Tuesday, May 22, 2007

How a High-School Dropout Made Millions in Sub-Prime Real Estate Lending

If ever the banking police needed an excuse to regulate the mortgage industry to death, Quick Loan Funding is it.

This Oange County Register article describes the amazing run of Daniel Sadek.

Read his story. It's an eye-opener. He went from Lebanese wartime high school dropout to real estate mogul multimillionaire to debtor in just a few years.

I respect his gumption. He grasped the American brass ring on the first try. The only problems were twofold: the ring was an exceptionally low-hanging fruit at the time, and he's incompetent, or immoral, or both.

[Thanks to dupagechildrensmuseum.org for the image.]

But that's what happens when an inflationary bubble works its way through the market system. Incompetence and immorality are rewarded. Money seems to be growing on trees -- indeed, money is growing on trees. Every Tom, Sadek, and Harriette can find easy dough to roll in with little or no effort or expertise.

After the Dot-com fiasco the mountains of cash still in the system turned to mortgage securities, encouraged by three things: (1) the Federal Reserve's lowering of rates in 2001, not for its direct effect on interest rates but for its signaling of more loose-cash times ahead; (2) the government-sanctioned mortgage-qualifying looseness of the GSEs (government sponsored entities like Freddie Mac and Fannie Mae et al.); and (3) the normal evolution of the securitization business. ("Securitization" is the packaging and marketing of various debt instruments like mortgage MBOs [mortgage backed obligations] that is now being done outside -- or at least at arm's length from -- the banking industry per se, thereby avoiding regulatory supervision to date. This is likely to change within the next five years, in my opinion, because without limitation of these products' use as credit collateral, the global economy is going to be in deep doo-doo very soon.)

This shift of excess monetary wherewithal was no surprise to anyone. Securitized bonds look like a good secure deal. Foreign central banks, global dollar investors and pensions alike moved billions into that market. In fact, there was so much cash available that credit became cheap for lack of takers, and vultures like Sadek (bless his innocent little heart) were allowed to go on a feeding frenzy.

Who is to blame? Not the vultures. Vultures are just acting like they are supposed to, i.e. like birds of prey. The real culprits are:

(1) Former and present US Congresses for enacting legislation to create and preserve market-maiming monsters like Freddie and Fannie.

(2) The governments of the US and of the other industrialized nations who participated in the decoupling of the dollar, the British pound, the European currencies, the Japanese yen, etc. from the price of gold back in the 1970s.

(3) The Federal Reserve and the central bankers of a number of foreign nations on several fronts:

- For devaluing our 1900 dollar from $1 to $.06 or less through ineffective efforts to "push the economy string" by inflating the currency, the latest episode being between 2001 and 2004; for devaluing the Japanese yen, most recently since the 1990s; for quasi-illegally supressing the revaluation of their currency by pegging the Chinese yuan and other nations' currencies to the dollar;

- For being fully aware, as the well-trained economists that they are, of the easing monetary effects securitization would have on money and credit, and for failing to do anything to set reserve standards for this wildcat bank-industry-clone that is presently threatening global economic equilibrium (the central bankers have now seen the dangers and are desperately trying to correct their mistake behind closed doors with the participation of the BIS [the Bank for International Settlements] before the messy situation hits the fan);

- For knowingly playing a chauvinistic international inflating game, pitting national policy against that of their respective trading partners in an attempt to favor their own industries and profit from currency imbalances come hell or high water (all countries are guilty of this, but most egregiously the Japanese, the Chinese, and even the buck-stops-here US. We should be making an effort to be the standard bearer of monetary policy instead of the tallest-dwarf bully on the block who gets his kicks watching the weaker sidekicks flounder around.)

I wonder if Sadek will end up like that Thai real estate "tycoon" we all saw on 60 Minutes -- you remember, the guy who took us on a tour of his semi--finished but abandoned gazillionaire's golf paradise. These days he's hawking hamburgers from his bicycle in the streets of Bangkok -- probably where both he and Sadek should have been all along.

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