Posted on 09/19/2008 11:51:15 AM PDT by agooga
SJB: You want answers?
Barney Frank: I'm think I'm entitled.
SJB: You want the truth?
Barney Frank: I want the truth!
SJB: You can't HANDLE the truth!!
SJB: Son, we live in a world that has liberals. And those liberals have to be fought by everyone who loves freedom and prosperity. Who's gonna do it? You? You, Chris Dodd? Conservatives have a greater responsibility than you can possibly fathom. You weep for careless, irresponsible mortgage borrowers and you curse sound lending practices. You have that luxury. You have the luxury of not knowing what I know: that sound underwriting and credit practices, while inconvenient, saves our economy from ruin. And the existence of sound, well-capitalized banks, while grotesque and incomprehensible to you, is essential to a free and prosperous economy...You don't want the truth. Because deep down, in places you don't talk about at Georgetown parties, you want those banks there. You need those banks on that wall.
We use words like down payment, income verification and credit history...we use these words as the backbone to a safe and sound financial system. You use 'em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the economic system which the free market provides, then questions the manner in which the free market provides it! I'd rather you just said thank you and went on your way. Otherwise, I suggest you buy a defaulted mortgage and save us some dough. Either way, I don't give a damn what you think you're entitled to.
SJB: Did you order the banks to lower their credit standards?
Barney Frank: (quietly) I did the job the Rats sent me to do.
SJB: Did you order the banks to lower their credit standards??!
Barney Frank: You're goddamn right I did!!
The cattle prods of these mass movements are those who hype these things through the media (such as ‘get your interest only loan now!’, or ‘invest in this high earning piece of paper’) who typically turn around and sell short stocks they don't have, but do purchase as the market spirals downward at a fraction of what it's worth.
For example, AIG is a sound company - they took some losses, and had already planned sales of assets, but there was no reason for the stock to become virtually worthless. The 85 billion is a controlled liquidation of many of the non-core assets of the company, and it's possible that they'll survive out the other end, but odds are that since they've lost the investor confidence, they will likely be absorbed.
To my mind, the finger-pointing is much like that bit of gas when we were young. The person who smelt it, dealt it. The same people who are on a witch hunt to find out who caused this mess are, indeed, usually the people who did. Sure, greed by those in leadership harms the bottom line, but they are mere drips in the bucket compared to hype and hysteria that the financial broadsheets dish out.
If you look back, I'm sure you'll find mocking articles about anyone who'd not use derivatives to cover themselves in the event of credit default, even in the smallest of transactions. You'll find articles saying what a great thing these interest only loans are, touting investment property in hot markets, articles on flipping properties, etc. On the covers of these publications, this week, are stories about the horror the market they created and advocated has become.
The investment banks that also did commercial banking are actually doing alright: Bank of America, Citigroup, and JPMorgan Chase.
I would add SEC poor management of leverage requirements for companies like Lehman and M/L. They are being increased dramatically now, but from low levels the SEC bought into. One of the causes of the Depression was SEC failure to increase margin requirements in the late 20’s to contain speculation.
Also the AIG failure relates to Credit Derivatives, which I think are explained well by this Free Republic post link. This is a guess on my part, because I have not found the time to read my 12-page printout of the article. http://209.157.64.200/focus/f-news/2085468/posts
The specific problems of institutions, financial instruments and the rules that were followed or ignored or nonexistent is very complicated but in general the problem is very simple.
Financial incentives for self-enrichment are so powerful that they are almost always underestimated by the rule-makers in business and in government. When financial incentives are underestimated they give financial power to those individuals who are wrongfully enriching themselves and this in turn leads to the spread of seductive financial incentives to others in order to facilitate the interests of the folks who first went wrong.
It’s not unlike a Ponzi scheme wheren most of the victims of financial fraud are also perpetrators and conspirators to a greater or lesser degree.
Both political parties are trying to make hay with the financial crisis but it must be kept in mind that some of the bad things people do result from human nature that has changed very little since the days before there was a Democrat or Republican party.
By all means investigate the specifics of what went wrong, but don’t ignore the breathtaking power of financial incentives to shape human behavior.
This agency has always been extremely understaffed, on purpose.
Here’s a complication to your comments.
When the transnationals figured out that remittances by illegal and legal immigrants was big money(mostly because of unprotected borders the immigrant population has soared), they decided to find ways to cash in on them.
The government has been issuing community reinvestment act credits to American and Mexican banks that participated in the UN/Millennium Development plan by lowering the rates they charge for remittances.
They’ve been using this stuff to social engineer the economy into a globalist tool.
What idiot lends to someone who, for example has an income of $5000/year on a $600,000 house? This has happened.
Zero down. Low down payment. Interest only. 40-year mortgages. Balloon mortgages. 125% reverse mortgages. No income verification.
I would spend 10 minutes cursing if I weren’t so angry.
On the docket=national health care. Social security. Hurricane recovery. Winter fuel prices. Financial bailouts making confetti of industry giants.
Where is the money going to come from?
I've been asking that alot too.
The only replies are taxes + inflation, etc..
So far, if it's really our money going out it's equal to many thousands of dollars per just in the last few days.
“By all means investigate the specifics of what went wrong, but don’t ignore the breathtaking power of financial incentives to shape human behavior.”
I guess this is central. But, what can be done to remove the incentive? What was done by individual lenders, on the face of it, seems legal, but basically immoral.
Write shoddy loans you know will never be repaid, cash huge checks, pass the bad paper on to the other guy. Repeat.
Wrong.
Glass-Steagall set industry boundaries between banks, investment, insurance and real estate. Repeal permitted this present collapse, as money from one business could be moved around to another division to cover losses.
The big boys, the top 5 banks, put aside billions of US dollars from their reserves to cover this loss period and are outsourcing H1B visas like dams broke to pay South Asians $6000/year instead of US citizens’ salaries. It’s the labor version of what’s happened in finance, robbing Peter to pay Paul.
No, I'm saying that, with respect to Wall Street, default risk, particularly correlation, was poorly modeled. Everyone involved just failed the comprehend the potential for the level of defaults on recent vintage loans. The crisis occurred because leveraged positions in packages of these loans. "Wall Street" was quite rational, given the default risk modeling. The issue is that the models were profoundly wrong. The press and the "folks," as BOR likes to call them, are just too disinterested about this stuff to think about it very much. "Wall Street greed" is an easy answer to all financial problems. Unfortunately, all explanations must fit the prefered morality play.
5. Democrats blocking McCain's legislation to reform Fannie/Freddie in 2005
6. Democrat corruption siphoning millions via Fannie?Freddie into the pockets of cronies like Johnson and Raines and into Democrats' political campaigns (the biggest being Dodd's, Obama's, Kerry's)
Not at all. The far left has always had a deep hatred of Phil Gramm for some reason (probably because they are all "a bunch of whiners"), but the fact of the matter is that the repeal of parts of Glass-Stegall was necessary to put US financial institutions on a more equal footing with their foreign competitors. The only "bad" parts of the Gramm-Leach-Bliley legislation were Democrat amendments.
The cause of this problem isn't insufficient regulation; the cause is government interference in the market. The implied government backing of FNM meant that some collateralized debt obligations seemed to be far less risky than they would have been in a free market, resulting in them being mis-priced and encouraging institutions (such as insurance companies)that traditionally only dealt in conservative investments to over-leverage themselves with these "safe" instruments.
Certainly there are a number of villains (most of whom will be rewarded rather than punished for their actions, thanks to the bailout(s) currently planned) who were instrumental in creating this problem, but Phil Gramm was not one of them.
How does this explain Bear, Lehman or ML, which had no deposit-based banking ops (real estate lending arms were funded though capital markets) and no insurance divisions? Moreover, GSA did not prohibit investment banks from dealing in mortgage backed securities. Your best bet is to focus on “Main Street” and ask yourself: Why did “Wall Street” assume so few deadbeats in its default modeling?
“No, I’m saying that, with respect to Wall Street, default risk, particularly correlation, was poorly modeled.”
Ahh... You’re saying it was lack of lender’s knowledge and foresight as to how many of the loans would default and what impact the defaults would have for the bottom line.
But if the lenders believed these toxic loans could be easily absorbed, why were they so cunningly bundled and sold off to unsuspecting buyers?
That ain’t what the historical research shows. You’re going to have to show that the banks with securities affiliates did worse-—and they didn’t. They did better. Any time you diversify risk, the system is stronger. That’s why virtually every free market economist there is has supported the repeal of G-S.
You blame the crappy buildings on illegal immigrants? I blame that on the contractor - who probably wasn't illegal. My father was a contractor. The buck stopped with him.
I'm not for open borders and would prefer a reasonable immigration policy, but even I have to admit that most illegal immigrants around here (Mexicans) work their butts off in the heat.
“what can be done to remove the incentive?”
One thing that could be done is to somehow prevent businesses from hiring their own independent auditors. I am an auditor by training although I haven’t worked in this area for many years. I tend to see everything in terms of balance sheets and assets and liabilities that are understandable.
If the smart businessman can’t explain to me, the stupid auditor, how he calculated the value of an exotic asset or liability then I would have a serious problem in attesting that the balance sheet is fairly stated. However, if I were a staff auditor in the employ of an international audit firm and my boss was pressuring me to close out the engagement I might decide that the client’s bullshit valuation model is just the way things are done in this industry. Imagine how many young smart auditors in this situation have decided that their queasiness was stupid and that they would rather be smart and close out the job and get a good performance review from their manager.
If auditors were given an incentive to find things wrong with a company’s financial statements they could find all kinds of things wrong. I don’t know how you could set up such an arrangement but I do know that the only way to defeat a bad financial incentive is to set up incentives that push in the opposite direction.
So in answer to your question, beats the heck out of me!
The capital markets were a spring of liquidity that funded very large loan volumes. Lenders who did not fund loans through deposits could have done nothing without this liquidity. The “unsuspecting buyers” in the capital markets made the same bad judgments about default risk.
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