Why the Germans Bought the Toxic Waste: More on Michael Lewis

Pajamas Media ^ | September 4, 2011 | David P. Goldman

[Kaslin]

My last post on Michael Lewis’ scatological screed at Vanity Fair drew a fair number of comments regarding German bankers’ problems with toxic-waste securities sold by American investment banks. Why the world supported America’s housing bubble by purchasing derivative securities (collateralized debt obligations, or CDO’s, backed by sub-prime mortgages) is a separate question. For years, I gave presentations to German money managers (often in German) on these securities, as head of Credit Strategy at Credit Suisse (1998-2002) and head of debt research at Bank of America (2002-2005). B of A, to its credit, stayed out of the subprime origination business until Ken Lewis bought Countrywide in 2008, with consequences we read about every day. I quit B of A in 2005 over what the bank and I agreed to call “philosophical differences,” and later joined a credit hedge fund — Asteri Capital — which cashed out its investors with a profit in August 2008, just before Lehman went under. We survived the crisis by shorting the banks.

The Germans bought the toxic waste because they had to. I wrote about this in 2008:

The German financial system wanted to consume low-quality American assets, but did not want to look on what it was eating. German banks have written down about US$25 billion in securities derived from low-quality (“subprime”) American mortgages, and doubtless will lose a great deal more. But it is silly to blame the sausage-grinder. Why didn’t the Germans and all the other overseas investors buy mortgages in their own countries, instead of scraping the bottom of the credit barrel in the United States? It is because there aren’t enough Germans, or Italians, or Frenchmen or Japanese starting families and buying homes. There weren’t enough Americans, either, and therein lies a tale.

The aging pensioners of Europe and Asia must find young people to pay interest into their pensions, and they do not have enough young people at home. Germans aged 15 to 24, on the threshold of family formation, comprise only 12% of the country’s population today and will fall to only 8% by 2030. But one-fifth of Germans now are on the threshold of retirement and half will be there by mid-century.

Germany’s low birth rate means that the domestic economy can’t generate enough assets to meet the investment requirements of prospective retirees. The great Robert Mundell, the grandfather of supply-side economics and 1999 Nobel Laureate, observed in an obscure but important article that demographics explain almost all the chronic current account deficits in history: countries with aging populations lend to countries with young populations.

The trouble is that America’s population was aging, but more slowly than Germany’s. From a demographic standpoint America had overbuilt single-family homes, but the change was slow enough for Americans to kid themselves that they would be able to sell that McMansion in an exurb to fund their retirement. There are plenty of countries with very young populations, e.g., Brazil and Nigeria, but nobody wanted to lend to home buyers there. So the world came to America’s capital market. And Wall Street, with the blessing of the federal housing regulators, reached into the bottom of the credit barrel to provide the product.

The world kept shipping capital to the United States over the past 10 years [through 2007] because it had nowhere else to go. The financial markets, in turn, found ways to persuade Americans to borrow more and more money. If there weren’t enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis. That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

America’s financial market could not produce enough pork chops, so the Europeans bought Spam and scrapple. America’s rating agencies assured them that derivatives created from subprime mortgages, second-lien mortgages and other dubious parts of the pig were the equivalent of pork chops, and foreign investors wolfed them down.

The financial crisis occurred because Democratic administrations pushed subprime mortgages to benefit minorities, because politicians treated the federal mortgage agencies as patronage piggy-banks, because the ratings agencies “sold their soul” (as one S&P official admitted in a now-public email), because the Greenspan Fed tolerated untold amounts of leverage on the leverage, because the investment banks issued mortgages with robo-signers, and the Germans bought them with robo-investors. But all of this occurred in the context of a demographic tragedy: the world doesn’t have enough young people in the venues where investors want to risk money to meet the income needs of a tsunami of soon-to-be pensioners.

Mr. Lewis seems to believe that the problem with German bankers is an obsession with excrement. In fact, the Germans did exactly what the French, British, Italian, Spanish, and Japanese bankers did. They bought what was available on the market. They didn’t like it; they held their noses at it; but they bought it nonetheless because they thought they had to.

The German economy, by the way, has long since moved on from dependency on its Southern or Western neighbors (die Welschen) for export growth: during the past several years virtually all the growth in German exports has come from the East, from China and to some extent Russia. That leads me to believe that after the proverbial decent interval, Greece, Italy and Spain will be thrown out of European monetary union, their debt will be reorganized along the lines of Brady bonds, their banking systems sold to foreigners at a fraction of book value — and no-one will care very much.

[Gilbo_3]

interesting angle of how a 'sucker is born every minute' and why the smartest guys in the room all got duped to the tune of trillions...

musical chairs with the derivatives basket, or hot potato, as it were...

[Ozone34]

Whenever I see the word ‘scatological’ in some connection with ‘Germany’, the first thing that comes to my mind is Martin Luther. Actually what I think is going on here is that Matt Taibbi is starting to encroach on Michael Lewis’s turf on popular financial corruption reporting. Lewis may be co-opting some of Taibbi’s Thompsonesque style in response. Just a thought.

[john drake]

Demographic trends pretty much rule economic trends. Europe, Russia and Japan are imploding. The U.S. and Canada would be also if they weren’t allowing relatively high immigration. The rest of the world is starting to shows signs of lower population growth, but the West (and Japan) are way ahead of the others. Hmmmm, well, you can’t have your cake and eat it too. I suppose the continued suspension of adulthood, contraception and abortions in the tens of millions (or more) hasn’t helped much either.You reap what you sow, and in our case, these advanced nations didn’t sow much in the way of replacing their populations. Short of nuclear exchanges, large natural catastrophes or numerous,highly lethal plagues, the West is losing. I don’t believe a reversal of this kind of trend needed to save a nation has ever been successful. Time will tell.

[KantianBurke]

“The financial crisis occurred because Democratic administrations pushed subprime mortgages to benefit minorities”

Convenient but obnoxious that he omitted the role Dubya played in that mess. If we’re to prevent the recurrence of such disasters, big government GOPer’s need to be held accountable and their actions repudiated so that they’re not repeated. Sweeping it all under the rug is self defeating.

[rbg81]

I think there is something about the Germans being obsessed with sh!t. Ever looked at their toilets? They are designed so that the crapper can clearly inspect the crap prior to it being flushed. I dunno about you, but the last thing I want to do it look at my bodily waste before I flush it. In fact, if there was a toilet design that effectively hid it, I’d consider buying it.

[The Working Man]

If there weren’t enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis. That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

America’s financial market could not produce enough pork chops, so the Europeans bought Spam and scrapple. America’s rating agencies assured them that derivatives created from subprime mortgages, second-lien mortgages and other dubious parts of the pig were the equivalent of pork chops, and foreign investors wolfed them down.

---

This is a very good explanation and explains much of why we are in the Mortgage Mess/Disaster.

Once again Politicians and Bankers the world over looked to America to bail them out of their home-grown problems. And our own short-sighted leaders and Bankers looked at the short term bottom line and failed to see the Edge of the Waterfall ahead of them, (and us).

[expatpat]

You are right - the Germans are obsessed with their crapping functions. There are some toilets sold in Germany that have a force sensor in them to weigh total turd output.

Of course, the French are obsessed with their liver functions, and the Brits have their own obsession — but I don’t remember what it is......

[A'elian' nation]

Hey - you’re not supposed to crap in the bidet !

http://www.wikihow.com/Use-a-Bidet

The crap may float in the real toilet, but Germans have real toilets that FLuuuuuuuuuuSH - they sound like jet engines -
not like the crappy toilet crappers we have to use here.

We got to see our crap too, because it takes 2 or 3 flushes.

funny post though lol

[Neidermeyer]

Bank of America (2002-2005). B of A, to its credit, stayed out of the subprime origination business until Ken Lewis bought Countrywide in 2008, with consequences we read about every day.
******************************************************
FROM THE FHFA SUIT quoting AIG’s suit and discovery ...

130. BOA also departed from its own underwriting standards as a consequence of
striving to increase the volume of subprime mortgage loans it originated between 2004 and 2007.
In 2004, Bank of America announced its commitment to invest $750 billion over 10 years in
low- and moderate-income (“LMI”) communities through consumer loans and other programs.
FCIC Report at 97; see also BOA Press Release, “Bank of America Community Development
Lending Exceeds $85 Billion,” May 22, 2006. Pursuant to this initiative, in 2005 alone, BOA
provided more than $33.2 billion in mortgage loans to LMI borrowers and made “more than $40
million in loans and investments every business hour.” Id. As disclosed to the FCIC in June
2010, almost 17 percent of the LMI loans originated by Bank of America between 2004 and
2007 were delinquent at some point for 90 days or more. See 6/16/10 BOA letter to FCIC,
Schedule 2.5. Bank of America retained only about 50 percent of those LMI loans on its balance
sheet and either sold or securitized the rest. Id.
131. The FCIC reports that, in 2005, examiners from the Federal Reserve and other
agencies conducted a confidential “peer group” study of mortgage practices at six companies,
including BOA. According to Sabeth Siddique, then head of credit risk at the Federal Reserve
Board’s Division of Banking Supervision and Regulation, the study “showed a very rapid
increase in the volume of these irresponsible loans, very risky loans.” The study also showed
that “[a] large percentage of their loans issued were subprime and Alt-A mortgages, and the
underwriting standards for these products had deteriorated.” FCIC Report at 172.
132. BOA was one of the most aggressive competitors in the mortgage origination
market. Even the top executives of Countrywide Financial Corp., the notorious mortgage lender
singled out by the FCIC for having originated high-risk loans destined to bring “financial and
reputational catastrophe,” FCIC Report at xxii, complained to each other at the time that BOA’s
appetite for risky products was greater than that of Countywide. In a June 13, 2005 e-mail
Countrywide CEO Angelo Mozilo wrote to President and COO David Sambol: “This is the third
deal in the last 10 days that BoA has offered that is impossible to beat. In fact the other two49
were substantially worse than this one. It appears to me that BofA is making an aggressive
move into mortgages once again.” (Emphasis added).
133. BOA also participated in “warehouse lending” – extending a line of credit to a
third-party loan originator to fund mortgage loans – to ensure that it had access to a steady
stream of mortgage loans to securitize and sell to investors. In 2001, BOA sold EquiCredit, the
division of BOA that, at the time, was primarily responsible for making subprime loans. In order
to guarantee that it could obtain sufficient mortgages to pool into its residential mortgage-backed
securities securitizations, BOA began to directly fund originating banks, including Countrywide
and New Century Mortgage Corporation. According to Inside Mortgage Funding, BOA was the
leading participant in the warehouse lending channel, with nearly 26 percent market share by
2009. See BOA press release, “Bank of America Exits First Mortgage Wholesale Channel,”
October 5, 2010.
134. In addition, BOA sought to expand its share of the mortgage securities market by
aggressively pursuing subprime mortgage originators, including Option One, offering to pay
more for their mortgages than competing Wall Street banks and offering to perform less due
diligence than its competitors.
135. Plaintiffs with access to files compiled by BOA in originating loans have
confirmed that Bank of America routinely originated loans that failed to comply with its
guidelines. In its recently filed action alleging that BOA National and BOA Securities, among
others, engaged in common law fraud and violated the Securities Act of 1933, the insurer
American International Group, Inc. (“AIG”), has described that after managing to obtain the loan
files relating to a 2007 securitization of mortgage-backed securities (OOMLT 2007-FXD2), AIG
arranged for a third-party consultant to review a sample of the files to assess whether the loans

[Neidermeyer]

Here’s another good one .. http://www.scribd.com/doc/64006690/US-BANK-SUES-COUNTRYWIDE-AND-BANK-OF-AMERICA-AUG-2011-COMPLAINT-AND-EXHIBITS

[bert]

——subprime mortgages to benefit minorities——

The thought is intended to mean black folk. The truth is that single white women were significant beneficiaries of the fiasco. They ended up working two jobs and always worrying about the electric bill and having daddy get worried and paying the phone bill