Vail Valley Voices: How did America get in this mess?
Vail, CO, Colorado
The questions are constant and consistent: “What’s wrong with the economy? What’s a depression? Does this mean I won’t be able to go to college? How can the government fix it?”
As a social studies teacher, I love to hear these questions, although I’d love it more if I could answer them with any degree of confidence. I understand I’m in good company, though, because the secretary of the treasury, the chairman of the Federal Reserve Board and the leaders of the House and Senate finance committees don’t seem to have much confidence in their own answers, either.
One question I can answer with the benefit of some experience asks, “How did we
get into this mess, anyway?” In my life before teaching, I spent 20 years in various sales positions, a couple of which let me see some of the current mess in the making.
The first example occurred during the dot-com boom. I went to work for a company with an outstanding business opportunity: Convince Realtors to purchase a Web site on our central, searchable database available to homebuyers worldwide.
It was an easy sale because we provided a valuable service, the public loved
the site, and the Web sites were quite
Even better for me, the company treated its employees very well. We had all the perks: dramatic Los Angeles headquarters, big salaries, expense accounts, company cars, stock options and a killer bonus plan.
Unbeknownst to most us, we also had a CFO and CEO who were swapping ad space on our Web sites for ad space on other Web sites and calling it revenue. It looked like we were rolling in cash when we were really selling our best products at a loss.
The “money with mirrors” game, made famous by Enron and WorldCom, ended when investors’ auditors declared that we were never going to make a profit because we weren’t making any real money.
In three days, our stock price plummeted 95 percent, investors pulled the
plug, and the entire sales force was
The real losers were the Realtors and the home-buying public. The deceptive practices of a few executives left a gaping hole in the marketplace that has yet to be efficiently filled.
I followed the business bubble into the mortgage market and saw the root problem in today’s economy up close and personal. I went to work for a lender who compensated me very well, but within a week, I smelled something very fishy.
The interest rates we were offering were anything but competitive, our closing costs were some of the highest around, and our loan terms included penalties that were downright draconian. Yet
business was booming! It was, literally, too good to be true.
One morning just a few weeks after I started, I noticed two unfamiliar men in the branch manager’s office. After about 20 minutes, they quietly escorted our manager to the front door. Then they began calling in loan officers one at a time. Out of an office of 27 officers and processors, 23 were escorted out that day, leaving four of us new guys to wonder what had happened.
It seems that many of the loans that the office had originated were qualified using falsified documents. The branch manager’s particular talent was using his computer to alter W-2 forms and pay stubs, most of the time without the knowledge of the borrower.
By artificially inflating borrowers’ incomes, he gave people loans that were far in excess of what they could actually afford. While the mortgage business has always included a certain amount of gamesmanship to get a buyer qualified, this was blatant forgery and fraud. Worse, the loan packages were being shipped across state lines for underwriting, which made them fall under the purview of the RICO act.
The two men were from company headquarters (once again in California), and they said they were there to “clean up the act.” In reality, they were there to get rid of the people who didn’t know how to cheat well. They brought in a new manager who was much more experienced and far more subtle. I left within a week.
Unfortunately, that mortgage company stayed in business for five more years and became a recognized national brand. It advertised heavily, sponsored a NASCAR team and purchased the naming rights to a Major League Baseball stadium. It positioned itself as a viable supplier of the American dream.
Along with many other companies doing the same things, it wrote millions of fraudulent loans nationwide. Then it sold those loans to Wall Street financiers (Lehman Brothers, Bear Stearns, AIG, etc.), which sliced and diced them into packages that were used as the basis for mortgage-backed securities that were sold to virtually every institutional investor on the planet. But those securities aren’t worth the paper they’re printed on, and now we’re wondering what to do about all that worthless paper.
How did we get into this mess? We made it ourselves. Take those two examples and multiply them by tens of thousands of occurrences every month over about 10 years across all 50 states, and you’ll begin to understand how big the mess really is. None of us is guiltless.
I liked all the glitz and all the jazz, and I liked the fast, easy money as much as the next guy. It wasn’t until I watched a couple of my ex-cohorts call their lawyers that I stepped back and reminded myself that next to explaining myself to my parents (even at age 50-plus), one of my biggest fears is incarceration.
How do we clean up this mess? The distinguished brain trust mentioned in the first paragraph is charged with answering that question, and we are all anxiously waiting for the answers. How do we keep ourselves from making this mess again?
In my history classes, we often play the game of “What if?” I invite you to try a round: What if my employers had been based in Peoria rather than L.A.? What if our headquarters had looked a little less like the Sidney Opera House and a little more like a refurbished, Rust Belt factory? What if our salaries had been a little more modest, our bonus plan a little more reasonable and our prices a little higher? What if we had a little less style and a little more substance? What if we had employed that time-honored tactic from the last century: putting off short-term reward for long-term gain? As with my students, I’m looking forward to discussing your answers.
Dave Niewoonder teaches history, government and entrepreneurship at Battle Mountain High School.