Greed is inherent in all human activity.
The problem as I see it was that when the banks packaged their loans, the institutions which bought them did not properly evaluate the pools to uncover the bad loans and the bad lending practices which produced them.
Caveat emptor.
And as part of this entire process, fold in Freddie and Fannie.
I disagree that the problem is greed...because what is greed but self-interest where individual conscience has been confused or obscured.
It may all be a mess and complex derivatives may have played a large part in permitting the sale of bad loans, but ultimately it all goes back to the CRA and Freddie and Fannie and the muddying of the lending business by government interference.
BTW, Europe is another matter...and their problems are not unrelated to the influence of socialism and the unions.
That said, the growing complexities of the industry and the ignorant acceptance by buyers of shoddy lending products (including credit default swaps) did their part to contribute.
As a retired investment banker, I would tend to agree that there is a lack of exercise of conscience, but I have never known conscience to be the glue that held together business of any kind...it is the customers who must demand quality, not government or the manufacturers or sellers. It is up to a buyer to make sure that he is getting a good product. It the buyer is negligent, there will always be some con man to provide a pig-in-a-poke.
And how about investors being sold MBS’s that were rated as AAA by the banks? Tough luck then they should have checked the thousands of loans individually instead of believing the con men at the banks is that what you mean?
Then the banks get bailed out but not the investors sweet deal for those connected and that’s what banana republics do. If it was just Caveat emptor why are the NY Fed, Pimco, Blackrock, Allstate, MBIA, Fannie/Freddie all suing the banks? Surely they should have known better.
Fannie/Freddie were not nationalized until after the melt down and now they are just being used as another way to bail out the banks with our tax dollars.
Statistics prove BTW that the CRA had little to do with the housing meltdown it was the sub prime loans the liar loans that caused the crisis. Those were invented by the banks who gave up good safe lending practices that had served our nation well for years. As such they should have eaten the losses just like they ate the profits.
As I said they did this globally. Look at Ireland they were doing fine until their politicians tried to force them to pay for all the bankers greed. The CRA had no influence there.
Unlimited credit for GSEs seen as backdoor bailout
http://www.reuters.com/article/idUSTRE6044YU20100105
“The very best its million-dollar executives can do is claw back a penny on each bubbly subprime dollar?”
http://finance.fortune.cnn.com/2011/01/03/is-fannie-bailing-out-the-banks/
Have you ever read a CDO product offering? I mean, really read it?
Even if you have the sort of advanced math that I’ve had from doing signal processing classes as part of an EE degree, the math in some of these securities is deliberately obscuring the details. Huge statistical hand-waving went on inside some of these securities. After I finally ground my way through one of these beastly things, I had to come up for air (it took me like a week of evenings...) and ask “Who in the hell is actually READING these things? There cannot be anyone who is buying these things who is actually performing for-real due diligence!”
They’re just too complicated. Most straight bond offerings aren’t particularly thrilling readings like some bodice-ripping romance novel, but one can nut out the real risk factors therein if a person applies themselves to grinding through it. The CDO circular I got into was a masterful job of “if you can’t dazzle them with brilliance, baffle them with BS!” that used to be the province of academics. Huge statistical assumptions were made... without any foundation in actual facts of real estate markets.
That was in early 2007. From that, and some of the personal information I gathered walking around real estate developments in Reno, NV later that year, I concluded we were going to be in a world of hurt. I was estimating a 25% fall in housing prices. Obviously, I was wrong and misunderestimated the ultimate depth of the decline.
What I found was people who knew nothing about real estate cycles were buying one house to live in, and a second next to them (or two houses on either side of them) with IO loans for pure spec on housing prices. I asked if they were supposed to occupy the houses, but the people got real dodgy on answering that question most of the time. Wanted to know who _I_ was, why was I asking these questions, etc. From that, I can conclude that there was mortgage fraud going on all over some of these developments. Not the “organized crime” type of mortgage fraud the FBI seems to be going after, but the “Mr. Jones telling a little white lie” kind of fraud, where someone buying a house next door lied to the mortgage broker about living in the house. The broker, who wanted his/her fees and paycheck, goes along with the fraud. By the time the note is sold the first time, hey, no one is verifying any of the loan origination data. The securitization of this crap then completely obscures the facts on the ground as to loan quality.
The result was that the market buyers fell back upon the ratings of the government recognized credit rating agencies (S&P, Moodys & Fitch’s), who put gold-plated ratings on paper built on top of crap. Why did they do this? In part because the bankers were paying for the ratings, in part because the ratings agencies didn’t have the math background to really pull apart the security overlay from the bogus paper underneath. And none of the ratings agencies verified any of the collateral issues that are now appearing in courts across the US WRT MERS and assignments. I suppose that’s probably not the job of the ratings agencies, but still - someone should be verifying that the collateral is, you know, actual and factual.
Then there’s the issue of complete laziness on the part of many investors to get dirty and look into what they’re buying. We owned only about a quarter-mil+ of RMBS and banking stock, but that was enough for me to want to drive through new developments when I had spare time and poke my nose around.
Banks that owned billions or tens of billions? Feh. They could not be bothered to actually send someone out on the ground and ask “Hey, who is actually buying all these houses in Vegas and Reno? Because we’re not seeing enough new registrations of cars to track with the sales of houses... we’re not seeing enough retail sales taxes in these counties to jibe with an actual increase in population to fill all these houses.” Nevada realtors kept claiming that they were the “fastest growing state” umpteen years in a row... but if you were there in person and started looking around, you saw a LOT of things that simply did not add up.
Cost of an investment bank to send out a couple of young turks with per diems and a rental car to poke their noses around? Chump change. Hell, even if the banks allowed the youngsters to stay every night at a whorehouse, they would have come away far better off than they did with their hands-off approach.
If I have to stab down my finger upon the whole financial landscape of the last 20 years and say “They should take the majority of the blame” I’ll be pointing at the three large ratings agencies. Why? Because they’re the fall-back for most bad credit investing decisions: “Well, I can’t be held to account, because after all, S&P rated it AAA!” S&P then hides behind the FIrst Amendment, in effect saying “Well, we can say anything, and you can’t hold us liable because that might stifle our freedom of speech!”
This has to stop. If we take the three ratings agencies out of the picture, then investors must either do their own homework, or the market will accord ratings to debt via alternatives like a CDS market on the paper vs. underlying debt classes. The CDS market will have to define what a “credit event” is for the state muni bond (because right now, there is no “bk” event, as there is for corporate paper), and these will probably include things like late payments and restructuring. Still, if we have a fair and open market in credit insurance on muni paper, that provides the buyer of that paper with some indication of what the market thinks of the risk on that paper going forward.
The brutal truth is that the ratings being stamped on all manner of debt by these ratings agencies are just nonsense in the extreme. I don’t care if we’re talking muni, corporate or government paper now. Caveat emptor should be the rule of the day, and either we get rid of these poor excuses for partners in fraud, or we make them liable for their ratings. The latter course of action might make them respond to things like CDO’s by saying “We can’t actually determine what the credit quality is here, it is simply too complicated to model...” which would say a lot to the market as well...
Freddie/Fannie: I completely agree they’re a part of the problem. But from the defaults in the higher credit quality conforming loan market, I have to say that CRA just doesn’t ring true as a primary cause of the size and scope of this melt-down. If we want to talk about only the sub-prime markets and in only some of the markets previously red-lined, OK, I’m on board with that small segment. When I look around Reno and Vegas now, tho, those weren’t houses being sold on CRA-induced loans.