Wall Street's dirty, rotten scoundrels
blogs.suntimes.com
blogs.suntimes.com
If in the end it was the home owners who shouldn't have bought homes that caused the collapse, what could the likely regulation be? Seems to me ultimately it would be "people must be protected against themselves", that is, it would be a patronizing regulation that would assume that people in general are too stupid to take care for themselves. In turn, this would take away the capability for people to make decisions for themselves. In short, now maybe too many people owned homes, then too few people would own homes.
Personally I think that any regulation that pretends to know better what is good for people than the people themselves is flawed on principle.
What should of course be illegal (and probably already is) is fraud. Telling people they can afford something they can't afford could be fraud, to be decided on a case-by-case basis.
The really scandal to me is that they don't seem to teach anything at all about personal finances in school - at least in Germany they didn't. I guess it is just not a prerequisite or even counterproductive to making you a docile, useful worker.
The problem with placing the blame on the homeowners is that the state stepped in and saved some of the parties in question from counterparty risk. Yes, you should not take out a mortgage that's too big. But if you default the bank should also take a loss for doing such a bad job in giving you a loan.
AIG provided hedges against these bad loans. That, obviously, was a bad business move and they went belly up. But the intermediate banks never felt this counterparty risk because AIG was bailed out by the state.
The moral hazard is that the banks made bad loans and when the homeowners defaulted made large amounts on the hedges (sometimes more than the original capital of the loan). That would never have been possible without the taxpayer bailout, hence the anger.
It's was a fantastic PR move by several banks to publicly parade when they had paid off the bailout loans. The truth seems to be that it was peanuts compared to the money that flowed out from AIG through the hedges made.
The inexplicably generous benefits to the counterparties.
The more than rumors that AIG's insurance units' investments were of low grade (i.e. a lot of this toxic waste).
The fact that the government (NY's, i.e. Elliot Spizer) trashed AIG's corporate governance a few years before the denouncement and basically made their leaders' job pleasing it vs. doing the right thing.
This one example of AIG is not one I'm comfortable as of yet using for an object lesson.
As for the pay offs/backs, it was a matter of public knowledge/record that some of the firms that were made to take bailout loans ("you will not be allowed to leave this meeting until you sign") didn't need them ... the whole point was that the Treasury wasn't signaling to the market which companies were at death's door (e.g. three time loser Citibank) and which were OK (e.g. Goldman).
What I still don't get: wouldn't it make more sense to direct the anger at the bailout, that is, the government? The same guys who are now calling for regulations? Why trust them now?
With respect to blaming homeowners, I was referring to the article which blamed lenders to homeowners.
Anger at those who borrowed more than they should have is inchoate and can stay that way since it brings its own punishments, anger at those making the bailouts is focused and effective. E.g. voting for the TARP was one of many reasons Utah Senator Bennett lost his bid for nomination.
That's peachy. If those homes shouldn't have been bought, why were banks making the loans in the first place? Because they could immediately transfer the risk to other parties, who didn't know they were shoddy loans.
In a market with information asymmetry, that clears over years rather than days or weeks, I do find it quite distasteful to blame the home buyer.
Yes, they shouldn't have taken the loan out in the first place, but beseeching the population to be more "responsible" in the future (for some value of responsibility), as if this will somehow avoid disaster in the face of structural hazards, is either naive or disingenuous (pick one).
Because if they didn't, the Federal Government came down upon them like a ton of bricks.
This was one grand and mostly bipartisan experiment, the difference between the two parties being one of degree, e.g. "ownership society" (G. W. Bush) vs. "let's roll the dice" (Barney Frank). ADDED: A decades long experiment, going back to the New Deal when e.g. Fannie Mae was created in 1938.
To make it work, they obviously had to pump the system so that banks didn't hold onto the paper but could write new loans as they sold off the old ones. This had the not necessarily intended effect of separating the underwriting from the risk it created.
Getting back to the point about buyers, unless you're a libertarian raw of tooth and claw and e.g. want to let anyone agree to any sort of loan at any terms (e.g. payday loans as a milder example), yes, a population in general does need to be forced to be responsible. All the more so when from top to bottom (e.g. White House and the Congress down to loan originators) the establishment has ... established so many structural hazards.
Nevertheless, as you say, it is group behavior and greed - I don't think any kind of regulation can prevent that. People will just find other ways to screw up. And I think it IS fair to blame the greedy people at least a little bit.
As for banks having no risks, I don't really buy it. Could they count on the bailouts?
Some of your comments strike me as a little naive and ill informed.
For starters, it wasn't just the housing bubble the caused the collapse.
Secondly, it wasn't long ago that banks wouldn't lend to people who didn't have a stable income. Patronizing? Maybe. But did you know that they specifically targeted loans at people without an income? No bank can profitably loan to people like that! In Germany the banks are far more regulated; there really is no comparison.
Telling people they can afford something when they can't isn't fraud. Never has been, either.
I agree that better education is a step in the right direction, but no education is going to compensate for group behavior. When you earn roughly as much as your friends do and they all buy big houses in good neighborhoods (that they obviously can't afford) then you're going to want a similar house too. It's human nature. If nobody in the group could get a big mortgage the problem would disappear.
Regulation has kept banks from acting irresponsibly in the past and regulation can keep banks from acting irresponsibly in the future.
That may be true but it hasn't kept them out of serious trouble or from requiring bailouts. As I recall, the major trouble they avoided was direct risk from German home buyers, but e.g. commercial real estate has been another matter.
I'm not familiar with this movie and only skimmed the fine article, but it's worth pointing out the systemic global nature of this bubble and crash. The US wasn't the only place to have a residential housing bubble or solvency and liquidity bank crises.
I think we pretty much have to acknowledge that there was a global credit bubble that expressed itself in different ways in different places (e.g. the Japanese didn't really exit their lost decade) and work backwards from that.
I was referring to the theory put forward in the article.
"Telling people they can afford something when they can't isn't fraud. Never has been, either."
But saying something has an AAA rating when it really is junk might be fraud?
I still don't get how a bank can be irresponsible. At worst, they should just go broke. If they decide to give a loan to somebody with no income, it is their risk. If that person can't pay, the bank loses the loan. If they manage to insure it (in a legal way), OK.
That's the whole problem - banks, lenders, lendees, BP - they don't know what's best for themselves. And because our system has been specifically deregulated, these schemers were able to completely game the system.
err... what?
He's demonstrated the issue perfectly. Most people, him included, understand absolutely fuck all about derivatives, trading etc, their opinion being based solely on misleading and misinformed opinion pieces in the press.
Edit: I can only assume that if he's that offended by derivatives he doesn't have car insurance, home insurance, health insurance or any other kind of insurance.
While you're right about his error regarding the 'computer-driven' aspect as it relates to these instruments... it's a big part of the problem in flash trading and front-running to game the system.
Perhaps you'd like to take some interest in the real functions of investment.
Might be worthwhile to also investigate issues of credit-creation bias and how that's been working-out.
Free Enterprise isn't about who can be most creative in developing the most ridiculous gambling methods and disguising them as 'financial innovation'.
In overall thrust Mr. Ebert's piece is on the money... at least what there is left of it for regular folks.
Adam Smith is a good source.
There is no money in bad debt. There is money in shuffling bad debts. And that's what we had. Every bad loan requires atleast 2 good ones to cover it. And if you have a few bad ones you raise the rates. But when all you have are bad ones what do you do?
Even insurance has its limits, thats why reinsurance exists, to bail out the big guys when they've stretched themselves. Ask any Floridian about how they feel about home owners insurance? Car insurance is easy the risks are known and easily modeled. Home insurance is easy money until you have a major disaster. The governor of Florida had to threaten to shutdown all of Statefarm's business because they didn't want to pay claims after katrina and Rita.
No one knows fuck all about derivatives. Even the people that are supposed to know know fuck all about them. They're not in the business of holding derivatives, just shuffling them. As long as they could shuffle them, convince someone else to buy them (clients), and make a profit they didn't care.
And that's the point. When one company does it they have an edge, it's dangerous but the market can absorb the loss. Losing Barings Bank in 1995 was the same thing though on a smaller scale. They went bankrupt, the market picked through the carcass.
When they all do it, we are vulnerable. There are no others to pick through the pieces. Hell they had to foist Leyman brothers on BofA because if no one took the bad debt then people would realize they were gambling. People realized it anyway and boom goes the dynamite.
In this case Richard Fuld of Lehman took home $480 million even as the company was falling apart. Billions in bonuses all around. Ebert thinks that's highly unethical.
Traders/quants/etc snort cocaine when dealing with billions of other people's money, including mortgages and pension funds, according the article. Ebert thinks that's highly unethical, too.
So this isn't about Roger Ebert's technical understanding of the matter, it's about traders acting against the interests of their clients, and not giving a fuck about it. I think Ebert is perfectly qualified to comment on that.
This is a misstatement that rises to the level of invidious lie in context. That's his compensation over 15 years (1993 to 2007), much of it in stock. His net worth was around a billion before the crash in large part thanks to that stock. Now ... it's not so much.
And this system has become completely divorced from any useful risk-managing effect derivatives were originally created for and is now creating impossible-to-manage risks of its own, and more importantly, is having a huge net negative effect on the economy.
Rather than mediating between those who have money to invest and those who need money to create value, the financial industry has in large parts become a parasite that sucks profits out of the economy while providing no value of its own.