Posted on 12/15/2011 9:14:27 AM PST by Starman417
60 Minutes, as usual, had a very nearly excellent program last week on the economic collapse, and they were all upset because no one has been arrested; no particular person appears to be under investigation. They have a good reason to be upset, but they seemed, at least in this report (and in several previous programs), to be clueless as to why.
What happened at the end of 2008 changed history and the direction of the United States. Treasury Secretary Hank Paulson goes to President George Bush and tells him, “The banks in the United States are about to collapse. We need TARP. Let me have nearly a trillion dollars, and I can take care of this.”
Then 10 or so huge banking conglomerates are called in and they are told that they are going to take a huge, temporary loan, and no one is to talk much about it. If a bank is in good shape, they take the money; if a bank is ready to collapse, they take the money. The explanation, which seemed reasonable, was, we do not want the public to know which banks are solvent and which ones are not. The problem was, so many of these banking conglomerates had a huge amount of bad housing investments in their portfolios.
At first, Congress said no. Then our economy very nearly collapsed. The Dow Jones dropped 778 points on at the end of September, 2008, right after Congress refused to pass the TARP legislation. This was the greatest net loss in Stock Market history, when $1.2 trillion of wealth was lost in one day.
TARP was immediately passed; money was left on the table for the next administration, and, eventually, hundreds of institutions were bailed out. As a result, the momentum for Republican candidates McCain and Palin stopped and they began to lose ground. The Democrats capitalized on this, blaming the Republicans, and Obama blamed George Bush. and the Democrats took over the Presidency, with strong majorities in the Senate and the House.
If you will recall the Obama campaign, you heard President Bush and his economic policies being blamed, over and over again, for the market crash. TARP was not strongly questioned, but it was clearly Bush’s fault, at least, according to Obama and the media. Democrats successfully blamed George Bush, the banks and Wall Street, and said it was all their fault for the market crash.
So, here it is, 3 years later, after 2 years of super-majorities by Democrats in Congress, and, for some reason, these evil bankers and evil Wall Street types are not being pursued for their criminal acts. In fact, it turns out that Wall Street is giving far more money to Democrats than to Republicans. Furthermore, it was Wall Street that got bailed out, both under Bush and under Obama. Those same evil bankers and financial types that the media told us were at fault.
(Excerpt) Read more at floppingaces.net...
No one to blame?
We had:
1. Congress passing CRA to give mortgages to people with bad credit.
2. Home buyers lying on apps with the full cooperation of loan officers and bank upper management. Speculators bought multiple properties hoping for a quick killing.
3. Bankers packaging what they knew to be non-performing sub-prime loans into bonds.
4. Rating agencies that sold the junk bonds as AAA to idiot pension fund managers, et al, worldwide.
5. Major banks not filing with counties when they transferred ownership of mortages via MERS. Foreclosure mills forging signatures when original wet-signature mortgages had been lost/shredded.
Throughout this entire fiasco the regulators were asleep.
There are plenty of crooks to pursue with fines and asset forfeiture.
Good article. It all leads back to our govt. and those people will not investigate themselves!
And after Frank arrest Bush for being stupid enough to believe Paulsen.
Naturally Dems are trying to blame evil, nasty banksters for burning down the financial house. The fact that government lit the torches, handed them to the banksters, and then poured gasoline on the fire is studiously ignored by the nation’s Dems who can’t bear to look in the mirror at the real villains.
Obviously they prefer We the People in Flyover Country come up to DC to “investigate”...and if that happens...they’ll be “investigatin” the height of the local lamposts and sources
knotted fiber....
"Paint 'em all with the same brush and dilute the malfeasance." Roosevelt did the same thing when he declared a Bank Holiday in 1933. A lot of the solvent banks raised hell at being lumped in with the corrupt ones.
The CRA is a red herring ... just look at the numbers in CA, NV and FL ,,, almost none of the foreclosures are in CRA / poor / black / minority areas ... Just because Rush is wrong on CRA and harps continually on it as if it is THE cause of the crash doesn’t make it right.
Great article. Just one point of fact: his criticism of rapid rescore for credit scoring is off the mark.
You can’t rescore a bad risk into a good risk; and, credit score is a only a measure of risk in terms of the lenders record of managing credit, having nothing to do with the other legs of the lending decision such as income, affordability, stability...
A janitor can have the same as or higher credit score than Bill Gates; it has nothing to do with income or ability to pay.
Great article. Just one point of fact: his criticism of rapid rescore for credit scoring is off the mark.
You can’t rescore a bad risk into a good risk; and, credit score is a only a measure of risk in terms of the *borrowers* record of managing credit, having nothing to do with the other legs of the lending decision such as income, affordability, stability...
A janitor can have the same as or higher credit score than Bill Gates; it has nothing to do with income or ability to pay.
But it’s fodder for blog pimps. 60 Minutes does the story, for what it’s worth, and the “citizen journalist” regurgitates it on his “Flapping Lips” blog but truncates it so he can get blog hits. Ah, love the “new media.”
“Pelham, be a sport and explain it to us one more time, would you?”
There’s a number of problems with trying to lay the economic crisis at the feet of the CRA.
The CRA only applied to deposit-taking institutions. That means S&Ls and the sorts of banks where we, the public, have our savings and checking accounts. The CRA did not apply to Wall Street investment banks, hedge funds, and pure mortgage lenders, all of which raised their money through investors.
These non-deposit, non-CRA firms were major players in the development of the subprime mortgage market and the resulting bubble, generating trillions of dollars of mortgages and related derivatives. Trillions of dollars of bad paper is sufficient to generate a global economic crisis. The total amount of CRA loans ever issued simply wasn’t in that league.
The CRA wasn’t specifically about mortgages. It was a requirement that deposit-taking firms make a portion of their loans to the communities from which they raised their deposits. These loans could have been business loans, personal loans, or mortgages.
The law arose from the practice of banks to take deposits from low income neighborhoods and to use those funds to make loans only in high income neighborhoods. The low income customers couldn’t get loans for their businesses or houses despite being long time customers of these banks.
Whether the law is a good idea or not is open to debate. But the law didn’t mandate subprime mortgages. That idea is a post-bubble claim being made by some people looking for a political hook for the crisis, but that claim has to ignore a host of facts that don’t fit.
A comment on some of Darth’s points:
“2. Home buyers lying on apps with the full cooperation of loan officers and bank upper management.”
Probably much more common among independent mortgage brokerages than with banks. It seems to be a side effect of the recent practice of divorcing loan origination from loan funding.
“3. Bankers packaging what they knew to be non-performing sub-prime loans into bonds”
Primarily a practice of investment banks rather than retail banks. IBs were becoming major rivals to Fannie and Freddie, issuing trillions of dollars of CDOs, CMOs, CDOs Squared, and other variations on collateralized mortgage paper.
“4. Rating agencies that sold the junk bonds as AAA to idiot pension fund managers, et al, worldwide”
The rating agencies didn’t sell anything, they simply put their (worthless) ratings on the paper generated by the IBs and hedge funds. Part of the problem is that the rating agencies got paid by the firms that they were rating. But another large factor is that the entire financial industry had deluded itself with a fancy piece of mathematics called Li’s Gaussian Copula Function that led them all to seriously underestimate the risk of what they were doing.
“Throughout this entire fiasco the regulators were asleep.”
That is absolutely true. A belief that “the market can regulate itself” permeated both political parties and many of the agencies entrusted to regulate the financial markets. And the few regulators who did try to do their job were hounded into submission.
When I see one division of Goldman Sachs selling subprime mortgage bonds as AAA while another division was shorting them and buying CDOs on bonds they had already sold, it sure looks like financial fraud.
When it appears to me that the math in the bond prospectus defied common sense, it reminds me of the Dilbert cartoon where the Marketing Guy says, “It looks like criminal fraud, but it’s called “marketing””.
When I see MF Global insiders stealing over $1B and no one has been indicted or arrested, it sure looks like outright theft.
It sure looks to me like our country is afflicted with a tidal wave of white collar crime.
Conservative candidates need to address this crime wave.
Eye-opening article at http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all:
"Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.
"[...] Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. [...]
"It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
[...]
"During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.
"In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.
"In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.
"Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.
"Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up."
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