Sunday, November 6, 2011

'I hear your complaints,' Bloomberg said. 'Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that. 'But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will.

"'They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and Congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans.'The subprime thing is in the process of being repeated.

Then banks had to concoct ways to make that worthless mortgage worth something to them. So they found ways to sell what was worthless to a bunch of dupes who they lied to about what they were selling; and then those dupes figured out that they were dupes, and they repackaged the whole thing to another set of dupes. And that kept happening, until finally they run out of dupes -- just like the end of a Ponzi scheme. At the end of the day, there weren't any dupes left to buy these worthless mortgages.


Baxter said...

The anti-regulation party was in control when sub-prime paper found it's way into AAA packages of bundled mortgages. Clearly, the cop was not on the beat and his absence was intentional.

Fannie and Freddie never originated a sub-prime loan. Not one. Fan/Fred is a victim, not a perp, of the alchemic CDOs produced by our capital markets.

Hags said...

Actually, there was never any regulation ever proposed by anyone that would have contained the sub-prime bond market disaster.

If you want to read a fabulous account of how the whole thing went up and then crashed you should read Michael Lewis' book The Big Short. (Lewis also wrote Moneyball, The Blindside, and Liars Poker.) He tells his story through the lives of real people. In The Big Short he traces the paths of three individuals or small groups who saw through the insanity and fraud that was being perpetrated.

I am an unapologetic capitalist, but what the banks and the investment banks did was aid and abet (in the case of the banks) and commit (in the case of the investment banks) a fraud. Consumers were offered loans they could not repay, the banks knew it and didn't care because they collected fees and sold the loans to investment bankers, and the investment bankers duped the rating agencies (who seemed to be happy to be duped so they could collect their fees) into giving AAA ratings to BBB loans. Then the investment banks sold the bonds to chumps all over the world, and they kept a bunch of the bonds for their own account. Oops.

It is a great book about interesting and strange people who saw through the ruse. And they made millions for being right. However, they did not make nearly as much as the bond traders who carried out the fraud.

I think the only regulation that could have been written that would have at least mitigated the disaster would have been one that would limit the amount of leverage that investment banks could use. They were up to as much as 40:1 and they bet billions and they were wrong. Dead wrong. When the crash came there was not enough cash money to pay up, not only at Bear Sterns and Lehman Brothers but there wasn't enough cash money in the whole system. That is why the Feds loaned over $80 billion to AIG. AIG had sold insurance to the investment banks but AIG didn't have the cash to pay off. By the Feds loaning $ to AIG, AIG was able to pay off the investment banks and inject cash into the system.

I believe Congress and Clinton and Bush II all contributed to the push for unqualified lending. There is more than enough blame for everyone. The current Administration and their Democratic Congress pushed through "reforms" that have resulted in the Too-Big-To-Fail banks becoming even bigger. Thanks for that.

Nothing is fixed. More work is needed, and it isn't clear to me who is going to do it.

All the best,


Baxter said...

Gosh, Hags, we are 100% in agreement.

I would add that the cops that were supposed to be on the beat were intentionally absent as uber advocates of a Laissez-Faire approach. Christopher Cox, to this day, doesn't acknowledge his large role in the failure. The anti-regulation culture of the GOP runs deep and as this episode demonstrates, risks catastrophe.

President Clinton erred in the bipartisan repeal of Glass-Steagall in 1999. Yet another victory for the Law of Unintended Consequences.

I have been a fan of Michael Lewis ever since Liars Poker. Boomerang is on my night stand and the Big Short soon will be.

Baxter said...

By the way, I became a big fan of Michael Lewis thanks to Eric Martin, who gave me Liars Poker for my 30th birthday...

Eric Martin said...

Hag's comments are spot on.

I saw Michael Lewis speak in DC last month.

Jim G. said...

Excuse me for pissing on your panty party, but, the entitlement mentality that brought us the community reinvestment act FORCED banks to lend to unqualified owners. The government promoted home ownership. This is not a fault of free markets. It is a fault of manipulated markets.

Baxter said...

The Community Reinvestment Act became law in 1977. To blame it for a housing collapse 31 years later is utterly silly.

The cops were intentionally off the beat. Chief players in our capitalist game were allowed to run amok absent supervision. The results speak for themselves.

After all that, the GOP presidential candidates still loudly tout deregulation. Apologies to Pete Seeger; when will they ever learn?