To an extent I agree with your points. However, the CRA issue cannot alone explain the fact that the largest houses had made way more investment in dodgy mortgages than even the law would have requried. I mean, it doesn’t explain Fuld going limit long on Subprime over the summer of 2008.
But where I do fault the largest investment houses is that they claim to be these great, bold capitalists, and then they go crying to Congress in 2008 for taxpayer money when their bets went bad. They only want to be capitalists when it suits them.
They claim, of course, that they were forced to take TARP money, but that is not how I remember it: My counterparties at the large houses were all sending out messages on Bloomberg and email about how we have to support TARP and get it passed through Congress. How it will save the entire economy and instantly solve all our problems. One of them told me “This is about survival.” So I offered to buy a yard of 6 mo. EUR/USD ATM calls for 25 bps. For some reason he wasn’t desperate enough to take me up on my offer. ;-)
As for Goldman, I am quite suspicious of the fact that they were the only large house not forced to merge with another failing bank, and that for some reason Paulson bailed out Bear but didn’t bail out Goldman’s biggest competitor Lehman. That the Treasury structured a hybrid deal with them about a week or two after Buffet struck the same deal with them, but for some reason the Treasury charged half the interest rate that Buffet did. And that, at the same time, they also were giving hundreds of millions to Obama’s campaign.
If it walks like a duck...
Since you inserted "alone," you are technically correct. But it is like saying: the engine is by itself responsible for pulling the last car. That is true: a connection between the two via intermediate cars of the train is also required. But it is always there.
Similarly in this case. The CRA created steadily increasing prices. New expectations about the future --- the only ones that matter in investments --- were subsequently formed. Until these evermore optimistic expectations become new "common sense," appreciation of assets does not become a bubble. The expectations of economic agents are the connecting cars between the engine (CRA) and the last car (burst). Based on those expectations, banks took actions that seem foolish in retrospect. But so is Hitler, whose rise to power ended with 10% of Germans dead. So is Russian Communism, which left tens of millions dead and the rest impoverished. Those too were bubbles.
One has to be careful when applying retrospection when dealing with bubbles. You and I may question or outright despise some specific banks' actions. One has to refrain from overreaching, however: none of the banks has sufficient power to create or deflate bubbles. It took coercive power of the U.S. government to create the bubble. And took the power of U.S. government to bail out all big players ever since S&L crises and then abruptly to change course. Similarly, it took new demand from China and India to push up oil prices in this decade --- remember how those prices were blamed on "banks' speculations" just a year or two ago?
Yet another reason to be on guard from overreaching is the very nature of innovation. True innovation, by definition, operates in uncharted territory. When it comes to financial innovation, practically all of it in the last 40 years came from Wall Street. Not London, not Frankfurt, but Wall Street. The point is that even honest people may be found _in_restrospect_ to have overstepped the boundaries when those boundaries were unclear at the time. Society imposes restrictions only after an innovation has been found undesirable.
When applying the foregoing to the issue at hand, how come nobody mentions that securitization has been with us since late 1980s? Not only it did not cause problems but has been credited with contributing to our boom in the 1990s. It well may be that some specific deals were shady and less than honest, but to blame the entire phenomenon on the bankers is not only factually incorrect but intellectually dishonest: blame them for our immense prosperity as well.
[The same goes for pharma, another "evil" sector: I read a paper a few years ago documenting that over 90% of all new drugs in the last 30 years have been developed in the U.S. This is not surprising: we spend three time more on R&D and also times more on defense. Those who want us to be like Europe conveniently forget that Europe free-rides on us. In sum, when arriving at conclusions, please count not only costs but benefits as well.]
"They claim, of course, that they were forced to take TARP money, but that is not how I remember it: My counterparties at the large houses were all sending out messages"
That is indeed a fact: unlike Detroit, Wall Street was forced to take the money (Paulson scared Bush sh--s, excuse my language, and elicited thus his endorsement). This need not contradict what you saw subsequently: it well may be that, AFTER taking the money, banks may found it useful to put the PR spin you describe. I cannot attest to that (I simply don't know) and take your word for it. But the two effects are not in contradiction.
"As for Goldman, I am quite suspicious of the fact that they were the only large house not forced to merge with another failing bank,"
That is easily explained by the fact that GS was the healthiest of them all. They started to bet on the decline in May, and the crisis hit in October.
"and that for some reason Paulson bailed out Bear but didn’t bail out Goldman’s biggest competitor Lehman."
That single fact bothers me most of all. I can find no excuses for it. And not only for the act itself, but the recklessness with which it was undertaken. It is that recklessness that froze the credit markets. I am looking forward to reading more details some day, as more information is revealed in "memoirs" and collected.
Thank you for this discussion.
Equally troubling was the evident complete lack of concern how this was perceived. It wasn't until the ObamaCare goodies -CornHusker kick-back etc.- were handed out folks finally understood, they simply do not care how it looks to the public.
"If it walks like a duck..."
Indeed.