It is tempting to view the current economic crisis as a problem for Wall Street and Washington, D.C. However, a local resident can learn all that’s needed about the impending financial meltdown simply by standing on the northeast corner of Lake Avenue and Colorado Boulevard in Pasadena, California. From there, the entire crisis can be viewed in microcosm.
North across Lake is the building that once housed the headquarters of Countrywide, a major player in the marketing of home mortgages. Over the last decade, telemarketers from Countrywide called people all over the nation offering them mortgages or mortgage refinancing at conditions that seemed too good to be true. Countrywide’s telemarketers spoke with great reassurance that these mortgages were federally backed and sound. However, they played down, or entirely omitted, the caveat that the real estate market would need to expand at its current rate for the next decade if the scheme was to work.
Look a little further north on Lake and you will find IndyMac Bank. It was here that Countrywide sold bundles of dubious mortgages as investment securities. IndyMac bought the mortgage-backed securities with the depositors’ money and with the backing of Fannie Mae and Fredie Mac, two institutions chartered to “work with mortgage lenders to help people get lower housing costs and better access to home financing.”
Fannie and Freddie were created so that every American could have a chance to own a home, but in the last decade they were invaded by administrators who held to the philosophy that less regulation and oversight was better for a capitalist economy, because, in the end, the “magic hand of the marketplace” would take care of everything.
Without moving from your initial position on the northeast corner of Lake and Colorado look diagonally across the street to the southwest corner and you will find a Washington Mutual Bank. The mortgage-backed securities soon traveled two blocks south where they were repurchased by WaMu investors with the help of the funds of WaMu depositors.
This scheme worked for a few years. Then the “magic hand of the marketplace” did go to work. Real-estate values stopped increasing. Then they decreased, first a little and then a lot. The scheme collapsed and Countrywide, IndyMac and WaMu were on the rocks. The FDIC bailed out the depositors at IndyMac, but only for the first $100,000 in their account. Meanwhile, WaMu depositors were fully protected by a buyout, but WaMu shareholders took the hit. Fannie and Freddie stock plummeted, and ultimately, the federal government had to bail them out to prevent bankruptcy.
It’s easy to see why the financial crisis is our problem. Still standing at that corner, simply turn around and enter the offices of TIAA CREF, the largest retirement fund in the world. TIAA/CREF’s stated purpose is, “helping those in the academic, medical, cultural and research fields plan for and live in retirement.” It is the principal retirement plan of those on our region’s largest payroll, JPL and Caltech.
TIAA CREF members received a semi-annual report for the year ending June 30 noting that all stock funds reduced in value by amounts between 3 percent and 15 percent.
TIAA CREF also runs bond funds for those not wishing to take the risk of stocks. But the CREF Bond Market fund had 38% of its assets tied up in Fannie Mae and Freddie Mac bonds. On Monday, the day Congress failed to act, Fannie Mae and Freddie Mac stock closed at $1.56 and $1.80 respectively. A year ago they traded at $65 and $63. The earlier bailout of Fannie and Freddie kept them solvent and protected the bonds.
Fannie and Freddie have long been regarded by financial managers as very stable institutions. Therefore conservative retirement managers found these bonds attractive. However, Fannie and Freddie would have gone under in the last few weeks without government intervention. Retirement funds around the nation would have taken the hit.
Each year JPL and Caltech infuse about $500 million into the local economy in salary and compensation to employees. Their retirees continue to reside in the region and continue to spend their retirement funds in the local economy. They buy products from the local butchers, bakers and candlestick makers. If these monies are lost due to bankruptcy our whole community loses.
If the revised “bailout” legislation has provisions to help the homeowners who were victims of the predatory lending practices of firms like Countrywide, and if it permits democratic ownership and governance of the financial institutions that are going bankrupt and being bailed out by taxpayers, then, spending tax dollars is not just the responsible thing to do it is the only thing.
As for those who once managed and owned firms like Countrywide, my best hope is that they will spend a long time at Leavenworth “making little ones out of big ones,” but let’s settle that score later.
Robert M. Nelson
Robert M. Nelson is a Democratic Party activist and a senior research scientist at the Jet Propulsion Laboratory in La Canada Flintridge.
Originally published in the Pasadena Star News. Republished with permission of the author.