damnum absque injuria

October 9, 2008

Burning Down the House

Filed under:   by Xrlq @ 7:10 am

This video is required viewing for everyone who is thinking of voting next month.

13 Responses to “Burning Down the House”

  1. tgirsch Says:

    I’m partial to this video.

  2. tgirsch Says:

    (good part starts at about 2:30)

  3. tgirsch Says:

    Daniel Gross has the counterpoint:

    I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can’t find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?

  4. Xrlq Says:

    Interesting idea of a counter “point,” that. If the Politically Correct Mortgages Act can’t explain every single stupid thing that anyone did to contribute to the current meltdown, then golly gee, the Politically Correct Mortgages must not have had anything to do with it at all! Certainly no more than Freddie and Fannie have to do with the subprime mortgages they bought from Countrywide and others.

  5. tgirsch Says:

    Except that nobody here, least of all me, is arguing that the CRA and Fannie and Freddie had nothing at all to do with it. What we argue is that they exacerbated but did not cause the problems we currently face. Whereas to hear you and others on the right tell it, if not for the CRA, everything would be peachy-keen and swell with the economy…

  6. Xrlq Says:

    If your definition of “here” is this thread only, then I agree that no one has said any such thing “here.” But if “here” means the blogosphere generally, or even this particular blog, I beg to differ. You should see that thread where the other TGirsch said the GSEs had nothing to do with the subprime loans my former boss issued and sold to said GSEs.

  7. tgirsch Says:

    So did the GSEs buy ALL of the subprime loans? Did they even buy MOST of them? If not, then the point still stands that there were/are a whole lot of subprime loans that the GSE had nothing to do with.

  8. Xrlq Says:

    I don’t know what percentage of loans, subprime or otherwise, were sold to whom. I’m tempted to say “most,” but if the question were “what percentage were structured so that they *could* be sold to Freddie or Fannie, either by the issuer or on the secondary market?” the answer is damned near all.

  9. tgirsch Says:

    So your argument seems to be, then, that were it not for Freddie or Fannie, the subprime loans wouldn’t have been made at all, rather than just being structured differently. I find that difficult to swallow, especially considering some of the other irresponsible practices that were going on (e.g., over-leveraging) that had literally nothing to do with subprime mortgages. Financial companies were plenty capable of being irresponsible without Uncle Sam’s help. Sure, the .gov’s mortgage interference exacerbated some of those behaviors, but I don’t think it comes anywhere close to approaching the level of root cause.

  10. Xrlq Says:

    Absent the GSEs, the loans either would not have been made, or they would have been made on very, very different terms. Common sense dictates that any lender will be much more cautious when issuing paper he may not be able to re-sell vs. paper he knows he can easily unload anytime.

  11. tgirsch Says:

    If true, that brings us, ironically, right back around to Glass-Stegall. :) The “bad actor” lenders were easily able to unload, but (I’ll have to dig for this) only about a quarter of it went to Fannie/Freddie. They unloaded the rest via MBS, made much easier to do since many of these banks had their own investment banking arms through which to do so. Even friggin Amity Shlaes has acknowledged that the repeal of Glass-Steagall was a factor here.

    Were Fannie and Freddie part of the problem? Absolutely. Were they the root cause of the problem? Absolutely not, for a lot of the reasons discussed above. As I’ve been saying repeatedly, here and elsewhere, there’s plenty of blame to go around. A lot of the blame falls to my own party in this — they were active in the kinds of deregulation that led us into the mess we’re currently in. But only one of us is trying to argue that the whole mess is principally the fault of the other party.

  12. Xrlq Says:

    How much of it actually went to Freddie and Fannie is a relatively minor detail. The key is how much went to somebody who bought it at least in part because he knew he could sell it to Freddie and Fannie. Incentives matter. As to the Glass-Steagall bit, I’m still waiting for your example of any investment bank deliberately creating a bad MBS it couldn’t sell to anybody, all to benefit its affiliated lender. I don’t think you’ll be able to find any such evidence. MBS were around long before GLB.

    Note that I’m not saying Freddie and Fannie were the only causes of the meltdown, just that GLB wasn’t. The mark-to-market rules of Sarbanes-Oxley surely didn’t help, and that law really did take effect on Bush’s watch, so on that point I’d have to concede that there is some blame to go around (as with Freddie and Fannie reforms, which could have passed through a Republican Congress if 100% of the Republicans had been on board).

    If it makes you feel better (or even if it doesn’t), I think the Fed lowering interest rates a gazillion times was a major factor as well. Making credit too cheap resulted in too many dollars chasing too few houses for years on end, sending real estate prices through the roof and fueling the perception that real estate values would always go up. That, in turn, motivated a lot of foolish business decisions all around. Greenspan and Bernanke did it to avoid a recession, but all I think it really accomplished was to give us a much worse recession later on.

  13. tgirsch Says:

    How much of it actually went to Freddie and Fannie is a relatively minor detail. The key is how much went to somebody who bought it at least in part because he knew he could sell it to Freddie and Fannie. Incentives matter.

    Well yes, they do. But to that point, it still matters what percentage of such mortgages could be sold as such. If you can only sell one in four or one in five (which are the numbers I’ve been hearing), that’s not a whole lot of incentive, at least not if you’ve got any sense about you. Why would you make a lot of investments that you know are bad if you’re only going to be able to dump a quarter or a fifth of them?

    Recall, too, that most of the bad subprime loans being made weren’t of the “get a low-income first-time-buyer into a home” variety being mandated by the CRA. Instead, they were loans being made to middle- and upper-middle class buyers trying to live beyond their means, and hoping that real estate values would continue to endlessly go up. It wasn’t poor minority guy in the city buying his first home that was the big problem; it was Joe Suburb buying that four-bedroom dream house he couldn’t really afford.

    I’m still waiting for your example of any investment bank deliberately creating a bad MBS it couldn’t sell to anybody, all to benefit its affiliated lender.

    That’s not what I’m saying happened. What I’m saying, instead, is that the bad MBS were hidden/buried among other vehicles so that they could be sold.

    Setting aside Glass-Steagall/GLB for a moment, another problem is that the current administration simply doesn’t believe in regulation (at least, not of the financial markets), and as such, what rules did exist were simply poorly enforced. Regulators were far too likely to look the other way and allow the market to self-police.

    If it makes you feel better (or even if it doesn’t), I think the Fed lowering interest rates a gazillion times was a major factor as well.

    On this point, at least, we agree.

    Making credit too cheap resulted in too many dollars chasing too few houses for years on end, sending real estate prices through the roof and fueling the perception that real estate values would always go up.

    And that, to my mind, is a much larger contributing factor than Fannie/Freddie, and why we would have seen something similar even without them.

    Lenders weren’t making bad loans en masse because the Big Bad Government made them do it. They were doing it because money was really cheap, and in the short-term, they were making an assload of money doing it.

    Now, to some extent, I’m sure the Fannie/Freddie/CRA stuff helped exacerbate the bubble, but that’s all it did. With cheap money and lax regulation, we were going to have those practices anyway.

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