Posted on 11/07/2009 9:11:04 AM PST by FromLori
John Reed, who originally helped merge Traveller's Group with Citibank with Sandy Weill, is performing a mea culpa for creating megazombie Citigroup (C):
Bloomberg: “I’m sorry,” Reed, 70, said in an interview yesterday. “These are people I love and care about. You could imagine emotionally it’s not easy to see what’s happened."
“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity."
Reed also apologized for essentially helping repeal the Glass-Steagall Act:
“We learn from our mistakes,” said Reed, who wrote an Oct. 21 letter to the editor of the New York Times endorsing a division of banking activities. “When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.”
Read the whole thing >
(Excerpt) Read more at businessinsider.com ...
Glass-Steagall
I thought the GLB-act supposedly killed Glass-Steagall.
“We learn from our mistakes” said Reed
Unsaid by Reed,
But on the other hand we also proffit obscenely from our mistakes.
This is not good. It is suppose to be all Bush’s fault. That is what Obama tells us.
Uh-huh. But we don't all suffer from them, do we?
Sandy Weill on the other hand gets a complete fanny whipping.
Robert Rubin........well this is a family board....'nuff said.
Too big to fail has failed.
“I thought the GLB-act supposedly killed Glass-Steagall.”
Citigroup had been operating in violation of Glass-Steagall for a number of years. Graham-Leach-Bliley made it legal, made the death of G-S official.
Coming from this captain of the banking industry, this is actually a fairly damning evaluation of lassiez-faire capitalism. "What, now that I'm 'a citizen', I have to suffer with the rest of the country with the mountains of crap resulting from my previous government-sanctioned rapaciousness!? My 90-day horizon set things into motion that lasted beyond than the quarter's board meeting!?"
“I thought the GLB-act supposedly killed Glass-Steagall.”
Citigroup had been operating in violation of Glass-Steagall for a number of years. Graham-Leach-Bliley made it legal, made the death of G-S official.
But none of this affects the economy without the BAD LOANS, right?
Scrapping Glass-Steagall opened the door to the flood of bad loans. G-S kept investment banks out of retail banking.
Scrapping Glass-Steagall opened the door to the flood of bad loans. G-S kept investment banks out of retail banking.
But, that’s in regards to Wall Street right?
You still had CRA, and with CRA, you’d still have a bunch of bad loans right?
Or would Fannie Mae not have thrived without being able to repackage them?
Be careful of buying into explanations that are driven by political gamesmanship. The crowd that I now hear pushing a CRA FNMA theme are people who never saw the bubble growing, who claimed that that the “collapse of the bubble” was a media plot to talk down the economy, but who now offer themselves up as experts on the cause of the bubble.
Fanny Mae and Freddy Mac could only buy ‘conforming loans’. This is the sort of loan that requires a downpayment, proof of income, the usual sort of criteria that had been required to get a mortgage. The yield on this paper was low. Fanny Mae and Freddy Mac had made a decent living on it since 1935 and 1970 respectively. Both companies were on the New York stock exchange.
The CRA had been around since 1977. It wasn’t addressed by the Reagan administration, GHW Bush, Newt’s 1994 Republican Congress, nor Dubya (in fact Dubya added fuel to the fire by sponsoring the American Dream Downpayment Initiative). If CRA was going to cause the bad loan bubble it took nearly 30 years to play itself out. CRA was a misguided nuisance for lenders that was working in the same direction as the larger forces that provided the real power for the bubble, but the quantity of CRA loans didn’t have anything near the size sufficient to cause the credit bubble. It’s a matter of scale. Simple math alone prevents CRA from being the prime mover.
The major forces were Wall Street investment banks seeking investment themes that would yield high returns. Industrial lending had been disappearing as American industry moved offshore, and Wall Street was looking for new places to invest. There had always been a tiny market of very high yield retail loans to homeowners, a market serviced by the likes of Beneficial, Aames Home Loans, HFC, and the like. Very high yield on very small loans to customers with less than stellar credit.
But one bright Wall Street guy figured out that this high yield market could get much bigger. What if loans were made to all the people who wanted to by real estate but who didn’t qualify for traditional loans? What if these loans didn’t have any of the safeguards that were contained in conforming loans? What if these loans were bundled and securitized and sold off to investors?
This was the genesis of the bad loan tsunami. It could have been stopped if Glass-Steagall had been enforced, since these investment banks weren’t allowed to make retail loans. But instead of enforcing G-S it was scrapped.
The volume of subprime loans went up exponentially. Wall Street provided warehouse loans to storefront mortgage brokers, who initiated the loans for a fee and sold the paper back to Wall Street. No one in this process was regulated by the CRA. They were making these subprime loans for their own profit. And these loans proved to be enormously riskier than subprime conforming loans. In the idea of removing risk from their creation the derivatives market grew on top of this lending. The numbers involved in all of this grew into the trillions of dollars. If you were aware of this as it was happening you could see the train wreck coming.
No one in this process was regulated by the CRA.
But CRA was attached to the GLB-act. If these institutions wanted to benefit from GLB they had to be in compliance with CRA. That’s one thing I can’t get past.
And...I can’t believe anyone who has looked into this cannot tell this bubble was going to pop no matter what.
I’ve seen TWO instances where the Clinton Admin made changes to the CRA, one being the Cuomo announcement, and the other being that CRA was attached to GLB in order for Clinton to sign it.
It did. What’s missing here is the fact the Travellers deal went through first. So, glass-steagall had to go, pronto, since it was obviously not lawful for that kind of deal to go through in the first place. Congress likes to do stuff like this. Just a few hundred thousand greasing the right palms and one of the most important depression era regulations was expunged. In part this directly lead to the final collapse of the American economy.
“I’m sorry” is acceptable for a mistake.
CRA has been around since 1977. There was no bubble in subprime loans during the first 25 years of its existence.
GLB passed in 1999 opening the mortgage market to investment banking. The amount of subprime lending exploded, and much of it was now high-risk and non-conforming. The rise and collapse of the subprime market occurred in less than 10 years.
There has been a raft of studies by the likes of the FDIC, the Office of Thrift Supervision, the Federal Reserve, and private firms. In the world of subprime lending, 50% of subprime loans were made by independent mortgage brokers and were not subject to CRA. 25% of subprime loans were made by bank subsidiaries and affiliates and were only partially subject to CRA. Only 25% of subprime loans were fully CRA regulated. CRA loans were conforming and low yield. The great excesses in subprime lending occurred in the non-regulated sector where you had zero-down loans, no doc loans, payment option ARMs, and a host of similar high-yield innovations. These loans were highly sought after by the investment community because they promised high yields. They also turned out to be time bombs for those unlucky enough to have been involved with them.
Boring, conforming, low yield CRA loans have proven to be as safe as other conforming loans since they use similar criteria to vet the borrowers’ ability to make payments. CRA is probably a bad idea just like all other government mandated social engineering, but it doesn’t involve enough money to have created the credit bubble. That took the firepower of Wall Street looking to create a large new market to invest in. And once Glass-Steagall was out of their way they poured huge amounts of money into mortgages and the related derivatives market.
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