Mortgage crisis spreads on Wall Street

The subprime mortgage crisis, which has already forced a record number of working class families to lose their homes to foreclosure, has metastasized. It has spread into other sectors of the U.S. economy and sent shockwaves down Wall Street. The 21st-century robber barons of finance capital are scrambling to avoid a further meltdown as the predatory loans they underwrote go into default en masse.

Subprime lenders lure people with poor credit into taking out mortgages but then squeeze higher interest out of them and foreclose more often when they can’t pay.

The panic over the worsening crisis was on full display in the week culminating on June 22, when Bear Stearns—one of the largest and most influential investment banks on Wall Street—announced it would spend $3.2 billion of its own money in an effort to rescue one of its hedge funds, the ironically named High Grade Structured Credit Fund, from complete liquidation. The hedge fund was under siege by individual investors who had begun demanding their money back after it posted large losses resulting from the subprime crisis.

The $3.2 billion bailout proposal capped a frenzied week in which a number of different rescue plans were suggested. The capitalist rulers and their executives debated ways in which to best limit the damage to their holdings.

High Grade Structured Credit Fund is the less leveraged of two Bear Stearns hedge funds which were intricately involved in underwriting the predatory mortgage loans made to working families. During the housing bubble of 2000-2006, Bear Stearns, in addition to other Wall Street giants like Goldman Sachs and Bank of America, bankrolled the subprime mortgage lenders with hundreds of billions of dollars worth of credit.

The subprime lenders then used this money to ensnare working class families, a disproportionate number of them Black and Latin@, in adjustable rate mortgages that had “exploding” interest rates. These loans would start out at low “teaser” interest rates, some as low as 1 percent and 2 percent for the first few years, but would then reset or explode as interest rates skyrocketed into the double digits.

Subprime mortgage lenders and their investment bank sponsors on Wall Street raked in astronomical profits during the housing bubble. At their peak, subprime mortgages were a $1.3 trillion industry. But now that the housing bubble has burst, sending the price of homes into a freefall, borrowers who were caught in these predatory loan schemes are defaulting in unexpectedly large numbers.

The Wall Street institutions are now starting to feel acute losses. High Grade Structured Credit Fund had posted losses of nearly 23 percent over the first four months of 2007. Losses at the second Bear Stearns hedge fund, High Grade Structure Credit Enhanced Leverage Fund, are much worse, but so far Bear Stearns has not announced a bailout plan for that fund.

As is the case with all economic crises under capitalism, the working class has borne the brunt of the fallout from the subprime mortgage crisis. Entire communities have been uprooted as foreclosures force families from homes in which they had invested their entire life savings. “For Sale” signs have become ubiquitous, dotting the front yards of homes in working class neighborhoods across the country, as banks try to unload the foreclosed properties in an already glutted market.

The Center for Responsible Lending projects that an additional 20 percent of the some $265 billion worth of outstanding subprime mortgages around the country will enter into foreclosure over the coming months. Each new foreclosure further depresses the value of other homes in that neighborhood, creating a downward spiral.

Working class communities in states like Michigan, California, Colorado, Ohio, Arizona and New York have been particularly hard hit. In many areas in the Midwest, the wave of foreclosures coupled with large-scale layoffs in heavy industries has turned once vibrant communities into ghost towns.

While the surging wave of foreclosures appears to be an almost unstoppable force, it is important to highlight the many ways in which working families and other community groups are organizing to help stem the tide.

Activists in and around Cleveland, an area that has been absolutely devastated by the subprime mortgage crisis, have begun an innovative campaign to force the remaining subprime lending institutions out of the area. Under the direction of the East Side Organizing Project, activists have been placing thousands of toy sharks on the front lawns of the homes of subprime lending executives to convey the message that the lenders are loan sharks who are preying on the community.

The subprime crisis has led to a marked stagnation in the U.S. economy. New home construction had been a primary engine of economic growth in the U.S. since the late 1990s. Following the dot-com bust of 2000, Wall Street began intentionally funneling billions of dollars worth of investment capital into the housing market in an attempt to boost the U.S. economy.

During the housing bubble of 2000-2006, which was marked by historic levels of new home construction, the capitalists’ plan seemed to be working. The housing bubble had meant an increased demand for labor in numerous industries related to home construction. Carpenters, masons, electricians, plumbers—all saw demand for their skills increase. While the rest of the U.S. economic landscape consisted primarily of low-paying service industry jobs, the housing trades gave some workers a more financially rewarding option.

But the subprime meltdown has led to a near moratorium on new home construction, which in turn has meant more layoffs and a further reduction in wages for workers in the construction industries. Hundreds of thousands of workers have been laid off or have had their work hours and wages reduced in the wake of the subprime crisis. Workers in large conglomerates like Home Depot and Lowe’s have also become victims of subprime-induced layoffs as those stores trim their workforce in response to lower demand for construction products.

U.S. gross domestic product growth has slowed to a crawl. The latest figures show that the U.S. economy grew by a measly 0.6 percent over the first quarter of 2007. Wages continue to lag behind inflation even though aggregated measures of productivity and corporate profits continue to rise. Workers across the country are struggling to cope with food and gas prices that keep going up.

While it remains to be seen just how deep into the heart of the U.S. capitalist economy the subprime crisis will strike, it has already laid bare some critical chinks in the armor of the empire. While it is by no means certain that the subprime crisis will push the economy into a recession, it appears more likely with each new record high in foreclosure rates.

A full-blown economic recession, coupled with rising food and gas prices, an imperial army bogged down in the sands of Iraq, and an angry working class at home: it’s a scenario for a surge of organizing that could give even the smuggest capitalists nightmares.