Posted on 12/23/2007 6:13:39 PM PST by txzman
BASICALLY, a crossroads was passed in the Drexel/Milken scandals. Although hundreds and perhaps thousands of men and women were profiting from misconduct, only a few people, including Mr. Milken himself, went to prison. And even he emerged from prison a very rich man (and by what I see here in Los Angeles, a model citizen).
Today, in the midst of the mortgage mess, we see people breaching their fiduciary duty and getting away with it. A few may lose their jobs and wander off to a wealthy retirement. But the ordinary stockholders of the banks and mortgage companies are staggered.
(Excerpt) Read more at nytimes.com ...
If a loan is made that the borrower can't afford, or the borrower isn't made aware of all the terms, isn't that a problem with the lender?
If the borrower lies on his loan application, or takes a loan to buy a house for speculation thinking "i'll just walk away from it" if home-prices don't go up enough, isn't that a problem with the borrower?
You say that the "packagers" (structurers?) shouldn't have "lied" about the risk. I don't know who you think "lied" or how you think you know that. But anyway, since you think these things were riskier than advertised, haven't you asked yourself why they were risky? The answer is: because of the probability that these loans wouldn't be paid back. Right?
So given that you are aware that there was a large probability that a loan to a borrower wouldn't be paid back, how can you simultaneously assert that the lenders and borrowers weren't the "real problem"? Are not fraudulent loans, and borrowers who don't pay back, problems? You seem to take those things for granted. Seems to me that attitude is the real problem.
Since when is it "okay" and "to be expected", especially in conservative thought, for people to borrow money from other people and not pay it back? What happened to responsibility?
I’m afraid you don’t understand the concept of risk. If you know the true level you can manage it and profit from it. True, risk is only applicable to a fallen world but that is the world we live in.
Which is the part did you think I didn't know?
I'm corresponding with people who are implicitly asserting that Wall Street "lied" about the risks of these instruments (whose loss of value Wall Street is being hit with, so the complaint doesn't make much sense, but whatever). The same people are saying that lenders/borrowers weren't the "real problem".
But if there is more risk than anticipated, it's because of the practices and behavior of lenders and borrowers. I'm simply pointing out that the complaint that (1) risk was greater than advertised/stated and (2) lenders/borrowers are not the primary reason for the troubles, is inconsistent.
While the article is well-written and expresses feelings that I agree with, I have trouble with the lack of action-orientation. I am pleased that Goldman Sachs refused to share their client list with him.
But there needs to be an outcry for adequate actions to punish the guilty and avoid a recurrence. Here are the contributors and the behaviours that some of them did to contribute to the problem.
Realtors
They work for a 6% commission and will tell prospects anything to try and get the sale.
Buyer/borrowers
They want to own a house and have been lead to believe that they can’t go wrong buying even if they have to exagerate their earnings.
Mortgage Brokers
They work on commission and are motivated to get borrowers cheap money from banks.
Bank Lending Officers
They work on bonuses and are motivated to close a large number of deals.
Bank Executive Management
They work for sales bonuses and know they can sell off mortgage loans to Investment Banks.
Investment Banks
They work on bonuses are are motivated to package up a large number of offerings and sell them for a fee.
Ratings Agencies
Their job is to make an independent assessment of Investment Banks Offerings and assign a rating that indicates the risk of principal losses.
Portfolio Managers
They work for bonuses and are motivated to generate the greatest returns for the amount of risk they are allowed to take.
So who is resonsible for the problem? All of the above. Who can avoid a recurrence? It seems like the Investment Banks have the responsibility to ensure that their offerings are properly rated. They cannot blame the ratings agencies. Who oversees them? The SEC.
Without the Investment Banks playing games with these offerings, the chain would be broken and the rest of the guilty chain would have had no point in continuing their collusion.
Your logic reminds me of a person when the Minneapolis I-35 bridge collapse was being discussed. He seriously (at least I think so) suggested that there should be a sign on each end of every bridge in America. It should say “Cross at your own risk”. If anything happens and you don’t get to the other side, well, tough.
bump for publicity
Wall street doesn't disclose risk properly and when you omit that material fact it is fraud. The onus is certainly on the investor to protect himself but, remember, many of these things were rated AAA and, overnight, the bid for these things disappeared.
I was a CMO salesman once upon a time and the heroes were the guys who could dispose of the toxic waste tranches. Nobody cared about the guys who were selling the less risky stuff because the profitability of CMO deals depends on getting rid of the s%%t.
They didn't care who bought it and, more often than not, some little unscrupulous regional dealer bought the stuff and crammed it down the throat of some small, regional insurance company. Wall Street knew exactly what was going on when that happened.
Wrong people? We have CEO who earn huge amounts by defrauding their customers and then sail off into comfortable retirement. These men are bandits who have no high moral standing than a bank robber. As Bill Buckley has said, the worst thing about capitalism is the capitalists. There is so much slight od hand in these matters, that no one sees the tricks that are played. We get Enron,... we get everything going back to the South Sea Bubble.
This is a sweeping, grandiose charge - that "Wall Street" (all of it?) doesn't disclose risk "properly". How should it/they disclose risk?
The onus is certainly on the investor to protect himself but, remember, many of these things were rated AAA and, overnight, the bid for these things disappeared.
That's why investors should look at more than just "ratings".
There is definitely a problem with the ratings, they ought to be improved, they will have to be improved if there's going to be a chance of recovering something approaching previous liquidity, and everyone realizes that.
I still don't see how that adds up to Stein's charge that banks were violating someone's "fiduciary trust".
I was a CMO salesman once upon a time and the heroes were the guys who could dispose of the toxic waste tranches. Nobody cared about the guys who were selling the less risky stuff because the profitability of CMO deals depends on getting rid of the s%%t.
In other words, investment banks are businesses and they try to maximize returns.
Why are people continually surprised by this?
Which CEOs? How did they defraud their customers, exactly? Which customers?
Sounds like what's really going on are that banking CEOs are an obvious target because they get such huge compensation. Banks employ those CEOs, therefore this whole thing is the banks' fault. QED
Bump
Ben Stein is shocked — shocked I tell ya! — that there is greed on Wall Street.
Banks will have to improve the ratings if they want anyone to be interested in these instruments again. That much is clear.
One link in the chain you left out is the appraiser. Too often the appraiser is not independent, and the appraisal process is rife with corruption. Appraising itself is a bit of a voodoo science, but we've seen people gaming the system the last few years and getting the appraisal they want is a key part of that. I suspect a lot of the HPA we've seen recently has been the result of a feedback effect, appraisal-inflation -> inflated loans. Making the appraisal process more objective (if this is possible, and I think there might be ways) would lead to an improvement IMHO.
Anyhow, none of this really buttresses anything Stein said. Remember, he is angry about the banks' "fiduciary" responsibility (it's not clear how many of these transactions actually involved fiduciary responsibility on banks' part; certainly, Stein doesn't know) and he thinks people should go to jail.
Many of the things you cite (workers working on commission thus having all the wrong incentives etc.) are indeed contributing factors to a bubble market such as this, but I still have a hard time seeing why that means someone needs to go to jail per se.
If my logic "reminds you of" that then you have misunderstood what I'm saying. Let me know if I can help,
p.s. In the analogy you propose, who in the subprime mess has had trouble "getting to the other side of the bridge"? Who has been hurt by it? Think about that please,
...but I still have a hard time seeing why that means someone needs to go to jail per se
Because the public demands a scapegoat after every economic debacle.
I didn’t know that “Precious Boy’s” father had been foolish enough to put his money in the mortgage market - maybe it was because of his Hollywood addiction.
We can start with O’neal, Cayne and Prince, the three lords who were requested to step down because they failed properly to oversee the “risky business” in which their firms were engaged. No public accounting will be made of their stewardship. In part because the fraud is systemic and only if the damage is great enough to collapse the business will there be any judgement sweeping enough to touch the “lords.”
Not entirely true, as the banks had developed their hedging strategies, risk and return models, and such, based on older data from the world of good-credit borrowers and collateralized (10-20% down) loans, where those who originated the loans had to hold them on their books until they were paid off. They then sold combinations (tranches) of loans originated under entirely different circumstances, and did not price in the additional risk; and furthermore did not tell anybody.
The exposure is worldwide, and is one of the reasons banks are refusing to lend or to borrow from one another. We are facing a liquidity crisis, not a credit crunch.
Cheers!
...oh, and Merry Christmas.
Any business relies on the mutual trust of those it does business with. On Wall Street especially (when I say WS I mean the major firms, household names) there has to be trust. Why do you think it hires legions of analysts to give investors an "informed" decision process.
You and I both know that when a firm is stuck with a stock or bond it can't move then suddenly it becomes a "hot" investment.
When you're talking about peoples' retirement fund, college fund or housing fund they need to know the downside of each and every investment they make.
In fact, any good broker or institutional salesman should suggest a "stop" for anything he/she is selling. I know it isn't done but it surely should be.
That's probably because these people are (were) employees of private companies, not elected public servants; this was an issue between them and their firms (and stockholders). Why would there be a "public accounting"? What would that even mean? These firms are involved in risky businesses, these guys had positions of high responsibility, and the firms lost money, ipso facto these guys failed. So, they were fired. What else is supposed to happen?
The harm done was to the firms and their investors and perhaps some of those who bought into the firms' funds that held positions in these marked-down instruments. I'm not sure how that translates into a harm done to "the public" that requires a "public accounting". This is nothing but a business failure, on a larger scale. Guys responsible for business failures are on the hook for their jobs, certainly, but what else should they be on the hook for exactly? Should these men be flogged? jailed? what?
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