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The Case Of The "Disappeared" Subprime Minority Borrower
September 22, 2008
It was on a bitterly cold and frosty morning, towards the end of the winter of '07, that I was awakened by a tugging at my shoulder. It was Holmes. The flashlight in his hand shone upon his intense face. I knew at once that something was amiss.
"Come, Watson, come!" he cried. "The game is afoot. Not a word! Into your clothes and come!"
My friend had recently sunk into his customary melancholy, his presence but a wailing violin behind a closed door. Nevertheless, as I was hurriedly getting dressed, I remembered that a change had come upon him on the previous morning.
Mrs. Hudson had just brought in the morning papers, along with our toast. I was fiddling with the dial of our new Marconi, when Holmes' sharp cry from the breakfast table diverted my attention. He was marking with his fountain pen an item in the paper. The luster had returned to his eyes. Curious, I let go of the dial knob and leaned over Holmes' shoulder.
The underlined column read: "Study: Minorities' 'dream' foreclosed", and underneath, "The subprime-mortgage crisis will cost black and Hispanic homeowners up to $256 billion—the worst financial hit for minorities in modern U.S. history".
Just then, the Afro-American voice that had been carrying on in the radio program cohered into distinctive words:
"… money-lenders have already sucked the value out of whole communities, urban and suburban. The wealth loss is staggering: People of color have collectively lost between $164 billion to $213 billion over the past eight years, with Latinos losing slightly more than African Americans."
Holmes was buttering his toast and listening.
"Before the crisis hit," the distinctive voice was now choked with indignation, "it was estimated that it would take 594 years—more than half a millennium!—for Blacks to catch up with Whites in household wealth. Now, in the aftermath of the home mortgage massacre, it could take ten times as long—more than 5,000 years!—before Blacks achieve homeowner parity with Whites."
Holmes leaned back in his chair with a whimsical smile, as the commentary concluded: "Looking backward, that stretches from now to when the great pyramids were built!"
I turned off the wireless and sat down at the table.
"A cup of tea, Watson?" Holmes said.
"A nation destroys its banking system and its currency to fake the putative minorities' creditworthiness," my friend continued as he poured my morning restorative, "… and showers unearned benefits on them. When the subterfuge falls apart, its impact on the same minorities is twisted around to bolster an imputation of racial discrimination."
He stood up, tying the sash of his dressing gown.
"I say, Watson, from the point of view of the criminal expert, new opportunities are arising that may alleviate my singular boredom since the death of the late lamented Professor Moriarty."
As we alighted into the hansom cab, I had a premonition that a new adventure had just begun, related somehow to that statement…
—After The Adventure of the Abbey Grange, with apologies to Sir Arthur Conan-Doyle
The financial debacle of a $1.4 trillion pool of subprime mortgages of which at least half are unpayable and 25% are irrecoverable did not start in a political vacuum. For years, the American political Establishment badgered the banking industry about the "racism" implied in its loan portfolio. The denial of mortgage loans to "minorities" at a greater percentage than denial to whites has been deemed a prima facie evidence of racial discrimination.
"Classical socialism called for direct state ownership of the means of production, distribution, and exchange", wrote Peter Brimelow in a 1993 National Review article discussing a clash he had had in Forbes Magazine with the race-drunk mortgage industry critics.
"Neosocialism just aims at political control. Socialism claimed to be more efficient. Neosocialism claims to be more equitable. Above all, neosocialism professes to combat 'racism,' since this magic word cows all opposition. Apparent neosocialist objective of the season: commandeering the banking system and forcing it to subsidize key client constituencies." [Racism At Work? By Peter Brimelow, National Review, April 12, 1993].
Brimelow related how the Wall Street Journal had carried five stories in late 1992 alleging, based on raw rejection rates, that lenders were discriminating against minorities. Such allegations were obvious rubbish, as they took no account of standard credit considerations like employment, income, and net worth.
Finally, the WSJ reported on a Federal Reserve Bank of Boston study that did correct for these criteria, and still found that minorities were rejected at a slightly higher rate. [Mortgage lending in Boston: Interpreting HMDA data (Working Paper 92-7)] This difference, the Boston Fed had concluded, could only be due to racism.
Brimelow and his Forbes magazine co-author Leslie Spencer had inquired of the Boston Fed whether it had taken under account default rates for black and white mortgage holders. It had, the Boston Fed's Research Director replied, and it had found equal default rates. [The Hidden Clue, Forbes, January 4, 1993]
Brimelow then pointed out that this proved pure market forces were working in mortgage lending. Mortgage lenders were somehow able to weed out impartially credit risks, reducing defaults down to the same rate for whites and blacks.
"[That] is a sophisticated point", responded the Boston Fed's Research Director. "I do believe discrimination occurs", she reiterated, but then conceded, "I do not have evidence ... no one has evidence".
"They don't have evidence, but they sure have convictions", concluded Brimelow, presaging how the Boston Fed study's fatal flaw would be passed over by the mass media. He concluded:
"Neosocialism, however, is not science. What's going on here is a witch-hunt, conducted by the religious Left and aided by key elements of the civil service. The innocent victims will be the banking system, the savers of America, the economy, and ultimately liberty itself. The craven banking industry cannot be expected to resist. It is time conservatives stopped piously chanting about capital-gains tax cuts and woke up to the fact that their capital is under attack"
The same wishful assumptions masquerading as "research" by high public officials and reported by journalists as the truth were examined by four specialists, who published their findings in a 1996 paper, Mortgage Discrimination and FHA Loan Performance [PDF]. Their conclusion:
"Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a higher likelihood of mortgage default than other borrowers. These findings argue against allegations of substantial levels of bias in mortgage lending."
Three years later, two finance professors, Stanley D. Longhofer and Stephen Peters, pointed to the same fatal flaw behind all the caterwauling about the higher rejection rates for black and Hispanic mortgage applicants.
The US Fair Housing Act and the Equal Credit Opportunity Act prohibit discriminatory lending considerations by reasons of race, gender, marital status, religion, national origin, familial status, and handicap. Longhofer and Peters stated that, grand labels notwithstanding, these laws have nothing to do with fairness: they target social inequality, not bigotry. It's socialism through the back door.
"[E]verything else being the same, minority applicants are probably less creditworthy, on average, than whites. Therefore, in the absence of fair lending laws, it is likely that minorities would be denied loans more frequently than whites and would pay higher interest rates and fees on approved loans… [F]air-lending laws have the perverse effect of forcing lenders to cross-subsidize minority borrowers from the higher profits they earn on white borrowers. Such cross-subsidization is inherently 'unfair' because it works as a tax on one group that is used as a subsidy for another." [Why Is Mortgage Discrimination Illegal? A Fresh Look at the Mortgage Discrimination Debate, Longhofer and Peters, Cato Institute, PDF]
Thirty years of faked research and horrendous noise from "social justice" carnies, all amplified by the left-driven mass media, and the political elite figured out which direction held out the most rewards. A heavy dose of demagoguery followed. Some of these sub-eligible politicians, such as Congressman Barney Frank, Chairman of the Financial Services Committee, are still on the job, acting as though they have no part in the financial train wreck they have instigated.
Finally, with further pushing by different government branches and agencies, mortgage lenders found a solution to inconvenient reality. It was the subprime loan, with sub-viable variations such as "interest-only" and "no-money-down."
No forces were available to combat the American economy's unbalancing by cultural Marxists, socialists, noisy "minority" chieftains and power-hungry opportunists. Instead of leading a counteroffensive, the federal government (mostly under Republicans) pushed toward the fall. And the bankers went along—even though it was their depositors' capital they were converting to cotton candy.
Banks started dishing out mortgages as though they were consolation prizes for the poorly educated of shaky employability, or achievement awards for the undisciplined and uneducable with no collateral.
Overwhelmingly, these prize-winners have been "people of color."
Presto! Many more "people of color" could achieve "the American Dream"—some a few times over, as people with no money and no assets were able to buy several houses each, hoping for a quick and profitable flip.
And the occupants of CEO suites were happy too. They had gained points with neosocialist/ "minority" lobbies and their vast cohorts of useful idiots. Not to mention the favors of weathervane politicians—and enormous end-of-year bonuses to boot.
In trampling on rules of sound banking going back at least to medieval Italy, our financial wizards discovered the eternal quest of alchemy—how to convert lead into gold, for a while at least, before it turns into garbage. Employing PhD's in high mathematics, they diced and mixed financial offal, stuffed it into sausage skins, gave this dubious bologna properly pinstriped labels such as "Mortgage-backed Securities" and "Collateralized Debt Obligations", and sold it off by the slice to equally greedy and heedless financial institutions down the line.
From inception through each change of hands, each putrid sausage slice ("tranche") generated fat fees for its handlers.
But reality is stubborn. The underlying loans went sputtering, then died. The new, miracle collateral reverted to the ordure it had always been. Mortgage lenders started dying off from collateral toxemia. The sausage makers—the major financial powerhouses of the United States and Europe—started writing off tens, eventually hundreds, of billions of dollars in "nonperforming" assets. Insurance companies that guaranteed all that pungent charcuterie, and the guarantors of the fermenting meat byproducts that went into them—Fannie and Freddie to you—started swooning too.
In February 2008, the forward estimated total of total losses in the global banking industry was $600 billion. By mid-July 2008, that estimate had risen to $1.6 trillion. With the $10.1 trillion equity loss in the global stock market between December 2007 and July 2008 alone, the subprime debacle qualifies as the greatest financial disaster in history.
That's before the demise of Lehman Brothers, the world's largest underwriter of mortgage bonds; the US Federal Reserve's $85 billion loan to rescue the world's largest insurance company, AIG, from a similar fate; and the shotgun marriage of America's largest brokerage house, Merrill Lynch. And before the black week's wipe-out of another $3.6 trillion dollars in equity, reversed when the government announced a plan to buy all US stocks, bonds, mortgages and bank deposits for a down payment of $1 trillion plus fateful installments down the road.
The mega-hustlers who steered venerable financial institutions into this mega-iceberg, are not hurting. The press described the CEOs of two of the greatest malpractitioners of banking, Merrill Lynch and Citigroup, as having "fallen on their swords"—but not for these types such a noble end. Stan O'Neal, the ousted CEO of subprime-bombed Merrill Lynch, received a $160 million "retirement" package. The golden chute for Chuck Prince, the CEO who led Citigroup to the biggest loss in its 196-year history, was $42 million. John Mack, the CEO of Morgan Stanley, had to forego his 2007 bonus, but it's some consolation that at the height of the subprime scam, in 2006, he copped $41 million.
Dick Fuld, the CEO of bankrupt Lehman, took home $45 million in 2007, so he won't have to mourn the vaporization of his 401k. "Jimmy" Cayne, the former CEO of the former Bear Stearns, similarly burned on his vested stocks, presumably retired to his $28 million apartment in the Plaza Hotel, to lick his wounds.
The banks themselves have not had to drink the hemlock they had brewed either. Instead of falling under the weight of their own malpractice, except for Lehman they have basked in the largesse of the Federal Government. Technically, it's not a bailout using taxpayer money—just a wide-open "discount window", a spigot from which poured over a quarter trillion dollars in just four days in mid-September '08. But it's a bailout nonetheless, as pointed out by Barry Grey on the World Socialist Website:
"The government-backed bailout plan for Citigroup and Wall Street underscores the increasingly parasitic and socially destructive operations of American and world capitalism", says this socialist writer. "The role of the SIVs [Structured Investment Vehicle, funds that raise capital by selling short-term securities at low interest and then buy long-term securities at higher interest, very often packaged, subprime mortgage loan products] exemplifies the degree to which immense wealth is generated for a layer of multimillionaires and billionaires on the basis of financial manipulations almost entirely divorced from the process of production and socially useful investment."
Exactly right, says this anti-socialist. America's main industry, finance, has turned out to be a pyramid scheme of reckless, interlocking bets, essentially a stratospheric swindle.
But all this is just one side of the picture. For at the other end of the spectrum from the princes of finance are the mostly "minority" rubes who bought houses they could not afford with money they did not have, based on income data they had falsified, egged on frequently by crooks in the employ of companies such as Ameriquest—that self-lauded "proud sponsor of the American Dream". And there are enough of them, and their skin tones are compelling enough, to generate enormous political pressure for government action to bail them out too.
Entering "subprime minority" into Google recently yielded 544,000 links, with typical items reading:
Subprime Borrowers—Minorities Pay More for
Disparities in Mortgages by Race
Subprime Lending More Prevalent in
Low-Income Communities in New York Metropolitan Area
Minorities Discriminated against in Credit Markets,
Minorities Often Pay More for Mortgages, Study Says
hit hard by rising costs of subprime loans
- Subprime Mortgages Concentrated in City's Minority Neighborhoods
Even this small sample reveals the main sources of the incessant harangue: ethnic grievance lobbies, socialist fronts, and their three megaphones: lawyers, academics and the Mainstream Media.
To save greed-demented bankers and freeloading borrowers from themselves, the Fed has repeatedly cut interest rates and pumped tens of billions of dollars at artificially low rates to the subprime-tainted banks. As of September 7, 2008, the Bush administration, on behalf of the American taxpayer, essentially wrote a check for $200 billion to bail out the two fences of illicit mortgage loot—Fannie and Freddie to you—and assumed over $5 trillion in their liabilities, doubling the national debt.
When Fannie and Freddie were profitable, their profits went to the investors. Now that they have losses, those have been assumed by the US taxpayer.
And so we have a government practicing selective socialism on behalf of insatiable corporations on one end and improvident individuals on the other—at the expense of the vast majority in between.
It's socialism that plunders the renters, the old and retired, the savers and the bond investors in order to shower their money onto home owners-by-error, the debtors, and speculators in financial fancy.
This is even more unjust and stupid than simple socialism, for that socialism aimed to plunder a rich minority in order to benefit the middle and bottom majority. This American mutation, however, aims to plunder the middle majority in order to bail out the bottom and top minorities of race and riches.
What's going on is a base perversion of both morality and justice. It substitutes an innocent party to be punished for the malfeasance of another.
As of August 2008, inflation in the United States is rising at the fastest pace since 1981. The government, knowing this, cooks the books. Summer '08 inflation rates were up to 12.5%, but the government Core Consumer Price Index figures were 7% lower. To know the truth, one has to rely on American equivalents of samizdat, in the best USSR tradition.
A de facto devaluation of the dollar has now accelerated so much that a formal devaluation may be necessary. Therein lies the specter of the Weimar Republic: people exchanging wheelbarrows of banknotes for a loaf of bread…and a strong, indignant leader saving them from the nightmare with passionate oratory, national socialism, and the goose-step.
In effect, what's going on in the realms of both the subprime Wall Street swells and the little mortgage borrowers with subprime intelligence is a slow but relentless pressure to unravel contracts entered into by consenting adults. That is an erosion of Contract Law, the very foundation of civilized society.
This farce in four acts, with wigs, masks and costumes, trapdoors, sliding plywood scenery and weeping violins in the orchestra pit has been enacted for 40 years without letup for one reason only: to camouflage or otherwise deny racial group differences in IQ, and in mean ethnocultural traits such as the importance attached to education and to obeying the law. In the realm of statistical reality, all these, and not "racism", bear directly on the chances of material success in life—including home ownership.
The statistical facts imbedded in the last paragraph are considered so unacceptable in this country that the verb "to disappear" is deployed here in its transitive mode, the way it has been in the political practice of banana republics. Nevertheless, these phenomena are not only observable in one's daily life—if one but unplug those electrodes implanted in the brain since kindergarten—but are based on thousands of peer-reviewed studies going back 100 years. Corollary issues of ethno-cultural group differences have been studied with conclusive results for almost as long. [Race and Psychopathic Personality, By Richard Lynn, American Renaissance, July 2002]. But woe is him who dabbles in proscribed science.
"Minorities" register mean group IQs of 70 for sub-Saharan Africans, 85 for Afro-Americans and Polynesians and 88 for the main "minority" in the US, the Mexican mestizos, versus 100 for American whites. (The latter containing subgroups with an IQ mean as high as 115.) This is as close to science as anything has ever got in the social sciences. An authoritative review of the last 30 years of relevant research is here and a comprehensive understanding of the subject is available for the intelligent layperson at websites such as gnxp.com or Steve Sailer's archive, the best available bridge between the relative science and common sense interpretation.
The implications of the mean IQ differences for success in education, employment, home ownership etc. are overwhelming and, again, covered in depth by major researchers, ad infinitum. Here is Professor Linda Gottfredson:
"People with IQs between 75 and 90 are 88 times more likely to drop out of high school, seven times more likely to be jailed, and five times more likely as adults to live in poverty than people with IQs between 110 and 125. The 75-to-90 IQ woman is eight times more likely to become a chronic welfare recipient, and four times as likely to bear an illegitimate child than the 110-to-125-IQ woman." [The General Intelligence Factor, Linda Gottfredson, Scientific American, Volume 9, Number 4, Winter 1998.]
Due to the mathematical properties of the bell curve, 68.3% of the distribution lies within one standard deviation ("sigma") from the mean, and 95.5% lies within 2 sigmas. Since the sigma in intelligence studies of the American population is set at 15, that has deep implications relative to educational and other attainments.
An IQ of 100 is considered necessary for a successful completion of high school—real completion of a real high school, as opposed to the "social promotion" of the dumb through the already dumbed-down curriculum in American Schools (11). With a mean IQ of 100 for American whites, 50% of them have the capacity to acquire that high school graduation ticket to further knowledge and prosperity. But a mean IQ of 85 for American blacks means that only 15.9% of them have that capability. Nonwhite Mexicans have a slightly higher ratio. Nature, unlike Lake Wobegon, does leave children behind.
The subprime scandal is only one example of the political elite's willful blindness. Other adventures of "disappeared" minorities:
The US Transportation Security Administration spends $5 billion a year to delay, harass and annoy 677 million passengers on 10.3 billion occasions per year for the sake of weeding out their toothpaste tubes and making them feel equally debased as they crawl toward the selection chute beltless and barefoot.
All this in order not to have to notice that a definite statistical portrait—excluding the overwhelming majority of all passengers—emerges from tabulating the ethnic and demographic markers of the thousands of terrorists who have attacked American and European targets over the last quarter century.
The American educational systems spends over half a trillion dollars per year K-12 education—but it's a Sisyphean labor.
In a 2007 comparison of 29 OECD countries, the US came up first in education expenditure, spending approximately $10,000 per year, per pupil, while scoring (among 15 year olds) 24th in math and 17th in Science. In the latest reading skills comparison of 44 countries, the US was 23rd.. Meanwhile, to cite one of many, the Czech Republic spends on education about $3,000 per year per pupil, yet in international comparisons it's 6th in math, 5th in science and 2nd in reading.
Per US Government statistics, 42% of students enrolled in American public schools in 2005 were "minorities", and 20% spoke a language other than English at home.
"Minorities" is a euphemism that has nothing to do with population percentages but everything to do with "disappearing" the inconvenient truth of mean racial group differences that handicap the "minorities", but not the majority, in education and wealth acquisition.
In reckoning with these metrics lie the answers to all societal woes of the Third World-infused multiracial society. We have a criterion by which to stop the pouring of further enormous treasure down a bottomless well to "correct" what are not the faults of society but the woof and warp of the manifest forces of nature—or God, to one so inclined. We have a yardstick by which to assess the national interest with regard to unrestricted immigration. We have a map by which to pursue more effective solutions to the problems of crime, welfare, education, cultural dissolution and more.
But perhaps not in our lifetime—not until many more people can be described by Irving Kristol's quip that a conservative is a liberal who has been mugged by reality.
Ultimately, each individual must be judged on his own merit. His group's mean characteristics are essentially irrelevant.
But by granting racial group preferences to "minorities" based on the spurious assertion of racial discrimination, demagogues and bien pensant liberals actually compel truth-seekers to dig for statistical findings related to such groups, to refute the fraudulent charges of "racism".
Instead of condemning the suicidal magnanimity of bestowing home ownership on the mostly-"minority" improvident whose only qualifications were their skin tones and loudmouth advocates, America is busy pouring ashes on its head because of the inevitable consequences of folly that, by incredible coincidence, fall disproportionately on the selfsame "minorities".
It's not often in history that such extraordinary delusions have been so pervasive, with such negative consequences. But instead of facing reality and learning to work with it, our Moriartys lunge at our Sherlocks and wrestle them over the precipice of the Reichenbach Falls—to the ultimate doom of the whole of society.
It's a fraud to attack those who speak out on racial differences as "racists", as though reckoning with salient characteristics of group averages denies the potential of individual members of such groups. It's inexcusable to brainwash generations of vulnerable schoolchildren that a pervasive "racist" environment is responsible for the under-achievement of "minorities" It's the "minorities'" own hereditary qualities that are in free play here: IQ, parents, ancestral culture, the hand that fate has dealt.
The cultural Marxist, or useful idiot, intent on shouting down reality and seeing "racism" everywhere, may drown in a lake whose mean depth is four inches, while protesting that the second and third tallest men in the world, who are Chinese, invalidate comparisons of the mean height of the Chinese and the Dutch.
For forty years now, and perhaps for the first time in 350 years, the West, en masse, has been retreating from the Enlightenment that had catapulted it to the pinnacle of civilization. The forces of reason, empiricism, truth-seeking, basic freedoms (before they became "rights"); the flowering of genius in all areas of human endeavor, all are in retreat everywhere at the same time.
A liberal dogma, a totalitarian taboo divorced from any reality that has ever existed, has taken hold. The new Nicean creed posits that discrimination, i.e. the perception of differences between groups—males v. females; shepherd Muslims v. urban post-Christians; Mexican mestizo peasants v. Danish professors of physics; High Protestant culture v. Hmong tribal custom—are the greatest, the cardinal, sin.
The overwhelming preponderance of black multimillionaires in sports and Rap passes without a comment. No affirmative redress action is available for short Ashkenazi Jews and Bengali Indians who feel unfairly excluded from the NBA. But the preponderance of whites in the sciences, the professions and upper corporate ranks, and the material rewards that accrue to that, are seen as racism that requires a disastrous re-engineering of society.
In finance, we have gone laissez faire on a group of reckless buccaneers disguised in Savile Row finery, selling spoiled meat from the back seats of Maybach limos. But we have banished laissez faire in the main area where it is salutary: liberty to pursue happiness with the hand of cards one has been dealt by fate and DNA, played with will and character by the rules of pure meritocracy. And this, rather than the subprime meltdown of faked homeownership, is the destruction of the American Dream.
A roomful of Professor Moriartys could not have conceived a more diabolical scheme to destroy, morally and materially, the United States.
Takuan Seiyo [Email him] is a multiethnic and multilingual Euro-American immigrant, writer and former international media executive. A happy and highly contributive Californian for decades, TS left as a demographic, political and fiscal refugee. He is now content to live in Japan, a country that does not actively pursue its own extinction, where he is an oft-fingerprinted and respectfully discriminated-against minority. An earlier, shorter version of this essay appeared in print in the Quarterly Review, March 2008.