Explanation for the current financial crisis

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philo

Trad climber

boulder, co.

Topic Author's Original Post - Sep 16, 2008 - 11:39pm PT

By David Corn
July/August 2008 Issue

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.

Gramm's long been a handmaiden to Big Finance. In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the sec's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. "Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.

It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Subprime 1-2-3
Don't understand credit default swaps? Don't worry—neither does Congress. Herewith, a step-by-step outline of the subprime risk betting game. —Casey Miner

Subprime borrower: Has a few overdue credit card bills; goes to a storefront lender owned by major bank; takes out a $100,000 home-equity loan at 11 percent interest

Lending bank: Assuming housing prices will only go up, and that investors will want to buy mortgage loan packages, makes as many subprime loans as it can

Investment bank: Packages subprime mortgages into bundles called collateralized debt obligations, or cdos, then sells those cdos to eager investors. Goes to insurer to get protection for those investors, thus passing the default risk to the insurer through a "credit default swap."

Insurer: Thinking that default risk is low, agrees to cover more money than it can pay out, in exchange for a premium

Rating agency: On basis of original quality of loans and insurance policy they are "wrapped" in, issues a rating signaling certain slices of the cdo are low risk (aaa), medium risk (bbb), or high risk (ccc)

Investor: Borrows more money from investment bank to load up on cdo slices; makes money from interest payments made to the "pool" of loans. No one loses—as long as no one tries to cash in on the insurance.
It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)

But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It's like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm's bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street's biggest players (which, thanks to Gramm's earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. "Tens of trillions of dollars of transactions were done in the dark," says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. "No one had a picture of where the risks were flowing." Betting on the risk of any given transaction became more important—and more lucrative—than the transactions themselves, Partnoy notes: "So there was more betting on the riskiest subprime mortgages than there were actual mortgages." Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

Now, belatedly, the feds are swooping in—but not to regulate the industry, only to bail it out, as they did in engineering the March takeover of investment banking giant Bear Stearns by JPMorgan Chase, fearing the firm's collapse could trigger a dominoes-like crash of the entire credit derivatives market.

No one in Washington apologizes for anything, so it's no surprise that Gramm has failed to issue any mea culpa. Post-Enron, says Greenberger, the senator even called him to say, "You're going around saying this was my fault—and it's not my fault. I didn't intend this."

Whether or not Gramm had bothered to ponder the potential downsides of his commodities legislation, having helped set off an industry free-for-all, he reaped the rewards. In 2003, he left the Senate to take a highly lucrative job at ubs, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis' top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been "key to the growth" of its out-of-control cdo business. (Gramm declined to comment for this article.)

Gramm's record as a reckless deregulator has not affected his rating as a Republican economic expert. Sen. John McCain has relied on him for policy advice, especially, according to the campaign, on housing matters. The two have been buddies ever since they served together in the House in the 1980s; in 1996, McCain chaired Gramm's flop of a presidential campaign. (Gramm spent $21 million and earned only 10 delegates during the gop primaries.) In 2005, McCain told a Wall Street Journal columnist that Gramm was his economic guru. Two years later, Gramm wrote a piece for the Journal extolling McCain as a modern-day Abraham Lincoln, and he's hailed McCain's love of tax cuts and free trade. Media accounts have identified Gramm as a contender for the top slot at the Treasury Department if McCain reaches the White House. "If McCain gets in," frets Lynn Turner, a former chief sec accountant, "we'll have more of the same deregulatory mess. I like John McCain, but given what I know about Phil Gramm, I wouldn't vote for McCain."

As a thriving bank exec and presidential adviser, Gramm has defied a prime economic principle: Bad products are driven out of the market. In John McCain, he has gained an important customer, so his stock has gone up in value. And there's no telling when the Gramm bubble will burst.

David Corn is Mother Jones' Washington, D.C. bureau chief.

philo

Trad climber

boulder, co.

Topic Author's Reply - Sep 17, 2008 - 12:04am PT

Hey Emperor, Arthur Leavitt was the head of the SEC not the Fed. The author got it right. Read it again only slower this time

philo

Trad climber

boulder, co.

Topic Author's Reply - Sep 17, 2008 - 12:07am PT

Here is another one for the right wing(nuts) to desperately attempt to dispell.

McCain Economic Adviser Carly Fiorina's Golden Parachute
September 16, 2008 11:34 AM

ABC News' Lisa Chinn and Jennifer Parker report: Republican ticket mates John McCain and Sarah Palin Monday blasted corporate executives who leave their company with a "golden parachute" and pledged to "stop multimillion dollar payouts" to CEOs, seeming to forget their own top economic adviser Carly Fiorina walked away with $45 million, including a $21.4 million severance package when she was dismissed by Hewlett Packard in 2005.

"We are going to reform the way Wall Street does business and put an end to the greed that has driven our markets into chaos," McCain said at a campaign rally in Florida Monday, as Wall Street reeled with the news that brokerage firm Lehman Brothers filed for bankruptcy and Merrill Lynch was sold to Bank of America.

"We will stop multimillion dollar payouts to CEO’s who have broken the public trust. We will put an end to running Wall Street like a casino. We will make businesses work for the benefit of their shareholders and employees. And we will make sure that your savings, IRA, 401k and pension accounts are protected,” McCain said.

Republican vice presidential candidate Sarah Palin, echoed McCain's comments almost verbatim as she campaigned on her own in Golden, Colo., Monday.

"John McCain and I we're going to put an end to the mismanagement and abuses and on Wall Street that have resulted in this financial crisis," Palin said Monday. "We are going to reform the way Wall Street does business and stop multi-million dollar payouts and golden parachutes to CEOs who break the public trust."

The McCain campaign was asked by ABC News to clarify what a McCain administration would do to "stop multimillion dollar payouts" to CEOs.

McCain spokesman Brian Rogers said McCain supports allowing company shareholders to vote on CEO compensation. However it's unclear how any president could enforce such a measure within a private company.

"What he supports is making sure that shareholders can vote on CEO compensation, right now he's saying they don't," McCain spokesman Brian Rogers told ABC News.

McCain's top economics adviser Carly Fiorina, a McCain campaign surrogate who made the rounds on the Sunday morning talk shows this past weekend and appeared on CNN Monday speaking for McCain, herself benefited from a multimillion dollar payout.

Fiorina was dismissed as the CEO of Hewlett Packard in 2005 after a merger with Compaq floundered, stock prices plunged 50 percent, and 20,000 people were layed off. Fiorina walked away with a $21.4 million severance package.

Asked whether McCain was talking about CEOs like Fiorina, McCain's top adviser who walked away with millions in compensation as her company's stock price plunged, Rogers said McCain was "talking about the issues that are before us today."

"We're talking about Freddie and Fannie and CEOs like Jimmy Cayne of Bear Stearns, Angelo Mozilo at Countrywide, folks that are largely responsible for what happened and walk away with this kind of multimillion dollar payout," Rogers said.

"I don't think there's any analogy there," Rogers said referring to Fiorina.

UPDATE: Obama has co-sponsored a bill with eight other Democrats that is currently before the Senate Banking Committee, S.1181, that would amend the Securities Act of 1934 to include a separate shareholder vote on executive compensation. McCain is not a co-sponsor.

Chaz

Trad climber

So. Cal.

Sep 17, 2008 - 12:13am PT

No *financial crisis* for me.

What the f#ck's wrong with the rest of you?

HighDesertDJ

Trad climber

Arid-zona

Sep 17, 2008 - 12:16am PT

Oh snap. Well if Chaz is all good then I guess it must just be a bunch of whining whiners.

Chaz

Trad climber

So. Cal.

Sep 17, 2008 - 12:21am PT

Maybe not whiners.

For all I know, you may very well have something legitimate TO whine about.

But if you can't make a decent go of it with all the world has to offer, you can't blame anyone but yourself.

coward

Trad climber

Boulder, Wyoming

Sep 17, 2008 - 12:29am PT

Fattrad,

What a lousy defense you came up with for your guy, McSame.

Read closely - the article says that Arthur Levitt was the Securities and Exchange Commission chairman (which he was, from '93-'01). Factually correct. Google it.

Now, why don't you try to stick up for your lousy presidential hopeful again?
You weren't convincing the first time. Just what is BS about the article??

Sounds to me like Phil Gramm is not someone we want for a major economic advisor for the President. But we won't have to worry, because Obama will be President instead. And he just so happens to have a much better plan of how to go about fixing the economy than McCain. But it's too bad we'll all be in such a deep hole beginning the next administration due to the shortsighted gov't policies and greedy Wall Street bankers who have gotten us into this mess to begin with.

McCain's campaign is really going to tank as this economic shakeup continues. His ideas are sadly lacking in the economic department (and in foreign policy, if you ask me...the guy didn't even know that Iraq doesn't share a border with Afghanistan!!)

If you don't respond, I'll assume that you simply can't refute the original post.

Curt

Boulder climber

Gilbert, AZ

Sep 17, 2008 - 12:31am PT

philo

Trad climber

boulder, co.

Topic Author's Reply - Sep 17, 2008 - 12:38am PT

Wow Chaz how thoughtfull of you.

Kind of like a fully able bodied person saying that wheelchair ramps are for whinners because he doesn't need them.
You are a peach.

paganmonkeyboy

climber

mars...it's near nevada...

Sep 17, 2008 - 01:48am PT

you know something ladies and gentlemen ?
the next time any one bitches about federal laws and oversight
ask them when the last time was
that this went the other way
that instead of being greedy little f*#kers
the men playing with all the money
made us ALL money
and didn't just take it all
show me where it went the other way
and didn't ultimately come to this type of event

Every Time this happens this way
and a small select few make BANK
yet people will sit there and tell you
the free market is the holy grail
and given enough time things will work out

the free market watches kids starve to death every day
and will again tomorrow
that's right - tomorrow
here in 2008
someone will STARVE TO DEATH

thats just f*#king WRONG. tell me it isn't...

don't ever forget that while you are counting your money
(yeah, i know...i'm a dammed liberal that thinks its wrong so many are fighting just for drinking water
while a small few - many in our government - who woulda thunk it...
have more than their grandkids will ever spend...)

sweeeet....where do i sign ?

JEleazarian

Trad climber

Fresno CA

Sep 17, 2008 - 02:33am PT

Am I to understand that the federal government has the expertise to protect us from poor investments? For that matter, have they the expertise to pick good investments?

The problem with the "explanation" offered by Mother Jones is that it suffers from at least the following basic economic fallacies:

1. It assumes the federal regulators can protect the financial market from bad investments. This is a free lunch. Where do they get the information to do this? Not for free. What do we lose on the upside for restrictions on the downside? Discussed nowhere.

2. It shows the market with current regulations (plesae don't tell me it's unregulated; it isn't) is imperfect, and therefore more regulation is needed. Showing something is imperfect is insufficient to show its alternative is better.

3. It perpetuates "bailout" myths. If Bear, Stearns was "bailed out," what happened to all the investment of the Bear, Stearns owners?

4. It ignores the moral hazard brought about by governmental intervention in the housing markets. Fannie and Freddie could never have existed or continued as truly private institutions doing business the way they did. Their problems were well known in the financial markets. Certain members of congress (hint: most of them are in the current majority) kept them going.

It is simply a partisan piece, seen as truth by those who want to believe it, and as nonesense by those who don't. It contributes nothing to understanding the current economic conditions. To say that no one knew what the risks were, or where they were flowing in derivatives makes me feel like a genius. I saw them, wrote about them, and discussed them years ago.

If you really want a "villain," blame the Fed for keeping money loose, and the Democrats and Republicans (here I blame both Congress (and thereby both major party presidential candidates) and the executive) for trying to give people money rather than making changes in fiscal rewards that stimulate and reward growth-producing behavior. We had the dot-com meltdown, that many of us saw coming. Now we have the sub-prime meltdown, that virtually all of the insolvency bar saw coming. Please, don't blame Phil Gramm. It's much more complex -- and has many more accomplices -- than just one person, party or philosophy.

John

Curt

Boulder climber

Gilbert, AZ

Sep 17, 2008 - 02:40am PT

Agreed, that Phil Gramm is not the only one to blame--but he is certainly a poster boy for championing the policies that got us here.

Curt

JEleazarian

Trad climber

Fresno CA

Sep 17, 2008 - 02:49am PT

What policies were those?

John

Dr. Rock

Ice climber

Castle Rock

Sep 17, 2008 - 02:54am PT

No one person or one law is to blame.
And it is not some complicated series of events that happened.
It is real simple.
The moral fiber of the business community has been shrinking slowly for so long, that there is now no limit to the new lows that can be sought by the people who think up new scams to make money.

See, in order to make money, you have to know something that someone else does not.
If you do not believe this, open up any book on Economics.
Complicated and boring, why would anybody want to learn that?
Nobody?
Exactly!
So if you suffer school, you differentiate yourself from the guy renting the apartment.
If you want more, you just go for it, only on a grander and more deprived scale.

Then we apply what we learned in school and twist in some screwed up ethics because "if we don't, Joe Blow will, and he ain't gonna beat me, that as#@&%e!"

So this market is driven by hateful, greedy, aggressive, small dick motherf*#kers, these are the guys screwing up the world, and there are a hell of a lot of them, and the numbers grow everyday.

There is very little love left in the world today, and it keeps getting worse, so if you can hunker down somewhere, carve out a niche with some cool, happy people and ride this crap out, well, then you are in pretty good shape.

So it's not republican or democrat, not insurance or real estate, it's just people being as#@&%es, and look at their leader.

JEleazarian

Trad climber

Fresno CA

Sep 17, 2008 - 03:06am PT

I think you're on track, but I see the moral fiber of all of us shrinking. I want as much house as I can get for as little money as I can pay. I think that makes me just as greedy as the person who wants to sell me as little a house as he can get away with for as much money as he can extract out of me.

Frankly, it's not the greed that's changed. It's our "need" for material things. Perhaps because my father was from a really different generation (he was born before the Wright Brothers flew), I saw a simplicity in him that most contemporary urbanites would mistake for stupidity, immaturity or laziness.

The dot-com bubble, the housing bubble and subsequent sub-prime decline, and the inevitable market corrections to come all stem from the same thing -- we want more because we think we need it, and we look for ways to get more without working so hard.

John

philo

Trad climber

boulder, co.

Topic Author's Reply - Sep 17, 2008 - 03:45am PT

Wow. Way to go right wing(nuts). Nothing like obfuscation to cover the disasters of your Republican heros. You are trying to say the issue is that it is wrong to bail out the greedy men. When the real issue is these greedy men were only allowed to do what they did because of the rampant deregulation perpetrated by the past and present Republican administrations. Insiders of these administrations profited very handsomely at the expense of the American tax payers.
Here is a history lesson for you about the Bush Sr. deregulations that led to the Savings and loan disaster that made the Bush family and their Mob cronies so much money.
http://www.campaignwatch.org/more1.htm
It is well documented and well worth the read even if it is long.

philo

Trad climber

boulder, co.

Topic Author's Reply - Sep 17, 2008 - 05:14am PT

Bump because TRUTH is more important than LIES.

dirtineye

Trad climber

the south

Sep 17, 2008 - 08:30am PT

Yes, Leavitt was at the SEC as opposed to the Fed, but there is no doubt that lack of regulatory oversight has gotten us to this point. In fact, had Glass-Steagall not been repealed, this particular economic meltdown could not have occurred. There was a damn good reason that commercial banking and investment banking activities were separated in the first place.

Curt
**
AMEN

And good for your to PMB, and a few others.

But actually, this started about 28 years ago under Ronnie Rayguns. What followed was the idiotic bizarre plan to dismantle effective government and allow savage capitalism to rule.

Under Georgy Porgy the second, we got to see for 6 sad years just how bad it can get when big bizness can take whatever they want from government, including putting industry insiders in charge of 'regulating' those industries.

But anyway, it's not just 8 years, it's not just back to george the first, it's 28 years of willful destruction of American government, so that the rich can rule over serfs and peasants, which is how they would like it.

The republicans have succeeded in recreating the excesses of the gilded age, and placed us at the brink of something that will make the great depression look like the overture for the main performance.

Dick_Lugar

Trad climber

Indiana (the other Mideast)

Sep 17, 2008 - 08:50am PT

Diversify! diversify! diversify!...gold is doing fine:

http://afp.google.com/article/ALeqM5hdD5h1h9WC6lZVQE2fkfezJlnXpQ

I hear bonds will be a good investment now. But don't take my word for it, I'm not a very reliable source, consult with your financial advisor.

Tomcat

Trad climber

Chatham N.H.

Sep 17, 2008 - 09:08am PT

Interesting that Joe Subprime is only mentioned at the start of the article and never appears again.Joe bought more house,or more toys than he could pay for,he lost the house,but has the toys.And started this whole mess by defaulting on his loan.

Everyone else was not able to honor their agreement because of that.

paganmonkeyboy

climber

mars...it's near nevada...

Sep 17, 2008 - 09:19am PT

ya know, everyone wants to blame Joe Subprime for buying more than he can afford, and to a certain extent he is to blame, yes...but not all of this can be placed on reckless consumers' shoulders imho...

what about predatory lenders ?
what about an economy based on debt management instead of producing real tangible assets ?
what about a complete lack of oversite ?

Dirt - you get it - It's class warfare, and don't believe for a second you have the same opportunities as the UberRich - You Don't. They tell you that you do, over and over and over so you aren't burning down their palace, but the reality is You Don't. The field is not level, corporate power is becoming vaster and more consolidated Daily, and you are crazy if you think the system looks at us like it does the Uber-rich...

dirtineye

Trad climber

the south

Sep 17, 2008 - 09:43am PT

PMB wrote:

"what about predatory lenders ?
what about an economy based on debt management instead of producing real tangible assets ? "

Have you seen the documentary abour credit card debt called "Maxed Out"?

IN one segment, this PhD woman from an ivy league school talks about hwo she was asked to give a seminar to Citicorp, I believe, she talked about how they could cut out a LOT of bad debt if they just gave credit to people in amounts they could actually afford. She talked for a few hours, then a man at the back spoke. Everyone turned and paid attention, and she realized that this was the guy with the power.

HE said basically, "we make all our profit on those people who will never be able to pay off their balance, and are stuck making the minimum payment for life."

Another segment dealt with a lawyer who got a case before a judge, adn the judge asked the credit card company "how much is interest and penaties, and how much is principle?" and they said they couldn't answer that.

So the Judge asked well, for the last two years, how much is interest and how much is principle, and it turned out that for every dollar in principle, the cc company wanted two dollars in interests and fees.

And here is another little anecdote from a friend's life, and this is becoming a common trick apparently, this one from Capitol One. They start sending your bill the day it is due, so that when you get the stub they want you to send in, there is no way to pay on time, so they charge a late fee. THE y offer to let you do an electronic payment, which also has a fee (good grief, it's CHEAPER to do that , but they charge a FEE For it??? SCAM) They do this late mailing on purpose, and when you complain they claim the bill is a courtesy, and you should just know when to pay. (of course you don't have the stub with all the info they say like to have) After racking up 150 dollars in late fees, which they refused to remove even though she had never had a late payment before, my pal canceled the card.

Karl Baba

Trad climber

Yosemite, Ca

Sep 17, 2008 - 11:15am PT

One of the major flaws of capitalism is that, if unregulated, monopolies and cartels spring up that hold so much power that markets (and people) are no longer free. Somebody corners the market on something and has those who need that product by the balls.

The current mess is more complicated but is something like putting the real estate in our country in a big blender and making it into a smoothie that nobody can pay for. We need to save the smoothie makers (we think) because we think that will protect us but, in the end, somebody's going to drink that smoothie, the richest of the rich, the last man standing.

Peace

Karl

JEleazarian

Trad climber

Fresno CA

Sep 17, 2008 - 01:58pm PT

The Glass-Steagall Act would not have prevented the subprime lending downturn. Before Glass-Steagall, people still invested in subprime loans. I represented both borrowers and lenders in connection with working out those loans. As to "predatory lending," I've represented many financial institutions, none of which intentionally made a loan to acquire the collateral.

I've certainly seen plenty of "hard money" lenders (not financial institutions that would have been subject to Glass-Steagall or any other relevant regulation) make loans with an eye toward acquiring collateral. I've also represented many debtors against "vulture capitalists" (i.e. those that acquire secured debt -- usually at a deep discount -- with the intent of acquiring the collateral). Banking regulations actually encourage this, and have done so since the New Deal. A non-performing loan is devastating to a bank's profitability. It's better for the banks to unload these "special assets" at a discount, even if they could be paid in full with patience.

Finally, for Karl, you're aiming at a straw man. No one on this board is arguing for NO regulation. This issue is whether the current regulatory scheme is better than having more regulation. Thus far, all anyone demonstrated is that the current regulatory scheme is imperfect. It doesn't follow that more regulation is better.

Since I see I've made this point twice, I'll sign off on this thread. With the cool weather that's come in here, it's time to go climb!

John

bookworm

Social climber

Falls Church, VA

Sep 17, 2008 - 02:16pm PT

http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

and who hired franklin raines as a presidential campaign advisor? not mccain

klinefelter

Boulder climber

Bishop, CA

Sep 17, 2008 - 02:24pm PT

DECEMBER 20, 2006

G.W. Bush - "As we approach the end of 2006, the American economy continues to post strong gains...The recent report on retail sales shows a strong beginning to the holiday shopping season across the country...and I encourage you all to go shopping more."

SEPTEMBER 27, 2001

G.W. Bush - "Get on board. Do your business around the country. Fly and enjoy America's great destination spots. Get down to Disney World in Florida. Take your families and enjoy life, the way we want it to be enjoyed."

circa SEPTEMBER, 2001

G.W. Bush - "Americans must get back to work, to go shopping, going to the theatre [sic], to help get the country back on a sounder financial footing"

stevep

Boulder climber

Salt Lake, UT

Sep 17, 2008 - 02:29pm PT

I don't have much good to say about Franklin Raines. However, he's less responsible for this mess than Phil Gramm and the rest of the deregulation crowd.

More generally, I do expect the govt. to protect us from the Wall Street folks whose goal is to assume large amounts of short-term risk, because hat is the best way to line their own pockets.
Far fewer of those sub-prime loans would have been made, and the economy as a whole would have been less exposed to this risk if there had been better regulation. And certainly there are Dems (and supporters of Dems) that are partly responsible for this problem. But way less so than Repubs, whose main refrain seems to be Greed is Good.

jstan

climber

Sep 17, 2008 - 02:37pm PT

As I remember it to get a mortgage you used to have to:

1. Make a down payment of about 20%
2. Document Income
3. Provide documentation for Net Worth and other liabilities

Then later on when credit evaluations came into existence you got a credit score based on past history of your transaction record.

Most ( and sometimes all) of this went out the window and the government associated(?) entities continued to package these creative(?) loans into securities.

With any sensible government oversight these pseudo government entities would have had to post and maintain additional loan loss reserves to fund the additional risk and the securities would have been sold to the general market only as repurchase agreements having indefinite period.

Why were these creative loans treated the same as loans meeting the standard requirements?

Why?

When the government associated entities found they could no longer fund the additional loan loss reserves the creative mortgages would have remained the properties of whomever wrote the loan. Which is where they should have remained. If that entity were a bank, that bank would have had to explain their business model to the bank examiners of the FDIC. They would not have been able to slip this worthless paper through a crack and so take the profit while avoiding examination.

Chris Roderick

climber

Sep 17, 2008 - 05:11pm PT

The problem is leverage. At my broker if I have a $100 in there I can borrow another $100 to buy stocks. So if I buy $200 in stocks and it stays at that $200 level I have 50% equity. (assets minus debt divided by assets) If it goes to below 40% equity my broker will sell out my stock and repay himself his loan and give me the remainder.

The investment banks, on the other hand, have balance sheets with 30 to 1 debt/equity ratios or, to compare it to the numbers above, 3.23% equity (1/31). Doesn't take much of a move against them for that equity to get wiped out, but they were more concerned about meeting their quarterly earnings-per-share dick-measuring and bonus-determining contests than performing their fiduciary duty of protecting the shareholder's capital.

One of the hazards of the separation of management from ownership.

TradIsGood

Chalkless climber

the Gunks end of the country

Sep 17, 2008 - 05:58pm PT

In fact, had Glass-Steagall not been repealed, this particular economic meltdown could not have occurred. There was a damn good reason that commercial banking and investment banking activities were separated in the first place.

If it weren't repealed JPMorgan Chase could not have bought Bear, Bank of America could not have bought Merrill, HSBC could not have bought Lehman Brothers brokerage subsidiary.

The second part is true. But the banks abilities to purchase these companies safely is precisely because of their ability to raise money by borrowing from thousands of individuals instead of just a few institutions who can pull their money out essentially overnight as happened with the above mentioned investment banks driving them into bankruptcy.

The oversight and risk management of these institutions is going to become even more important. You can expect Morgan Stanley to follow shortly. I will go out on a limb here and predict that Goldman will lose its independence within the year as well.

All of this occurred really because of credit instruments manufactured that were too complex to be valued effectively and were thus both overvalued and illiquid. It happened in the 90s as well, but not on the same scale.

TradIsGood

Chalkless climber

the Gunks end of the country

Sep 17, 2008 - 05:59pm PT

bookworm, use the [ url = "..."] syntax [ /url] to fix your post, please!

Binks

Social climber

i am of the universe and you know what it's worth.

Sep 17, 2008 - 06:14pm PT

Tomcat wrote "Interesting that Joe Subprime is only mentioned at the start of the article and never appears again"

Joe Subprime is responsible for managing Joe Subprime's risk. These firms are responsible for managing the risk of the collective "Joe Subprimes".

Whose is the bigger failure? Pretty obviously a systemic failure, not to be laid at the feet of "Joe Subprime."

Dr. Rock

Ice climber

Castle Rock

Sep 17, 2008 - 06:37pm PT

Halifax UK is failing.
Russia is having problems.

I am pulling my Vanguard, f*#k the penalty, this is the big one.

The Govt is scared shitless that there will be a run, but don't tell anybody.
I predict a run next week.
China might make it.
But that's it.

You guys hang to the Titanic while I get my money out, OK?

It's just a bunch of suits shootin their mouths at this point.
Talk ain't gonna help, we are going down.

I no longer have any faith in the future of the world economy.

TGT

Social climber

So Cal

Sep 17, 2008 - 07:07pm PT

This all started better than ten years ago

The chief culprit isn't mentioned in this article. The youngest sec of housing ever Andrew Cuomo

http://tinyurl.com/4fd9fp

Buckwheat

Big Wall climber

No. Cal

Sep 17, 2008 - 07:19pm PT

Who is in charge of banking oversight... democrats, esp barney frank and senator dodd.

who recieved the most donations from fanny may and freddie mac... OBAMA.

who runs fannie may and freddy mac ex DEMOCRATS. Some are now Obamas finacial campaign advisors, Frank Reigns, etc. Shall I keep going??

This is a democrat scandal that has just begun.

Curt

Boulder climber

Gilbert, AZ

Sep 17, 2008 - 09:46pm PT

"...The Glass-Steagall Act would not have prevented the subprime lending downturn. Before Glass-Steagall, people still invested in subprime loans..."

I assume you mean before the repeal of Glass Steagall? Anyway, that is a ridiculous assertion. Sure, people invested in sub-prime mortgages when Glass-Steagall was in place. However, it is only because regulators were asleep at the switch (and Glass-Steagall was repealed) that securitizing and reselling these crappy mortgages got out of hand.

"...No one on this board is arguing for NO regulation. This issue is whether the current regulatory scheme is better than having more regulation. Thus far, all anyone demonstrated is that the current regulatory scheme is imperfect. It doesn't follow that more regulation is better..."

Another completely nonsensical comment. Of course more regulatory oversight of these financial institutions would have been better.

Curt

jstan

climber

Sep 17, 2008 - 10:09pm PT

Buckwheat:
Prior to 2006 the Dems could not even schedule a meeting room. Probably the lowest point to which this republic has ever sunk. After 2006 they were looking at a 49/51 majority in the Senate. Are they blameless? No. Of course not. But if you support only blameless people, you are going to be a pretty irrelevant person.

philo

Trad climber

boulder, co.

Topic Author's Reply - Sep 25, 2008 - 03:33pm PT

“Capital must protect itself in every way... Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd”.

J.P. Morgan.
on the verge of creating the FEDERAL RESEVE.

stevep

Boulder climber

Salt Lake, UT

Sep 25, 2008 - 04:12pm PT

Joe Subprime should have known better.

But there never should have been so many Joe Subprimes. Too little oversight on lending regulations and too little oversight on packaging those loans into securities that were too risky.

goatboy smellz

climber

स्कन्ध

Sep 25, 2008 - 10:12pm PT

U.S. government seizes Washington Mutual

http://www.iht.com/articles/2008/09/26/business/26wamu.php?pass=true

"The U.S. government on Thursday made the largest bank seizure in American history, taking over Washington Mutual, the severely troubled savings and loan, and selling pieces of it to JPMorgan Chase in an emergency deal intended to avoid sticking the taxpayer with a bill for another bank, according to people briefed on the plan.

For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and had pressed hard for the bank to sell itself. As panic gripped financial markets last week after the collapse of the investment bank Lehman Brothers, U.S. regulators stepped up their efforts, working behind the scenes, and at times going behind WaMu's back to work privately with potential bidders.

Indeed, the seizure and the deal with JPMorgan came as a shock to Washington Mutual's board, which was kept completely in the dark: the company's new chief executive, Alan Fishman, was flying from New York to Seattle at the time the deal was brokered, according to these people.

The shot-gun acquisition marks the second time since the housing crisis began that the government has pushed a troubled bank into the arms of JPMorgan Chase. In March, JPMorgan rescued Bear Stearns as it teetered into bankruptcy protection.

The deal will give JPMorgan branches in California and other markets where it does not have a footprint. But JPMorgan will also inherit a big loan portfolio of troubled mortgages and commercial real estate.

U.S. regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, had been severely depleted after suffering a debilitating loss from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would have cost the fund upwards of $20 billion to $30 billion.

"WaMu's impact could be enormous," said Jaret Seiberg, a banking industry analyst at the Stanford Group in Washington. "That is why we believe Washington Mutual is too big to fail in a conventional sense and you would have to see some sort of government stabilization effort."

"They were a deal machine in the late 1990s and spent the early part of this decade concentrating on residential mortgages," said Frederick Cannon, a banking analyst at Keefe Bruyette & Woods "The thrift business model was breaking down, even as they were building it up."

The takeover of Washington Mutual is yet another black-eye for its primary federal regulator, the Office of Thrift Supervision. It also oversaw IndyMac Bank, another big lender that suddenly collapsed in mid-July, and several other deeply troubled savings banks. Washington Mutual was the largest institution under its watch.

Washington Mutual long insisted that it could remain independent, but the giant thrift had quietly hired Goldman Sachs early last week to identify potential bidders. Among the banks that expressed interest were Citigroup, JPMorgan Chase, HSBC, Banco Santander, TD Bancorp and Wells Fargo. Each had different reasons for making an offer, but nobody could make the numbers work. Several deadlines past without anyone submitting bid.

Washington Mutual had struggled to find a partner earlier this year willing to inject fresh funds in its ailing business. This spring, it balked at an offer from JPMorgan to buy the entire company. Instead, TPG, the big private equity firm, led a group of investors that made a $5 billion capital injection in April."