The Divide: American Injustice in the Age of the Wealth Gap Highlight

Specifically, this was a massive criminal fraud scheme, something akin to a giant counterfeiting operation, in which banks mass-produced extremely risky, low-quality subprime mortgages and with lightning-quick efficiency sold them off to institutional sucker-investors as highly rated AAA bonds. The hot potato game targeted unions, pension funds, and government-backed mortgage companies like Fannie Mae on the secondary market. It was a modern take on the Rumpelstiltskin fairy tale. Big banks took great masses of straw (i.e., the risky home loans of the poor, undocumented, and unemployed) and spun it, factory style, into gold (i.e., AAA-rated securities). They used a technique called securitization that allowed banks and mortgage lenders to take vast pools of home loans belonging to underemployed janitors and immigrants and magically convert them into investments that were ostensibly as safe as Microsoft corporate bonds or the sovereign debt of Luxembourg, but more lucrative than either. The sudden introduction of these magic mortgage bonds into the marketplace pushed most every major institutional investor in the world to suddenly become consumed with the desire to lend money to American home borrowers, even if they didn’t know to whom exactly they were lending or how exactly these borrowers were qualifying for their home loans. As a result of this lunatic process, houses in middle- and lower-income neighborhoods from Fresno to the Jersey Shore became jammed full of new home borrowers, millions and millions of them, who in many cases were not equal to the task of making their monthly payments. The situation was tenable so long as housing prices kept rising and these teeming new populations of home borrowers could keep their heads above water, selling or refinancing their way out of trouble if need be. But the instant the arrow began tilting downward, this rapidly expanding death-balloon of phony real estate value inevitably had to—and did—explode. In other words, it was a Ponzi scheme, no different than the Bernie Madoff caper, only executed on an exponentially huger scale. The scheme depended upon the ability of a nexus of large financial companies to factory-produce and sell these magic home loans fast enough, and in big enough numbers, to continually keep more money coming in than going out.