speech about fulfilling every working-class American’s dream of homeownership was even caught on TV. Given the less than stellar records when it comes to corporate social responsibility and ethical business governance of American financial institutions (the Savings & Loan scandal of the 1980’s is an excellent example), are these financial institutions up to task in fulfilling every working-class American’s aspiration of home ownership? To fully understand our current subprime mortgage debacle, lets examine first the history of equity loan providers in America and their stance about Civil Rights.

Back in the 1960’s when an overwhelming majority of the American financial institutions thought that the concept of corporate social responsibility, ethical business governance and fiscal transparency – which are now the most overused selling points of financial institutions - were mere ideological musings of Marx and Lenin back then. These financial institutions were even engaged in a practice that would be deemed unacceptable by Civil Rights groups today, and they called it “Red Lining”. “Red Lining” is a very controversial practice adopted by equity home providers’ back in the 1960’s. Equity loan and other financial service providers literally draw a red line around neighborhoods whose populations are overwhelmingly African-American, Hispanics or other cultural minorities as no go zones when it comes to giving these people access to home ownership loans. Thus forever denying these people the proverbial “American Dream” of home ownership.

When the Republican / GOP neo-conservatives gained congressional power during the Clinton Administration of the 1990’s. The American financial institutions were literally given a carte blanche to make money by any means necessary. The concept of “Reverse Red Lining” first gained its first tentative steps. By providing risky or subprime mortgage loans to cultural minorities or to anyone with subprime or shaky credit ratings, equity loan providers could now actually pretend on how caring they are by providing these very high interest loans. The loan providers could easily feign corporate social responsibility sine they are providing loans to a group of people whose loan application were denied or rejected by other equity loan providers. These subprime mortgage loan providers even went public by raising money via IPO s or initial public offerings. Almost everyone, Wall Street even bought into it lock stock and barrel. Even including investors outside America joined the subprime bandwagon. A remote town in Iceland even bought into this “subprime loan gold rush” by investing a sizeable part of their town’s fiscal reserves. Lucrative loans with inherently high risks gained as much allure as casino gambling. Thus explaining why when the subprime bubble collapsed, its effects were felt throughout the entire world.

When the painful pinch of reality set in, it’s the ones with marginal financial resources i.e. the subprime mortgages target customers – namely African-Americans, Hispanics and other minorities – who suffered the most. Refinancing companies are doing a very poor job of consolidating the debts of homeowners affected by the subprime mortgage crisis. Some financial analysts even questioned the wisdom of debt consolidation in alleviating the affected homeowner’s problems.

Many are now starting to question whether the subprime mortgage’s original core mission is to recoup the profits lost by American financial institutions. Is it to recoup lost profits due to the Savings & Loan scandal of the 1980’s, the “dot com” bubble of the late 1990’s and the interest rates in which the former Federal Reserve chairman Alan Greenspan decided to set for far to low for far too long. With the questionable wisdom of predatory lending’s ability to kick-start the ailing American economy is a matter of lengthy conjecture. Shouldn’t all of us gain some form of wisdom by avoiding as much as possible very risky investment strategies or maybe we should stop treating our houses as mere financial instruments / tradable commodities and more as homes were our heart truly belongs.

Hedge Funds: Financial Cloak and Dagger?

First made famous as a financial instrument that made spectacular hostile takeovers possible during the 1980’s “Decade of Greed”. Now used by speculators to drive up oil and food prices, will stricter regulation tame hedge funds’ unbridled avarice?

By: Vanessa Uy

Okay I’ll admit it – and so do maybe a large number of people – that the financial world’s bereft of any semblance of corporate social responsibility is what probably makes it interesting to outsiders. If ever corporate social responsibility or ethical business governance existed during the “Decade of Greed”, the movie “Wall Street” surely would have never been made. Part of the financial world’s “cash cow” that tore the financial world into two camps when it comes to the widespread adoption of corporate social responsibility are hedge funds. But before we proceed further, let us discuss first the arcane and rigmarole – infested world of hedge funds.

A hedge fund is a private investment fund that charges a performance fee and usually offered only to a limited range of qualified accredited investors. Unlike true blue Initial Public Offerings or IPO s, in which anyone with money or other requisite funds can qualify to invest. Alfred Winslow Jones was credited for inventing hedge funds back in 1949. While there is no legal definition of hedge funds under the US securities laws and regulations, the term hedge fund usually pertain to funds invested in more complex and risky investments ignored by most – if not all - public funds. As a hedge fund’s investment activities are limited only by contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into the futures markets, swaps and other derivative contracts and leverage.

As the nomenclature implies, hedge funds usually avoid potential losses in the principal markets they are invested to by hedging it by any number of available methods. But a number of long-term investments had been inappropriately named as hedge funds, especially absolute-return funds. Even though these so-called “pseudo hedge funds” do not actually hedge their investments.

Hedge funds had always acquired a reputation of secrecy, a financial cloak and dagger if you will. This could cause serious headaches in its attempt to comply the transparency proviso of corporate social responsibility and / or ethical business governance. Unlike open-to-the-public “retail” funds - like US mutual funds - which are marketed freely to the public, in most countries, hedge funds are specifically prohibited from being marketed to investors who have no professional accreditation or to individuals with sufficient private funds. Sadly, this limits the information a hedge fund is legally required to release because divulging a hedge fund’s methods could unreasonably compromise their business interests. Thus limiting the pertinent information that a hedge fund is allowed legally to release.

Since a typical hedge fund’s assets can run into many billions of dollars and is always be multiplied by leverage, their sway over markets, whether they succeed or fail, is potentially substantial. There is even a continuing debate over whether hedge funds should be more thoroughly regulated. Given their current sway in the commodities markets, especially to crude oil and staple foods like rice, corn and soybeans, a more thorough regulation is indeed a long time coming. The bad news is that a more thorough regulation could be viewed by the majority in the financial world as a move from an already over regulated Keynesian style economics into a Soviet-era “Socialist Command Economy”. A move that would prove to be an anathema to an overwhelming majority in the financial world who had clung on to their Protestant / Calvinist Work Ethic like their lives depended on it.