Subprime Melt Down Self-Inflicted

If you’re like me, you’ve probably spent some time during the past week or two wondering just how much damage the subprime mortgage mess is going to inflict on individuals, businesses and, collectively, the country.

Whether you’re a homeowner facing increasing monthly payments due to adjustable rates now coming due, a retiree worrying about the stock market’s reaction and what kind of bite it may take out of your nest egg, a financial institution overly invested in subprime instruments, or just an average joe (or joe-ette) trying to find a lender willing to write a mortgage so you can get in the real estate market, the damage being done is extensive.

And self-inflicted. We, and I use the term “we” loosely, brought this on ourselves through greed and an apparent unwillingness or inability to take personal responsibility for our actions. In simple terms… which traditionally are the terms I favor… folks around the country were buying homes and taking on debt that they had no business acquiring, and lenders, mortgage brokers and clever financial institutions repackaging and bundling at a frantic pace were approving this crap because it put money in their pockets.

Up until now we’ve heard plenty of people saying that the brokers and lenders are at fault… they were acting dishonestly or, at best, not being completely transparent in explaining the terms of the various mortgages. They took advantage of uneducated consumers who were unable to understand the process and were just trying to get a foot on the ladder of prosperity. Greed drove the lending side into screwing over the country, or so goes the blame-the-industry theory.

Okeedokee… I’ve spent several years now in the private sector, working in the fields of business intelligence, due diligence and risk management. Do I think that there were brokers and lenders who operated with less than ideal ethics? You bet I do. You don’t need to be Moose and Squirrel to figure that out.

And from the 30,000 foot view, how clever do you have to be to know that you shouldn’t approve someone for a mortgage if they don’t provide documentation of their income or assets, or if they are unable to provide a downpayment of some relative significance? “But,’ cries the collective selfless soul of the industry, “…we simply wanted to allow people to own their own home…it’s a wonderful thing and it makes America strong.”

What a load of crap. Due diligence is the process of making sure that the transaction you’re about to enter into is sound, devoid of fraud and undertaken with the highest level of transparency possible. Yeah, homeownership is terrific and has been important to the American infrastructure… but you can’t build a solid house on a shaky foundation made of substandard products. Please, a moment of silence for that painfully obvious analogy.

The industry spent the past few years increasingly disinterested in carrying out even a basic level of due diligence when it came to alternative products such as the now infamous “liar loans” that became commonplace in the subprime market.

On the other side of the table we’ve got the consumer… educated or not, cautious or less so, well advised or unadvised. We’ve heard the industry defenders constantly refer to “caveat emptor,” let the buyer beware. As an aside, I have yet to meet a mortgage broker who could speak Latin.

Here’s what I think about the consumer and the process of buying a home. Buy what you can afford. Notice that the last sentence doesn’t say, “Buy what you can currently afford.”

And it doesn’t say, “Buy above your head because surely the house will appreciate in value and you’ll be able to sell it for a profit before the rates rise and you get hosed.”

Buy what you can freakin’ well afford. Otherwise, rent. And save. And quit blaming others because you wanted more than you could ever logically afford and because you refused to wait until you could afford it. There. That should generate a few thousand nasty emails.

So, according to our math, the current subprime mess that is roiling the nation and causing us all heartburn is the result of the greed and irresponsibility from the industry side rising up and smashing into the greed and irresponsibility from the consumer side. As a result, poo rains down on us all. Perhaps I’ve oversimplified it.

I’ve read a fair number of egghead pieces in the financial news explaining the complexity of the current crisis and how it all came about. Frankly, I don’t think you need to spend too much time dissecting the problem to understand how it happened. In any business transaction or relationship, common sense, decent ethics, personal responsibility and an ability to keep your greed zipped up will usually keep things ticking along nicely. It ain’t that tough. OK, I’m wrong. Apparently it’s pretty damn tough.

Not to say that the resulting mess hasn’t had it’s moments of surreal humor. Pity the poor large financial institutions and hedge funds that got addicted to the subprime market and ended up heavily invested in mortgage-backed securities, not to mention the debt taken on by various funds in an effort to make more jack.

Not to be flip, but my favorite quote so far comes from Goldman Sachs Chief Financial Officer David Viniar. Goldman Sachs has just had to pass around the collection plate and inject $3 billion into one of the firm’s hedge funds, currently operating at a 30 per cent loss. Viniar explained the injection of money into the funds as something other than a bail-out effort.

“This is not a rescue,” he said, “… given the dislocation in the markets, we believe this is a good investment opportunity for us and for the other investors that we have brought in.”

Oh. See, I thought they were chucking $3 billion into the fund because it had suffered significant losses and there was a serious liquidity concern. But that’s why I’m not a big brain on Wall Street. Truth be told, the perverse punchline is that Goldman Sachs, and others at the top of the food chain, will likely end up riding out the storm bobbing along in their bottomless bucket of cash, while you and me spend an increasing amount of time trying to keep our 401ks and other investments from taking on water.

But that’s just my opinion. Let me know your thoughts. Send your comments and insight to

Till next week, stay safe.

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Mike Baker served for more than 15 years as a covert field operations officer for the Central Intelligence Agency, specializing in counterterrorism, counternarcotics and counterinsurgency operations around the globe. Since leaving government service, he has been a principal in building and running several companies in the private intelligence, security and risk management sector, including most recently Prescience LLC, a global intelligence and strategy firm. He appears frequently in the media as an expert on such issues. Baker is also a partner in Classified Trash, a film and television production company. Baker serves as a script consultant and technical adviser within the entertainment industry, lending his expertise to such programs as the BBC's popular spy series "Spooks" as well as major motion pictures. In addition, Baker is a writer for a BBC drama to begin production in July 2007.

Mike Baker is the Co-Founder of Diligence LLC, a leading global intelligence, security and risk management firm. Prior to starting Diligence, Mike spent over a decade and half with the CIA as a covert field operations officer. He is a regular contributor in the national and international media on intelligence, security, counterterrorism and political issues. He appears regularly on Fox News, as well as other major media outlets.