Eliot Spitzer and the Subprime Mortgage Mess

Former New York Governor Eliot Spitzer has left Democrats with quite a paradox.

On the one hand, Democrats are trying to take over the White House on the heels of what probably will prove to be the most corrupt administration in American history. That means Democrats need to tout their ability to govern with integrity.

By most any standard, Spitzer's repeated dalliances with high-priced call girls fails any integrity test. And for that reason, Democrats don't need to spend too much time trying to defend him.

On the other hand, the investigation that led to Spitzer's downfall raises serious questions about two of the biggest issues that will face our next president.

Issue No. 1? The politicization of the U.S. Justice Department, and Scott Horton, of Harper's, writes that Spitzer's case might be just the latest of many examples where the Bush DOJ prosecuted a person (almost always a Democrat) not a crime.

The Spitzer case, Horton notes, seems to be following the usual Bush DOJ script. Political prosecutions in BushWorld usually involve two dubious tactics--a focus on campaign fundraising and a focus on minor offenses--things that previously had not been seen as wrongdoing, much less criminal acts.

When the Spitzer story first broke, these elements did not seem to be in place. But then The New York Times reported that investigators were looking at Spitzer's possible use of campaign funds for meetings with prostitutes and possible use of car services.

Issue No. 2? The subprime mortgage mess, and investigative reporter Greg Palast says Bushies might have targeted Spitzer in retaliation for his efforts to clean up the banking and lending industries.

First, Palast provides some history of the subprime problem:

Here’s what happened. Since the Bush regime came to power, a new species of loan became the norm, the ‘sub-prime’ mortgage and its variants including loans with teeny “introductory” interest rates. From out of nowhere, a company called ‘Countrywide’ became America’s top mortgage lender, accounting for one in five home loans, a large chunk of these ‘sub-prime.’

Here’s how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 monthly payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain’t worth a can of spam and the Grinnings are told to scram - because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the “discount” they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. The Grinnings move into their Toyota.

Then we learn about the Bush approach to the growing fiasco:

Instead of regulating the banks that had run amok, Bush’s regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of “federal pre-emption,” Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer’s investigation of ugly racial mortgage steering. Bush’s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup’s Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called “securitization.”

What that means is that they took a bunch of junk mortgages, like the Grinning’s, loans about to go down the toilet and re-packaged them into “tranches” of bonds which were stamped “AAA” - top grade - by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to US school district pension funds and town governments in Finland (really).

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide’s top man, Angelo Mozilo, will ‘earn’ a $77 million buy-out bonus this year on top of the $656 million--over half a billion dollars--he pulled in from 1998 through 2007.

What happened when the you-know-what hit the fan?

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That’s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure – and got to keep the Grinning’s house. There was no ‘quid’ of a foreclosure moratorium for the ‘pro quo’ of public bailout. Not one family was saved – but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo’s Countrywide stock rose 17% in one day. The Citi sheiks saw their company’s stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided – what a coinkydink! – the man called, ‘The Sheriff of Wall Street’ was cuffed. Spitzer was silenced.

Spitzer, it turned out, had gone out of his way to make himself a target, writing these words about predatory loans for the Washington Post:

“Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.”

Bush, Spitzer said right in the headline, was the “Predator Lenders’ Partner in Crime.” The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington to launch a campaign to take on the Bush regime and the biggest financial powers on the planet.

Spitzer wrote, “When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners the Bush administration will not be judged favorably.”

No wonder the Bushies went after him. Spitzer's full piece for the Post can be read here. It ran on Feb. 14, the day after his final rendezvous with a prostitute in D.C.

Meanwhile, how ugly is this subprime business going to get? Walter Hamilton, of The Los Angeles Times, tell us it is heading toward an avalanche of lawsuits. And Hamilton compares it to the savings-and-loan scandals of the 1980s.

Those of us who lived through that mess will recall that Bushes were in the middle of that financial fiasco, too.

We Americans are slow learners aren't we?