Sunday, April 24, 2011

This Book Explains It

In my quest for the answer to my primary question, "Why?", David Brooks' book, "The Social Animal: The Hidden Sources of Love, Character and Achievementsays a lot. In fact, it explains the "why" to a lot of questions. Why do people believe what they believe? Why do people make the choices they make? Why do people follow an obviously faulty ideology? Why do people repeat failure? Why do they choose against their own best interests? Why are people easily led by blatant propaganda? Why isn't it obvious to everyone without exception? Brooks provides an answer, and it makes sense.

When I opened the book to the first page, I immediately formed a big question in my mind: How did Brooks get on this wagon? How did he come to write "this" book? The subject of the book is about as far from his central endeavor as you can get! He is a commentator and writer about politics and policy, not a writer about psychology, neurology and physiology or how the brain works. He's a conservative writer and commentator, but with his book, he is saying that he is not blindly following conservative ideology. He's saying that he's more than willing to find a middle ground that works for all. He's interested in the same question I have: Why? That's an important distinction.

The book is about how the brain works, how we learn, how we love, why we choose what we choose and what makes us who we are. It's about the unconscious and conscious minds and what each do. And, it makes perfect sense. Contrary to what we've been taught for at least my lifetime, the unconscious mind is not a repository of repressed sexual desires where we live Freudian dreams and hate our mother. It is instead a center of innovation, of knowledge and miraculous invention and automatic learned reaction to the outside world. Contrary to what we've been taught, the conscious mind is not in control or the center of our knowledge as we all like to think. In fact, if we rely on conscious thought, we are more likely to not know what we do and why we do it. Wow! I repeat, it makes perfect sense.

One evening about fifteen or twenty years ago we were invited to dinner at Monica's and George's, two good friends, with two other "cousins" of the family. George, Russ and I were sort of extended family, attending only through our relations to the four women cousins. One of the cousins was a teacher, and the subject came up of the so-called "new" thought at the time on teaching kids. The idea being passed around by educators was to reinvent education, and thereby improve or enhance our children's ability to enter the world of adulthood, by somehow teaching them "how to think for themselves." It was all very vague to me, but the teacher cousin seemed to understand the teaching method being sold. But, one thing bothered me, and it started an argument at the dinner table.

"Learning by rote is out," she said. "Oh no!" I said, and the argument was on. At the time I was around forty-five and it had been my experience that how good I was at all of the jobs I had had up to that point solely depended on how well I learned those jobs by rote, by constantly repeating aspects of the job. As a career Navy person, I don't recall a single duty that I did well except through repeated drills and practice until my own performance was automatic. Repeated drills and practice was our gospel. And, there was nothing more satisfying than being on a well organized and functioning battle ship fine tuned through repeated drills. When we hit our targets at ninety-five percent or better, we were happy. When we steamed into hostile situations knowing we would win, we were happy. When we earned that Battle "E" for Battle Efficiency, we were happy and proud, and we sailed into harbors with that Battle "E" painted on our stack and we lined the deck in our dress uniforms! We looked good! We WERE good! And we knew it! We knew we could take on any situation and win. We worked hard and we played hard and we won. There was nothing better. The same was true of jobs I held after the Navy. I don't care where you work, you won't learn your job through theory. You learn it by doing it over and over again. So, she was wrong, and I knew it, but I didn't know why she was wrong and why I was right. Nevertheless, the new method was the one propagated and schools began to use it to teach their students.

Looking around now days, I don't see much improvement in our education system. In fact, the new method appears to have been a disaster and if any of those students who learned under the new methods achieved anything at all, it does not appear to because of the education system. We are on our way, again, of thinking up something new to teach children; this time with charter schools that are no different, in essence, than our public schools. We're off on another tangent, and should I mention the Republican gospel, "privatization?" Yep, charter schools is simply another way of privatizing public schools - the same old mantra.

Brooks presents a different idea and brings back an old idea. He cites studies and tests performed by neurologists, psychologists and physiologists over the past forty or fifty years. Usually, a book that cites scientific studies bores me to death, but Brooks weaves those findings into a story about a family and their children as they grow and go through life. He makes it interesting, very interesting. And, on page 86, about 20% of the way into the book, sort of hidden and obscure, not highlighted in bold print, he makes a profound statement about the brain: "The human brain is built to take conscious knowledge and turn it into unconscious knowledge." Wow! That ought to be in big bold letters! He goes on, "The first time you drive a car," he says, "you have to think about every move. But after a few months or years, driving is done almost automatically. Learning consists of taking things that are strange and unnatural, such as reading and algebra, and absorbing them so steadily that they become automatic. That frees up the conscious mind to work on new things. Alfred North Whitehead saw this learning process as a principle of progress: 'Civilization advances by extending the number of operations which we can perform without thinking about them.'" Well, he's right. He's talking about "repetitive" learning, learning things by rote. He's talking about learning until it becomes automatic so we can move on to new things.

I know why Brooks took the path that eventually became this book. He was curious. He wanted to know why the political divide in this country and why so many people have been convinced to follow people like Sarah Palin, who he calls a "cancer" and a "joke" in the Republican Party, or Glenn Beck, who is absolutely bonkers. The book was an accident, and he says as much in the first few pages of the book. He didn't start out to write the book.

The book explains a lot. Why do people get so infatuated with Fox News and Bill O'Rielly or Glenn Beck or Rush Limbaugh to the point that they close their minds to any other idea or source of information that prove them wrong? Even to the point of denying facts that prove O'Rielly, Beck and Limbaugh to be outrageous liars and rumor mongers in many cases? Why are they so convinced that Obama was not born in the United States, even in the face of a legitimate birth certificate? Why do they call him a socialist when the facts and his own behavior show that he's an ardent capitalist? Why do they get on the band wagon of hating a Muslim Mosque, an absolute anti-Constitutional stance, when there is absolutely no evidence supporting their hatred? In fact, the hatred stemmed from the rumor-mongering-spreading, mostly over Fox Cable, of a loony conspiracy theory. How does that happen? And, by the way, why don't people know what is REALLY in the Constitution? People who repeatedly misquote and misinterpret it? Where in hell did Michele Bachmann go to school? Or, did she? She's crazy and ignorant in nearly 100% of what she says!

And then there is another question. How or why did we come to believe that capitalism is the God send to our salvation? That laissez-faire is our end-all, best for all of us, the greatest thing since apple pie for our society? The answer to all of these questions is "repetitive" learning. Propaganda, repeated over and over, through the media until we are unable to see better solutions or even the truth for ourselves. We begin to believe in myth. The fact is that capitalism is a very vicious and ruthless endeavor when it is left to its own development and unregulated. Companies do not have a conscience. In fact, psychoanalysts have analyzed company behavior to be very similar to psychotic sociopath behavior. They have no pity, empathy or sympathy. They don't care if their presence destroys a community, town or city. There is only one thing that's important to a company: profit. And, to make the profit, a company will buy and close another company, costing millions of jobs. It will exploit land and externalize costs for taxpayers to pay, such as environmental cleanup costs. They will seek out cheap labor overseas, and destroy the community they are located in. In San Francisco, Twitter blackmailed the city to accept a condition for it staying in the city only if it didn't have to pay city taxes. The San Francisco Council caved in, so Twitter is staying, working, growing, making money without having to support the community it is in by paying taxes. What a bunch of nonsense! Someone else has to pay for the streets and sidewalks, public parking, traffic control, water system, sewage system and all of the rest of the infrastructure that Twitter uses to make its executives filthy rich.

The fact is that capitalism, just like any other economic system, needs to be controlled or it will destroy the social fabric we live in. But, we learn by repetition, and we've been convinced, over and over again, and despite historical fact, that there is no other way. So, we vote for it, just like we vote for the demise of Planned Parenthood, which is nothing like the lies about it that are repeated again and again until we believe it. We vote for budget cuts, but not for Defense cuts, because we are repeatedly told to fear for our security. We vote for privatizing Medicare with vouchers, which will be paid for by the government, when in fact privatizing it will make it more costly and in the end be nothing more than handing over Medicare to a private company. We vote for tax cuts for the rich because we are repeatedly told they "make the jobs," which is not true. We vote for corporate tax cuts while the corporations send jobs out of country, because, we're told repeatedly, that "we," the "United States," must "compete with the world," when the facts show that our standard of living is going down BECAUSE we continue to believe what we are repeatedly told. In fact, taxes that support maintaining and growing our country's infrastructure insures our competitiveness in the world, not our corporate tax rates. Like anything else, including investments by companies themselves; when we invest in ourselves, we grow and prosper.

We need to relearn a few things. It's time we rebelled against the bill of goods we're being fed. Brooks is brilliant in this book and it is so well written, at least for the first 86 pages, that anyone can read and understand it. I'll even go one better. If my family and friends sign up for a free Amazon Kindle account, and download and install the free Kindle Reader on their PC or Mac, I'll loan the book to them for free! I think there is a thirty-day limit for book loans, though, so they'll have to read it fast. And I don't know if I can lend it to more than one person at a time. But, that's my offer, limited as it is, and I can do that all the way from California! What a deal!

Every parent raising a child should read this book. Every teacher should read it. Every grandparent babysitting their grandchildren should read it. Every adult contemplating a family should read it. Read it!

One more thing. Repetitive learning IS brainwashing. So, the choice is which brainwashing do we want, the good kind that teaches us facts, truths, how to make intelligent decisions and how to live well? Or, do we want nonsense? And, I have another question, now. Why didn't I already know this? Well, dammit, I was brainwashed! Isn't it obvious?


Sunday, April 17, 2011

The Financial Metldown

Reference: Permanent Subcommittee for Investigations Report: “Wall Street And The Financial Crisis: Anatomy of a Financial Collapse”

The Financial Crisis Timeline:

December 2006: Ownit Mortgage Solutions bankruptcy

February 27, 2007: Freddie Mac announces it will no longer buy the most risky subprime mortgages

March 7, 2007: FDIC issues cease & desist order against Fremont for unsafe and unsound banking

April 2, 2007: New Century bankruptcy

June 17, 2007: Two Bear Stearns subprime hedge funds collapse

July 10 and 12, 2007: Credit rating agencies issue first mass downgrades of hundreds of RMBS and CDO securities

August 6, 2007: American Home Mortgage bankruptcy

August 17, 2007: Federal Reserve: “[M]arket conditions have deteriorated…. downside risks to growth have increased appreciably.”

August 31, 2007: Ameriquest Mortgage ceases operations

December 12, 2007: Federal Reserve establishes Term Auction Facility to provide bank funding secured by collateral

January 2008: ABX Index stops issuing new subprime indices

January 11, 2008: Countrywide announces sale to Bank of America

January 30, 2008: S&P downgrades or places on credit watch over 8,000 RMBS/CDO securities

March 24, 2008: Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns

May 29, 2008: Bear Stearns shareholders approve sale

July 11, 2008: IndyMac Bank fails and is seized by FDIC

July 15, 2008: SEC restricts naked short selling of some financial stocks

September 7, 2008: U.S. takes control of Fannie Mae & Freddie Mac

September 15, 2008: Lehman Brothers bankruptcy

September 15, 2008: Merrill Lynch announces sale to Bank of America

September 16, 2008: Federal Reserve offers $85 billion credit line to AIG; Reserve Primary Money Fund NAV falls below $1

September 21, 2008: Goldman Sachs and Morgan Stanley convert to bank holding companies

September 25, 2008: WaMu fails, seized by FDIC, sold to JPMorgan Chase

October 3, 2008: Congress and President Bush establish TARP

October 12, 2008: Wachovia sold to Wells Fargo

October 28, 2008: U.S. uses TARP to buy $125 billion in preferred stock at 9 banks

November 25, 2008: Federal Reserve buys Fannie and Freddie assets


Friday, April 15, 2011

The Washington Mutual Case Study: How one bank nearly destroyed the FDIC

Just in case you wonder whether your bank savings and checking accounts are safe, please read the following. The following is an excerpt from the Permanent Subcommittee on Investigations report entitled: “Wall Street And The Financial Crisis: Anatomy of a Financial Collapse.” It is very well written, so you don't have to worry about a lot of legalese or complicated language. It's easily understood. This quote from the report is from the Executive Summary about the subcommittee's case study of Washington Mutual Bank. Just this one bank nearly destroyed the Federal Depositary Insurance Corporation's guarantee of your $100,000 or less savings account. If you STILL think these banks should not be regulated and that regulators can be EASY on them, then you're crazy.

The first chapter focuses on how high risk mortgage lending contributed to the financial crisis, using as a case study Washington Mutual Bank (WaMu). At the time of its failure, WaMu was the nation’s largest thrift and sixth largest bank, with $300 billion in assets, $188 billion in deposits, 2,300 branches in 15 states, and over 43,000 employees. Beginning in 2004, it embarked upon a lending strategy to pursue higher profits by emphasizing high risk loans. By 2006, WaMu’s high risk loans began incurring high rates of delinquency and default, and in 2007, its mortgage backed securities began incurring ratings downgrades and losses. Also in 2007, the bank itself began incurring losses due to a portfolio that contained poor quality and fraudulent loans and securities. Its stock price dropped as shareholders lost confidence, and depositors began withdrawing funds, eventually causing a liquidity crisis at the bank. On September 25, 2008, WaMu was seized by its regulator, the Office of Thrift Supervision, placed in receivership with the Federal Deposit Insurance Corporation (FDIC), and sold to JPMorgan Chase for $1.9 billion. Had the sale not gone through, WaMu’s failure might have exhausted the entire $45 billion Deposit Insurance Fund. This case study focuses on how one bank’s search for increased growth and profit led to the origination and securitization of hundreds of billions of dollars in high risk, poor quality mortgages that ultimately plummeted in value, hurting investors, the bank, and the U.S. Financial system. WaMu had held itself out as a prudent lender, but in reality, the bank turned increasingly to higher risk loans. Over a four-year period, those higher risk loans grew from 19% of WaMu’s loan originations in 2003, to 55% in 2006, while its lower risk, fixed rate loans fell from 64% to 25% of its originations. At the same time, WaMu increased its securitization of subprime loans sixfold, primarily through its subprime lender, Long Beach Mortgage Corporation, increasing such loans from nearly $4.5 billion in 2003, to $29 billion in 2006.

From 2000 to 2007, WaMu and Long Beach together securitized at least $77 billion in subprime loans. WaMu also originated an increasing number of its flagship product, Option Adjustable Rate Mortgages (Option ARMs), which created high risk, negatively amortizing mortgages and, from 2003 to 2007, represented as much as half of all of WaMu’s loan originations. In 2006 alone, Washington Mutual originated more than $42.6 billion in Option ARM loans and sold or securitized at least $115 billion to investors, including sales to the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). In addition, WaMu greatly increased its origination and securitization of high risk home equity loan products. By 2007, home equity loans made up $63.5 billion or 27% of its home loan portfolio, a 130% increase from 2003.

At the same time that WaMu was implementing its high risk lending strategy, WaMu and Long Beach engaged in a host of shoddy lending practices that produced billions of dollars in high risk, poor quality mortgages and mortgage-backed securities. Those practices included qualifying high risk borrowers for larger loans than they could afford; steering borrowers from conventional mortgages to higher risk loan products; accepting loan applications without verifying the borrower’s income; using loans with low, short term “teaser” rates that could lead to payment shock when higher interest rates took effect later on; promoting negatively amortizing loans in which many borrowers increased rather than paid down their debt; and authorizing loans with multiple layers of risk. In addition, WaMu and Long Beach failed to enforce compliance with their own lending standards; allowed excessive loan error and exception rates; exercised weak oversight over the third party mortgage brokers who supplied half or more of their loans; and tolerated the issuance of loans with fraudulent or erroneous borrower information. They also designed compensation incentives that rewarded loan personnel for issuing a large volume of higher risk loans, valuing speed and volume over loan quality.

As a result, WaMu, and particularly its Long Beach subsidiary, became known by industry insiders for its failed mortgages and poorly performing RMBS securities. Among sophisticated investors, its securitizations were understood to be some of the worst performing in the marketplace. Inside the bank, WaMu’s President Steve Rotella described Long Beach as “terrible” and “a mess,” with default rates that were “ugly.” WaMu’s high risk lending operation was also problem-plagued. WaMu management was provided with compelling evidence of deficient lending practices in internal emails, audit reports, and reviews. Internal reviews of two high volume WaMu loan centers, for example, described “extensive fraud” by employees who “willfully” circumvented bank policies. A WaMu review of internal controls to stop fraudulent loans from being sold to investors described them as “ineffective.” On at least one occasion, senior managers knowingly sold delinquency-prone loans to investors. Aside from Long Beach, WaMu’s President described WaMu’s prime home loan business as the “worst managed business” he had seen in his career.

Documents obtained by the Subcommittee reveal that WaMu launched its high risk lending strategy primarily because higher risk loans and mortgage backed securities could be sold for higher prices on Wall Street. They garnered higher prices, because higher risk meant the securities paid a higher coupon rate than other comparably rated securities, and investors paid a higher price to buy them. Selling or securitizing the loans also removed them from WaMu’s books and appeared to insulate the bank from risk.

The Subcommittee investigation indicates that unacceptable lending and securitization practices were not restricted to Washington Mutual, but were present at a host of financial institutions that originated, sold, and securitized billions of dollars in high risk, poor quality home loans that inundated U.S. financial markets. Many of the resulting securities ultimately plummeted in value, leaving banks and investors with huge losses that helped send the economy into a downward spiral. These lenders were not the victims of the financial crisis; the high risk loans they issued were the fuel that ignited the financial crisis.”