Posted on 01/09/2014 8:35:15 PM PST by Brad from Tennessee
Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans leading lives of quiet desperation: without jobs, without resources, without hope.
Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever more esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?
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Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent; rather it has offered one or another excuse for not criminally prosecuting them—excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations.
(Excerpt) Read more at nybooks.com ...
“The financial crisis was caused by the US Government in an effort to buy votes and further the prospects of the the Democrat Party and Progressivism. “
Convenient story, not accurate. The private financial sector lobbied hard during the Clinton years to be allowed to get into the lending that generated the bubble. They cultivated the subprime market without being compelled to make those loans in the slightest. Only commercial banks were covered by the CRA.
“Unfortunately because they were probably afraid of being branded “racists”.”
Try again. The CRA only covered deposit takers like retail banks and S&Ls. The number of loans required by the CRA was quite small and they didn’t have to be mortgages. Reagan and both Bush Administrations were not concerned with the CRA.
“You mean like WAMU or Countrywide?”
Funny that you should mention Countrywide. Countrywide began as a pure mortgage lender, meaning that it got its capital from investors, not depositors. And as so it was not covered by the CRA. Later on it acquired an S&L and that did bring it under the CRA. WAMU would have been under the CRA. But the two very largest subprime lenders who got this all rolling, Argent and Ameriquest, were not.
“Yes, bankers, like you and me are greedy, but I would venture to guess that the vast majority of them are not stupid.”
Then in this instance you guess wrong. They were all using a pricing model based on the flawed Gaussian Copula Function which blew up in their faces and wrecked their own companies.
“If you were a banker would you make a loan that you knew there was a 90% chance that it wouldn’t be repaid?”
Sure I would, because I know something about financing those loans that you don’t. Unlike in all previous decades of mortgage lending I had no intention of holding onto the loans. I would collateralize them and sell them off as CDOs, CMOs, CDOs squared all of the other extremely lucrative derivatives that generated income for me and passed all of the risk off to the investors who bought them.
“Also please tell me, who bought most of the securitized loans?”
Investors looking for yield. Insurance companies, retirement funds, foreign banks, mutual funds, money markets. Subprime CDOs provided high yield at a time when T-bills were paying 1%.
“Also please tell me, why did the top rating agencies give AAA ratings to these securitized subprime loans?”
Because they were paid by the firms who manufactured the CDOs, a classic conflict of interest, and because the financial firms creating the derivatives misled the rating agencies about just what they were stuffing into these derivatives. For one thing the rating agencies assumed that the loans were conforming loans like the ones that Fanny and Freddie crank out, but they weren’t- they were vastly more risky, the no docs, no downs, no income, all of the crazy lending designed solely to generate more subprime paper to feed the derivatives market. By the end of the bubble the need for derivatives fodder was driving the lending process.
“You use a lot of handwaving in your arguments,”
No, I use a lot of facts that you are unfamiliar with so you now think that a bit of ad hominem is going to help your case. Try again junior, I knew a lot of people involved in this industry and I was one of a small number here at FR warning that disaster was coming from the housing market. So try patronizing someone who knows as little as you do about what happened, because that crap doesn’t work with me.
They needed a buyer for their garbage loans. The USG provided that buyer, the ultimate "greater fool", in the form of the government-sponsored enterprises, Fannie and Freddie. Without that backstop, the mortgage-lending cowboys would have crashed long before they actually did and without the far-reaching consequences.
A healthy market would have kept the cowboys in check. But a healthy market was contrary to Progressive policy.
From 2005-2007, he rarely made a speech without saying America achieved record home ownership under his administration.
Thanks for the heads up on David Li, whose name I don't know.
Several of the credit rating agencies have claimed innocence based on the two algorithms I mentioned, which is why I listed them.
That’s right.
And that’s a problem.
But for one person to accept a bribe, someone else must, by definition, pay a bribe.
In this case, the person paying the bribe has somehow bought themself immunity, and considers it merely a cost of doing business.
That was only because the mortgages were interest-only Option ARMS, with no principal payments for the first two or three years. Once the interest-only period ran out and the borrower had to start paying-down the actual loan, the monthly payment doubled or tripled.
AS I suspected. They didn’t break any laws.
There are no laws against bribery?
America is being invaded and looted, and will be in ruins in 50 years.
This is a world-historical event. If any people are alive in 2000 years, books will be written about it.
And our politicians, ALL OF THEM, are in it up to their necks. The right is not as bad as the left, but they’re still in on the deal.
Who, specifically, bribed who (or is it whom?)
The court records of Jefferson County, Alabama will reveal who was convicted of bribery.
They are mysteriously silent on who paid the bribes.
Here’s an article about the case:
It appears the bribes were paid by someone at JP Morgan, thus-far unnamed.
Gary White, who oversaw the county’s environmental services department, was sentenced today in Tuscaloosa by U.S. District Judge Scott Coogler on a 2008 conviction for taking cash in exchange for awarding $11 million in no-bid sewer contracts...
A federal jury in January 2008 convicted White of taking cash in white envelopes from Sohan Singh, the president of U.S. Infrastructure Inc., according to the U.S. attorney.
Singh’s bribes were pocket change.
JPM paid $722 million to get the SEC off their back in this case.
Just a simple “cost of doing business”. Nobody went to prison.
Just like Jon Corzine. Made a billion-and-a-half dollars of other people’s money disappear, and he’s out walking around, a free man.
Yes, I agree.
The premise of those loans was based on the theory that home prices would continue to rise rapidly.
Thus, after 2 years, the “value” of your home might be 15% or 20% above the price you originally “paid” for it.
That increase in value would be viewed as “equity” by your lender.
Thus, in theory, you could qualify for a “normal” mortgage with “normal” interest rates and “normal” monthly payments.
When home prices began to go down - BOOM - the entire financial premise for millions of loans exploded, and people just walked away, from their homes and their mortgages.
Even in theory, some of them could never work.
I heard about one particularly egregious case in which a dishwasher making $7 per hour ($14000 per year) got a loan on a $700000 house.
Even at zero interest, zero insurance and zero property taxes, paying that off in 30 years would be nearly $2000 per month.
Nobody can afford a house payment that’s twice their monthly gross.
Around 2006 I casually knew a middle aged Black guy living in the apartment across the hall from me.
Twice he tried to explain to me what he did for a living, which was essentially recruiting lower income Black folks who could pass a basic credit check, then delivering those folks to realtors and mortgage brokers.
He got a percentage of the fees, and he was taking home an average of $2,000 a week.
For the life of me, I could not understand how those people got approved for loans, how they made their payments, or how rising home prices turned into your “down payment.”
It wasn't until a couple years later that it suddenly dawned on me that my neighbor was working at the spear point of a multi-trillion dollar scam.
CRA was not the only factor, but it along with other government interventions in promoting “affordable” housing and home ownership in general, by browbeating banks and using relaxed underwriting standards on the part of HUD, Fannie Mae, Freddie Mac, etc. definitely were major players in the crisis. And yes so were the quants with their theories and models on how to price risk, which they obviously got very wrong. And of crucial importance were the rating agencies. If they had rated the risks correctly, none of this would have happened, because the demand for junk would have never risen to the level that it did.
I found this entry in Wikipedia fairly balanced and quite thorough in summarizing the various takes on the causes. Not surprisingly, it contains a lot of political axe grinding on both sides.
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis
“They needed a buyer for their garbage loans. The USG provided that buyer, the ultimate “greater fool”, in the form of the government-sponsored enterprises, Fannie and Freddie. Without that backstop, the mortgage-lending cowboys would have crashed long before they actually did and without the far-reaching consequences. “
You don’t know what you are talking about. Fanny and Freddie dealt in low yield conforming loans and they were having their lunch eaten by private sector rivals who bundled and sold high yield paper throughout the financial world. Fanny and Freddy actually lost market share during the bubble.
And you evidently are blissfully unaware that Fanny and Freddy were both listed on the stock exchange. They had been spun off from the government back in 1970. There was no legal requirement for the American taxpayer to backstop their businesses. That great free market President Dubya decided to socialize the losses of these two investor owned GSEs.
” CRA was not the only factor, but it along with other government interventions in promoting “affordable” housing and home ownership in general, by browbeating banks and using relaxed underwriting standards on the part of HUD, Fannie Mae, Freddie Mac, etc. definitely were major players in the crisis.”
Until you recognize the difference between “banks” and “investment banks” you will never understand what went on.
CRA and the rest of this regulation covered retail banks and S&Ls. Banks that raise their money from depositors. The corner banks that we all use. What we normally think of with the word ‘banks’. These banks were not the major players in the housing bubble.
In contrast investment banks and hedge funds are Wall Street firms. They raise their money from investors. They do not take deposits. They were not covered by the CRA or much of anything else. They had spent the 80s lobbying Congress to have Glass Steagall scrapped so that they could get back into the retail business. They got CFMA2000 passed to keep derivatives unregulated.
Investment banks and hedgies did exactly as they damn well pleased during the bubble. The government couldn’t browbeat them because they were not depository institutions and they had paid good money to keep themselves regulation free.
If they funded high risk subprime paper, and they did exactly that to a staggering degree, it was entirely because they wanted to. IBs and hedgies funded loan brokers, loan brokers wrote high risk paper, the IBs and hedgies bundled those loans and sold both the CDO bundles and a trillion in derivatives and swaps based upon them.
It was a very, very profitable business while it lasted. It had the unfortunate side effect of blowing up and sending a tsunami throughout the world economy. But the speculative nature of investment banking has long been known and was the reason that Glass Steagall was passed in 1933 in the first place. That previous generation figured out that investment banking needed to be walled off so that its periodic implosions would be limited. Our generation of geniuses decided that markets could regulate themselves and stodgy old laws like the 1933 Banking Act were holding back progress. We found out what ‘progress’ means around 2008.
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