Howard Darmstadter: The Boy in the Bubble


“The theory that there was a systemic fraud against homebuyers always depended on a major implausibility—that you can have a successful business model based on lending large amounts of money to people who can’t pay you back.”
~ Howard Darmstadte

But, Howard, that is exactly what they created…


The Boy in the Bubble

Did widespread fraud really drive the housing crisis? This former Citigroup employee was inside the bubble when it popped.

In the financial crisis of 2008, I lost my job at Citigroup. Thousands of other people in the financial services industry, and millions outside it, also lost their jobs, but, in my case, unemployment might appear an appropriate punishment for my sins. From 2000 until my ejection from Citigroup, I wrote prospectuses and other documents for mortgage-backed securities (MBS) issuances by CitiMortgage, a Citigroup subsidiary. The received history of the financial crisis casts MBS as the major villain, which would make me a villain-enabler.

Renewed attention to the causes of the financial crisis has been sparked by the film The Big Short, adapted from Michael Lewis’s 2010 book The Big Short: Inside the Doomsday Machine, as well as by candidate Bernie Sanders inveighing against all things Wall Street. The book, the movie, and the candidate all assert or imply that the financial crisis was largely propelled by fraud.

In the book, the word “fraud” appears 19 times, “corrupt” and its cognates 11 times, and “criminal” four times. I haven’t been able to check the full movie, but the two-minute trailer manages to use “fraud” three times (and “shady” once), beginning with “When the banks committed the greatest fraud in U.S. history ….”

Many critics have bought the story. Thus, A.O. Scott reviewing the film in The New York Times: “I don’t condone mob violence and I’m supposed to keep my political opinions to myself, but as soon as I’m done writing this I’m going out to the garage to look for a pitchfork,” and then “There is no happy ending to this story, no punishment for the crime.”

The Big Short retails two standard allegations of systemic fraud. First, it argues that lenders issued mortgages to people whom they knew could not afford them. Second, The Big Short alleges that the various financial instruments structured from these mortgages—the MBS and “collateralized debt obligations” (CDOs)—were misrepresented to investors. A trio of economists for the Federal Reserve Banks of Boston and Atlanta have exploded most of these fraud-based theories, but it’s a mythology that fits in so well with popular predilections (the “Wall Street vs. Main Street” mantra) that it will probably never go away.

What nobody told the homebuyers, because hardly anyone believed it, was that the value of their homes would sink dramatically over the next few years. In the preceding years, there had been a huge run up in house prices, fueled by the mass belief that if you didn’t buy now, you’d be priced out in the future—a classic bubble-builder. Much of the 2008 crisis can be traced to this single misperception.

Rest here…


2 Responses to “Howard Darmstadter: The Boy in the Bubble”
  1. Soraya says:

    There was a systematic fraud planned against homebuyers, how do you explained that I have to refinaced the first house that my husband purchased with a normal loan when I purchased the second home in 2005 still trying to protect it. Broker and Real state decided to do this even we had the money to put down they just wanted to wrapped in those baked security loans with adjustable rates and advice to transfer it to me probably because I am Spanish ,self employees the target of this fraudulent banks . Bank of America,Countrywide and Intimacy. We have lost already 2 houses and try to protect the last one after they got us into the worse financial situation we have been in our lives. We have to cloused out business because we could not recovered money issued foreclosure done to our customers etc. These banks forced us to bankruptcy, loosing money to help us with loan mod , lawyers etc. Now that we trying to save the last property I have found out in my own and reading about these mortgages issues that the investor in 1 the houses I lost wth countrywide is or was Angelo Mozilo owner or founder of Countrywide, the house with Indimac ro One west bank.T he property we trying to save was or is Countrywide/Bank of America , Investor Merrill Lynch transfered to BSI Financial in November/2014 just after the settlement for 16.2 Million with FHFAand Freddie Mac to cover securities and Bank of America agree to fix those trouble loans helping us with and affordable rates or even reduce principals that were inflated in those toxic loans , but not Bank of America continue doing fraudulent transactions with intentions of foreclosure . How with stop this when we can not find a decent lawyer to protect consumers? I have filed claim with General Attorneys, FHFA and others government institutions We pray justice will come sone or this story could be material of the writer of this site.

    • mike Drouin says:

      Let me ask you a question . Would you promise to pay someone back who didn’t lend you any money ??? of course not !!! that would be lunacy right ??? well that’s exactly what millions of Homeowners did from 2001 to 2007 . Countrywide , and in my case , Option One , were ” straw man lenders ” ( Sub – prime Lenders ) who bridged the gap between Investment Banks , and Depository banks in order to fuel a scheme for obscene profits !! ending with FREE Houses being given to Depository Banks like , Bank of America , Wells Fargo , JP Morgan Chase , Citi Group …… These two Banking systems don’t belong in the same conversation let alone a business contract with each other , so they created entities that would shoulder all the liability of a scheme that would play investor against borrower , both ends of a contract against the middle . That contract is the Mortgage Backed Securities ( MBS ) The reason I asked the question in the beginning was because all the loans created by the Sub-Prime entities were funded secretly by the Investment Banks , with Investor Money . and the Straw Man Lender , just SERVICED that Loan and hid that from you . You think your paying a Mortgage but your in a different contract where your monthly payments go to the investors as a cash flow claim with all the entities involved getting fee’s for handling the payments . It’s all SMOKE AND MIRRORS at this point just to confuse you and bring their scheme to an end . The Depository banks don’t want to service the Loan , they want the free house !!! sorry , but that’s the truth . The fact that these loans were secretly funded by another entity is Fraud in the Inducement , and the fact that another contract was brokered instead of a Mortgage , behind your back and without your permission is Fraud in the Factum , and is subject to Rescission / Cancellation . The Promissory Note is the contract !!! and you promised to pay someone who did not lend you any money !!!

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