[kenberg]

phil_20686, on Feb 5 2010, 09:51 AM, said:

In short I think its clear that there was political and regulatory pressure to increase lending to low credit households. You can read all about it in frankly tedious detail here;

http://www.federalreserve.gov/newsevents/s...ke20070330a.htm

Tedious it is, but I'm working on it!

[Winstonm]

Phil,

As soon as you mentioned redlining I knew you were going to repeat the wingnut fantasy about the CRA causing the crisis. I don't want to be insulting, as you seem fairly bright, but those who make this claim about CRA are simply talking out their ass and trying to cover for their own misguided ideology. But here is the gist of your misunderstanding - CRA only applied to depository institutions. It did not apply to mortgage brokers such as Countrywide Finance, nor to Investment Banks like Lehman Brothers, or to AIG or to the ratings agencies like Moodys. The rot did not occur within the commercial banking system, the depository system, yet that is where the CRA applied, and even then it never required a bad loan be made.

Here is someone who is a hell of a lot smarter than you or me (Barry Ritholz) talking about CRA:

Quote

I have been meaning to get back to this issue, but events in the market have kept me a tad busy.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork

Read the whole story here of why CRA is NOT an issue:
http://www.ritholtz.com/blog/

Barry also made a challenge to debate anyone for their own money versus his from $10K up to $100 over the CRA issue - perhaps you would like to take on his challenge.

[Rain]

http://www.pbs.org/newshour/updates/busine...case_02-04.html

[kenberg]

We should pass lightly over the poetry I think, but I liked reading his reflections. He speaks of the house that he bought in the city in 76 for fifty-four thousand. I bought my townhouse in 70 or 71 for twenty-eight and when I sold it later for thirty something I recall saying "Obviously this can't go on, no one will ever pay forty grand for a townhouse". Well, I'm a mathematician, not a real estate analyst.

Perhaps the lesson to be learned is not only that I am a lousy market analyst, but also the people who earn their living doing it aren't so hot at it either. Although they do seem to be quite skilled at arranging for someone else to bear the burden of putting it all together again.

Still, my mantra is that you buy what you can afford to pay for. If everyone took that approach, we would not be where we are. But then if pigs could fly.....

[mike777]

my guess is all or almost all of us buy a home in the hope we can pay for it the next 30 years, not today, but we understand that is just a guess, often a wild guess.

In any event I dont see that most or almost all of these default home loans were reckless, they may have been but I think we do not have solid facts to claim they were.

OTOH I do think that the speculative loans were, well, speculative.

[Winstonm]

The model broke down because it was lend to securitize and not lend to hold - and that primarily is what made the loans reckless IMO.

These were mortgage brokers who earned fees for making loans - if the loan defaulted it didn't matter to them.

The last year and the current defaults are a different type, though. Those have been caused primarily by the recession and the difficulties in employment.

But most of the 2006-2008 subprime loans were beyond reckless - they were hopeless.

[mike777]

Winstonm, on Feb 10 2010, 09:24 PM, said:

The model broke down because it was lend to securitize and not lend to hold - and that primarily is what made the loans reckless IMO. 

These were mortgage brokers who earned fees for making loans - if the loan defaulted it didn't matter to them.

The last year and the current defaults are a different type, though.  Those have been caused primarily by the recession and the difficulties in employment.

But most of the 2006-2008 subprime loans were beyond reckless - they were hopeless.

1) I am a mortgage broker and i make an insane reckless loan, I make billions of them.



2) The real issue is why in the world can I resell reckless, super reckless loans. I mean this logic seems to be based on the greater fool theory. That the capitalist system is nothing more than the greater fool.

3) mortgage brokers make say.....1 billion in fees but they have ten billion or 50 billion in capital at risk if they cannot resell the loans.

[kenberg]

mike777, on Feb 10 2010, 09:12 PM, said:

my guess is all or almost all of us buy a home in the hope we can pay for it the next 30 years, not today, but we understand that is just a guess, often a wild guess.

In any event I dont see that most or almost all of these default home loans were reckless, they may have been but I think we do not have solid facts to claim they were.

OTOH I do think that the speculative loans were, well, speculative.

The trick is to make sure that people speculate with their own money. Or with their employer's money if they are employed to do so. Perhaps they thought they were, but in fact it is I and every other citizen that has been left holding the bag.

The difference between the loan I had and m any of these speculative looans is, as I understand it, pretty clear. Of course if I lost my job or suffered some catastrophic financial reserve, there would be a good chance that I would default. To protect against this, the bank wanted to know many things, for example if I had tenure (I did). But barring catastrophe, my finances were such that I could make my loan payments. On a fair number of these loans, as i understand it and I think is generally acknowledged, more was needed. In particular housing prices had to continue going up. The loans were set so that interest rate would or at least could go up, the idea was that the loan could be renegotiated when the equity increased through this rise in value. Basing a loan on such an assumption is taking on a different sort of risk. One is just a normal unavoidable risk of life, the other is placing a market bet.

Fundamentally, the professionals were supposed to know better, and minimizing the persception of risk for unsophisticated home buyers is not something the industry can be proud of. But worst of all, when it all came apart, it wasn't their money. When the ***** hit the fan, they were in their yachts watching from a safe distance.

[mike777]

kenberg, on Feb 10 2010, 10:28 PM, said:

mike777, on Feb 10 2010, 09:12 PM, said:

my guess is all or almost all of us buy a home in the hope we can pay for it the next 30 years, not today, but we understand that is just a guess, often a wild guess.

In any event I dont see that most or almost all of these default home loans were reckless, they may have been but I think we do not have solid facts to claim they were.

OTOH I do think that the speculative loans were, well, speculative.

The trick is to make sure that people speculate with their own money. Or with their employer's money if they are employed to do so. Perhaps they thought they were, but in fact it is I and every other citizen that has been left holding the bag.

The difference between the loan I had and m any of these speculative looans is, as I understand it, pretty clear. Of course if I lost my job or suffered some catastrophic financial reserve, there would be a good chance that I would default. To protect against this, the bank wanted to know many things, for example if I had tenure (I did). But barring catastrophe, my finances were such that I could make my loan payments. On a fair number of these loans, as i understand it and I think is generally acknowledged, more was needed. In particular housing prices had to continue going up. The loans were set so that interest rate would or at least could go up, the idea was that the loan could be renegotiated when the equity increased through this rise in value. Basing a loan on such an assumption is taking on a different sort of risk. One is just a normal unavoidable risk of life, the other is placing a market bet.

Fundamentally, the professionals were supposed to know better, and minimizing the risk for unsophisticated home buyers is not something the industry can be proud of. But worst of all, when it all came apart, it wasn't their money. When the ***** hit the fan, they were in their yachts watching from a safe distance.

But is was our money at risk......it was the owners money at risk, it was the loan officers job at risk.


I mean if you think the government can project 30years of future risk better than the owners ok...but why?


Again my main point is that most, the vast majority of these loans were not reckless.


If you do not trust the owners, the top management, the loan officers too not make lots and lots of reckless loans, than what do you replace the system with?

Government employees?

This is not a post against no regulation but at least let us start with enforcing the laws, rules on the books.

[mike777]

Keep in mind:


1) people who deposit money in my bank, they are loaning me money.
2) They know I will loan that money....ten times over
3) they know these loans, all of these loans are risky.
4) The owners know all of the above.


btw you have tenure


1) You can still be fired.
2) you may have to take a paycut
3) you may retire inless than 30 years\
4) you may leave your tenured position over the next 30 years
5) you may die
6) you may get super sick
7) I borrow money to loan to you for 30 years but you pay your loan off early, interest rates move against me....
8) etc.

bottom line my loan to you has alot alot of risk and YOU HAVE TENURE!

[Winstonm]

Quote

) The real issue is why in the world can I resell reckless, super reckless loans. I mean this logic seems to be based on the greater fool theory. That the capitalist system is nothing more than the greater fool.

Hyman Minsky described this process well IMO - the point is reached where the majority of the loans being made are Ponzi, i.e., loans where neither the principal nor interest can be paid but only by refinancing and turning over the loan can the payments be made. We reached that point with mortgage financing and houses priced dramatically above historical mean.

Is this the greater fool - Absolutely. And the greater fool in many cases had names like Lehman Brothers, Bear Sterns, Citigroup, Societe' General, and on and on.

I know Mike has made the statement often that ecomonists do not even acknowledge that bubbles exist nor can they define what a bubble might be - that to me is more a condemnation of prevailing economic thought than proof that names like Minsky, Irving Fisher, and Von Mises had it wrong.

We continue every few decades to prove them right, and then we shake our heads about how could we have possibly seen it coming - and dive right back into theories that are proven to fail given enough time.

Irving Fisher did not accept disequalibrium prior to the Great Depression. Much to this credit it was in disequalibrium he searched for an explanation of the events. His thesis in 1932 about debt-deflation confirmed that he had changed his mind completely. This, IMO, is the mark of a really great thinker - one who can look into his own strongly held beliefs and cast them aside when they prove to be inadequate.

[mike777]

James Dimon says expect a banking wide system disaster every 5-7 years.

[kenberg]

Mike,

I have to go shovel some more snow but here is a little.

Yes, there were various risks in my loan. Although I did not get fired or die, I did later get a divorce and this plays havoc with finances. It's not that risk can be eliminated. Of course it cannot. But making loans based on the assumption that house prices will go up is an extra risk. Over the long run, I imagine they will. In the short run, there are many flat spots. And dips. Taking an informed chance on my job, my health, or my marriage is probably part of the territory for a mortgage banker. Trusting that of course house prices will continue to rise is a different matter.

I know little about banking and investment and actually I am blithely content in my ignorance. But things really became unglued, elections have consequences, and so I must try to understand. Here are a few of my thoughts.


We live our lives,we choose and we vote based on assumptions.Call it ideology, faith, whatever, but we do it. These beliefs are perhaps not exactly wrong, but they are often overstated. Professionals are not always thinking of the long term responsibility of their actions, and for that matter they are limited, often very limited, in their abilities. The consumer is not at all a rational actor but rather frequently uninformed and willing to believe what he needs to believe to justify buying what he wants to buy. Example of the first: It was a while back but I still recall the invitation I received from my (former) bank to attend a lecture on investing. The woman began with common stocks and preferred stocks, explaining that the former are the ones everyone has heard of and the latter are the better ones. Can I leave now? Example of the latter: My wife's son, when he was younger, was telling me of this really great used car dealer who was working with him (an ominous expression) to get him into just the car he wanted. This young man is, thankfully, older now.

If there is money to be made, people will try to make it and it is not reasonable to expect long term consequences to be an effective brake on this. It helps though if the consequences accrue to the person making the decisions and especially helpful if the consequences are not too distant in time. No doubt some people could get fired for making bad loans if they were really bad, but I suspect that there were considerable incentives pushing in the other direction.

I don't think that most people are either idiots or crooks, whether they are bankers or plumbers. Or mathematicians. Some are, most aren't. But people are people and thinking that they will act rationally after fully weighing long term consequences and taking due account of their responsibility to the nation and the world doesn't match my view either.

I am not fond of having loan decisions made by the government, no, not at all. But leaving it all to market forces and the wisdom of bankers doesn't appeal to me either. I'm open to suggestions.

[y66]

Here's Robert Reich's take on a new book titled Reckless Endangerment. Some excerpts:

Quote

The authors, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, an expert on housing finance, deftly trace the beginnings of the collapse to the mid-1990s, when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying.

The authors are at their best demonstrating how the revolving door between Wall Street and Washington facilitated the charade. As Treasury secretary, Robert Rubin, formerly the head of Goldman Sachs, pushed for repeal of the ­Depression-era Glass-Steagall Act that had separated commercial from investment banking — a move that Sanford Weill, the chief executive of Travelers Group had long sought so that Travelers could merge with ­Citibank. After leaving the Treasury, Rubin became Citigroup’s vice chairman, and “over the following decade pocketed more than $100,000,000 as the bank sank deeper and deeper into a risky morass of its own design.” With Rubin’s protégé Timothy F. Geithner as its head, the New York Federal Reserve Bank reduced its oversight of Wall Street.

A tight web of personal relationships connected Fannie, Goldman Sachs, Citigroup, the New York Fed, the Federal Reserve and the Treasury. In 1996, Fannie added Stephen Friedman, the former chairman of Goldman Sachs, to its board. In 1999, Johnson joined Goldman’s board. That same year Henry M. Paulson Jr. became the head of Goldman and was in charge when the firm created many of its most disastrous securities — while Geithner’s New York Fed looked the other way. As the Treasury secretary under George W. Bush, Paulson would oversee the taxpayer bailout of Fannie Mae, Freddie Mac, Goldman, Citigroup, other banks and the giant insurer American International Group (A.I.G), on which Goldman had relied. As head of the New York Fed, and then as the Treasury secretary, Geithner would also oversee the bailout

The real problem, which the authors only hint at, is that Washington and the financial sector have become so tightly intertwined that public accountability has all but vanished. The revolving door described in “Reckless Endangerment” is but one symptom. The extraordinary wealth of America’s financial class also elicits boundless cooperation from politicians who depend on it for campaign contributions and from a fawning business press, as well as a stream of honors from universities, prestigious charities and think tanks eager to reward their generosity. In this symbiotic world, conflicts of interest are easily hidden, appearances of conflicts taken for granted and abuses of public trust for personal gain readily dismissed.

All told, the nation appears to have learned remarkably little from the near meltdown. Fannie and Freddie, now wards of the state, currently back more than half of all new mortgages, and their executives are still pocketing fortunes. Wall Street’s biggest banks are a fifth larger than they were when they got into trouble, and the pay packages of their top guns as generous. Although the rest of America has paid dearly, we seem more recklessly endangered than ever.

More recklessly endangered than ever? Car 54, Where Are You?

[Winstonm]

Quote

All told, the nation appears to have learned remarkably little from the near meltdown. Fannie and Freddie, now wards of the state, currently back more than half of all new mortgages, and their executives are still pocketing fortunes. Wall Street’s biggest banks are a fifth larger than they were when they got into trouble, and the pay packages of their top guns as generous.

Probably Obama's greatest failure: the waste of a good crisis.

[kenberg]

A few comments:

The re-appearance of this thread was fun, I got to see what I wrote a year plus ago and it does not seem totally stupid. Hot damn.

An interview with one of the authors:
http://www.npr.org/2...inancial-crisis

A quote:
The American people realize they've been robbed. They're just not sure by whom.

I watched the HBO movie, Too Big to Fail. Interesting but not greatly informative. Ed Asner played Warren Buffett, that was sort of fun.

Volcanoes cannot entirely be controlled. Neither can hurricanes or earthquakes. But we must try to keep them from destroying us. Just ask the dinosaurs.

Robert Reich: I don't trust him. I cannot exactly justify this. I have instincts about people and I don't trust him. Back when John Edwards was riding high I didn't trust him either. I am not suggesting Reich is the skunk that Edwards is, but I think he, Reich, is more interested in ideology than in careful reflection.