“Dad, What’s a Financial Crisis?”
“It’s something that happens every five to seven years,” Jamie Dimon told his daughter without a breath of sarcasm, writes Bloomberg financial reporter Bob Ivry in his book “The Seven Sins of Wall Street.”
As the United States navigates its way through a post-recession financial environment, our tendency to fall back on old habits makes the term “recovery” questionable at best. While there has been a concerted public effort to address the regulatory discontinuities that brought the global economy to the brink of collapse in 2008, mega-banks continue to use the same financial instruments to gamble with the lives of ordinary citizens. The mortgage-backed securities industry may have been in the spotlight for years, but cousin industries have flourished in its shadows. Here is an example of a new value-creating machine and how it threatens the economy.
Remember how banks were encouraged to sell as many mortgages as humanly possible, no matter what the circumstances? The “junk” or “sub-prime” mortgages, where the borrowers had no chance of making their outlandish payments, were grouped together and sold to investors as bonds. We all saw how well that turned out as soon as homeowners’ mortgage rates adjusted upwards and payments stopped being made; the ripple effect caused people in all corners of the economy to lose money.
Now, in the wake of mass foreclosures, Wall Street has found a new way to make money from the basic human need for shelter. Private equity firms have zoned in on certain housing markets, like in Riverside County, CA, and purchased blocks of foreclosed homes with cash. By doing this, they were able to artificially inflate the price of the housing stock, ensuring that first-time buyers are priced out of the market.
So what will private equity firms do with all of these empty, expensive homes? Rent them out, of course! With the inflated price of housing, however, people are now paying more than 50% of their income on rent in some regions. This leaves fewer dollars for other essentials like food, transport, and health insurance, let alone thousands of other industries that consumers support. With fewer customers, businesses make fewer sales, growth stalls and our nation’s economic output suffers.
But does a weak economy mean reduced profits for Wall Street? Private Equity firms aren’t stupid. There must be something about these foreclosed homes with value-creating capability. Enter “rental-backed securities.” Private equity firms like Blackstone bundle the revenue streams from rental payments into bonds, and then sell them to investors – much like mortgaged-backed securities. Though the first rental-backed securities received a triple A rating by evaluators Moody’s, Morningstar, and Kroll, the question of what will happen if rent payments begin to come up short looms. And with people spending more than half of their paycheck to keep a roof over their heads, it’s more a matter of “when” than “if” this will happen.
While the sale of rental-backed securities is slated to reach $70 billion a year, the wealth created by this industry will be transferred largely from the labor of renters to the far away-landlords on Wall Street. GDP will likely increase, but the purchasing power of thousands of Americans, especially younger, first-time renters, will be significantly diminished.
Rental-backed securities are just one of the ways mega-banks are maintaining their control and oversight of our economy. Despite their omnipresence, there are lots of things you can do to remove your support for practices like these and encourage a shift to a more just and local economy. By moving your accounts from your current mega-bank to a community development bank or credit union, you can be confident that each fee you pay will be pumped back into local causes, and not into the funds of private equity landlords. Green America’s Break Up with your Megabank and Take Charge campaigns offer resources to help you start making the transition to an economy that works for the people and the planet today.