How Did We Get Here?

I have been mulling a longer piece on the causes of the 2008 fiscal meltdown, but really haven't been able to motivate myself to get it done.  But this piece in the Washington Examiner lays out a couple of the causes that have been largely neglected in the media.

The media narrative has been that the 2008 meltdown was caused by greed; specifically corporate greed.  I happen to agree that corporate greed played a huge role in the collapse of the housing market.  Companies like Countrywide created mortgages where there was a significantly reduced probability of repayment.  Companies like Goldman Sachs....primarily Goldman Sachs...monetized those loans and then created worthless derivatives based on those loans.  When the fiscal house of cards collapsed, they were left holding all the money.

A nice deal....if you are Goldman Sachs.

I also think that individual greed played a role.  Specifically, the individual desire to have more than you can reasonably justify based on your income.  It isn't enough to just be able to "make the payments".

I can recall discussing mortgages back in the early 2000s with a friend.  Someone in his family had just taken out a mortgage where they would not be required to repay any principle.  They just had to make the interest payments.  We both thought they were nuts.

How did the market develop loans for which there was no expectation that the principle would ever be repaid?

It turns out that there was a program created during the Carter administration called the Community Reinvestment Act.  It was designed to help some folks obtain mortgage financing that might not otherwise be able to do so.   A big deal to those that qualified, but not really a big deal in the larger home finance market.

The Clinton administration took that program and put it on fiscal steroids with his National Homeownership Strategy.  The Bush administration changed the name, but otherwise kept the same program in place.  This program broadened the pool beyond otherwise credit worthy poor people to include people who had no rational expectation of repaying those loans.

I don't have the video, but I do recall seeing Mr. Clinton on TV in the fall of 2008 saying that perhaps his administration had been a little too aggressive when it came to boosting home ownership.

With more people buying homes, the price of homes went up.  Speculative investments were made on speculative investments.  Leveraging of debt occurred.

You would still think that the private risk incurred in creating such debts would cause financial institutions to shy away from the so-called "sub-prime" mortgages.  Here is where the government doubled down on a bad idea.

The amount of private risk was minimized by the federal government.  At the time of the meltdown, the U.S. government was almost the sole purchaser of sub-prime mortgages due to the efforts of Fannie Mae and Freddie Mac.

Essentially, the government created the mandate for the loans and then created a market that would offer the loans.  The net result is a tale that should have grown old by now; privatized profits and public risk.

From the article linked above:

"All of us participated in the destructive behavior -- government, lenders, borrowers, the media, rating agencies," said Warren Buffett. "At the core of the folly was the almost universal belief that the value of houses was bound to increase."

There are naturally other elements to the saga.  The influence peddling between members of Congress and companies like Countrywide that prevented the Bush administration from limiting the number of risky mortgages that Fannie and Freddie were snapping up.  The lax enforcement of investment laws by the SEC during the Bush administration.  The gutting of the Glass-Steagall Act (passed by a GOP led congress, signed by a Democrat President) may have also played a role.

It is corporatism...government imposed policies that favor certain corporate interests...writ large.

And the results were unsurprising to anyone that has spent more than a few moments studying American history.

Guaranteed Profit?

There has grown up in the minds of certain groups in this country the notion that because a man or corporation has made a profit out of the public for a number of years, the government and the courts are charged with the duty of guaranteeing such profit in the future, even in the face of changing circumstances and contrary to public interest. This strange doctrine is not supported by statute or common law. Neither individuals nor corporations have any right to come into court and ask that the clock of history be stopped, or turned back.

- Lifeline, by Robert Heinlein




Messrs. Bush and Obama - and most members of Congress - should have the above tattooed on the inside of their eyelids and across their asses.

Punishing The Guilty

As I hope I have noted in the past, there are many reasons for the fiscal meltdown of 2008.  Some bankers, financiers, mortgage brokers, and other unscrupulous actors within the home buying industry clearly acting in bad faith to push people with marginal credit into accepting marginal loan terms.  The 'Occupy' folks are correct to note that the government has not done enough to pursue those private sector bad actors.

But what about the unscrupulous public sector actors?

Shoot The Bastards Instead

The NYTimes has this recent report indicating that the government will....finally....press charges of fraud against some of the architects of the 2008 fiscal meltdown.

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

I have been contemplating a much larger essay on the causes of the 2008 meltdown.  There were many.

It is now patently clear that the size and scope of the meltdown would have been far less were it not for outright fraud on the part of elements of the banking industry.  I read a piece in Vanity Fair a couple years back that made it clear that Goldman Sachs, innovator of the credit default swap form of securities, had the internal position that those securities were bad risks while simultaneously selling those same securities [to] investors.

Were I of a less temperate nature, I might suggest that stringing Goldman Sachs executives and managers up by the balls and letting the crows feast on their rotting flesh is a fit punishment.  Similarly, I might suggest that distaff Goldman Sachs executives and managers be subjected to forcible sex change operations so that they can be strung up by their balls so that crows might feast on their rotting flesh.

I am too much of a lesbian to ever want to hurt a vagina.

Unfortunately, securities fraud cases are notoriously hard to prove.  The second difficulty is that many of the more obviously instances of potential fraud were committed by companies that no longer exist.  Via Megan McArdle:

Securities cases are hard to prove in the best of circumstances--even Eliot Spitzers' famous crusade against Wall Street consisted of getting fairly minor settlements from most of the big fish he went after . . . and losing every case he took to court.  The first mortgage securities case to go to trial, with two Bear Stearns bankers, likewise returned a "not guilty" verdict.  Many of these same banks got themselves in serious financial trouble by gorging on their own toxic mortgage securities, which dims the fraud angle.  Unfortunately, being arrogant idiots with the risk appetite of a coked-up skydiver is not a crime.

On the issuance side, most of the knowing, obviously provable fraud seems to have been at the mortgage broker level, or in mortgage mills that are now out of business.  Proving that someone ought to have known that they were being scammed is harder--especially since they can argue that if they ought to have known, so should the GSEs.

Shooting them where they stand seems a cleaner solution.  I am open to suggestions involving tar and feathers.

Barney Frank - Then And Now

When....ahem....Republican.....President George W. Bush wanted to overhaul the mortgage lending industry, Mr. Frank stood solidly opposed.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

 Now that the damage has been done, he sings a different tune.

“Low-income home ownership has been a mistake, and I have been a consistent critic of it,’’ said Frank, 70. Republicans, he said, were principally responsible for failing to reform Fannie Mae and Freddie Mac, the mortgage giants the government seized in September 2008.

Emphasis added.

Tar and feathers are too good for him.  Links to the respective stories may be found here.

Default On Your Mortgage? Why Not!

If it is good enough for the Mortgage Bankers Association, then it must be good enough for you!

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
www.thedailyshow.com
Daily Show Full Episodes Political Humor Rally to Restore Sanity

Where Were The Protests?

One of the current criticisms of the Tea Party folks that drives me nuts is when people ask why the Tea Party folks didn't protest George W. Bush when he was creating the initial round of bailouts.

Who knew?

At the time we were treated to all sorts of economic horror stories.  Free market economies experience recessions.  The are an unpleasant but necessary part of any healthy, growing economy.  The only way to experience the boom is to have the bust.  It is hard to defend free markets in the middle of a deep recession.  You get called all sorts of ugly names.

Who knew that the problems at AIG might have been addressed some other way?

Who knew that healthy banks would snap up the bankrupt ones right away?

Who knew that Morgan Stanley Goldman Sachs and many European banks would benefit from Congressional largess?

Who knew that part of the problem was federal regulators with the authority to stop the worst abuses were actually spending their time downloading porn?  On Mr. Bush's watch, in case you weren't paying attention.

We were faced with "do this and do it now or else".  Who knew that there were other options?


The ugly fact of the matter is that recessions come and go.  And while some small portion of the money spent in the early days of the recession might have been defensible, the larger part of that money has been summarily wasted.  We would have a healthier economy now if we had simply let the contraction continue until the markets really stabilized.  At least then we would know where we were.

As of right now, we sit with a hole of unknown depth below us as we wait for the next over inflated market to collapse to its true value.

Another Piece Of Invaluable Information

Terry Gross of Fresh Air interviewed author Michael Lewis yesterday.  Mr. Lewis has written a book about the people that made millions, perhaps billions, from the recent stock market collapse.  He started his book, "Big Short", in an attempt to understand why these people has such a different perception of the market than was the case for the rest of Wall Street.

The interview is quite interesting.  One facet of the story that I thought was fascinating was that all of the people Mr. Lewis studied had attempted to warn Wall Street in one way or another.  They were ignored and the rest is history.

I continue to find these kinds of stories interesting.  There is no single cause for the 2008 collapse.  As we continue to learn more about what really happened and why it happened, we continue to find a variety of causes the confluence of which resulted in our current economic difficulties.

A cautionary note, I don't endorse Ms. Gross or her program "Fresh Air".  I spend a great deal of time screaming at my radio whenever I am listening to her show because of her lack of curiosity regarding some subjects and her outright bias regarding others. 

She occasionally has a gem of a program.  This is one of those occasions.

This Is Stimulating

Megan McArdle has a brief piece on administration claims regarding the efficacy of last year's stimulus bill that is worth a read.  Her take on the question of whether or not the stimulus helped?  Sure.  Some.

But nearly as much as the administration is claiming.

I was never a big fan of the stimulus bill for a couple of reasons.  The first reason is that the Congressional Budget Office was predicting a recovery in the second half of 2009 without spending a dime of stimulus money.

The second reason is that it seemed that someone had calculated a dollar value to be spent to cause a certain amount of recovery.  After that, the administration and Congress were hell bent to spend that amount of money regardless of what it was actually purchasing.  Some of the things the stimulus purchased....like the spiffy new main road that I use to get to and from my neighborhood....created jobs and resulted in something of value.  Some of the other things the stimulus purchased.....not so much.  They should have spent more time focusing on what was being bought and less time worrying about how much was being spent.  If there were only $300billion in worthwhile projects, then that is all they should have spent.

The third reason for my skepticism over the stimulus is that I don't think a real economic recovery was ever going to be caused by government spending.  I have the good fortune to speak with business owners and managers during the regular course of my employment.  These people almost uniformly say that there is business out there to be done.  They need to hire more people.  They need new equipment.  There is money to be made and they want to make it.

What is keeping them from doing so?

A Congress and an administration that demonizes corporations and denigrates profit.  A Congress and an administration that continue to promote increasing income taxes for those same business owners and managers.  A Congress and an administration that continues to push for health care reforms that these same business owners cannot afford.  A Congress and an administration that continues deficit spending at rates unseen in 70 years.

These business owners and managers know that such spending isn't sustainable.  If it isn't checked soon, then interest rates are going to climb.  Inflation will return.  And as a result, they will lose whatever they have invested to expand their operations.

The government has spent $287 billion of the $787 billion in stimulus money.  The modest good that it has done is well and good.

But if the administration wants to truly set the country back on the course of economic progress and prosperity, then they would be well advised to cancel the unspent funds, forswear tax increases, and get serious about cutting the federal budget until it is balanced.

Derivatives On A National Scale

One of the unavoidable conclusions that we should draw from the fiscal meltdown of 2008 is that some people were making terribly unscrupulous decisions regarding the borrowing and lending of money.  I've been working on a longer post on the subject for a while, but for the moment consider the following.

One of the largest players in the credit default swap game was Goldman Sachs of New York.  They were busy telling their customers to invest in these derivatives while at the same time they were making investments....or more accurately making wagers....that those same derivative investments would fail.  When the house of cards finally fell, we had money that was leveraged as much as 15 to 1.

I read somewhere that one of the problems with the crash of 1929 and the subsequent depression was that money had been significantly leveraged.  I believe the ratio was...ummm.....15 to 1.  Erg.

With so much bad fiscal news, how can things get worse?

How about having Goldman Sachs create a credit swap for an entire country?  Greece, specifically.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.


Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

 I am not given to reflexively calling for tar and feathers for businessmen, but in this case I may be willing to make an exception.