Month: November 2011

A dissent of sorts, nudging the blame away from the banks:

I have been involved in the mortgage-backed securities market for about 20 years.  Your conclusion that the government did not force the banks to make bad loans is absolutely correct.  Mayor Bloomberg's remarks, for whatever reason, are absolutely false. However, the analysis and blame are much more complex.  By making this an argument of Banks v. Government, as the Tea Party and Occupy Wall Street seem to make, and which the media perpetuates, is too simplistic.

While "the banks" share some of the blame and some banks misled some investors on some deals, I believe those cases were generally isolated and may have slightly exacerbated the problem, but did not cause the problem.  It was a breakdown of the system that caused the problem.  If a bank tells investors that they are investing in a pile of shit (subprime mortgages) and the investors buy them, why should the banks get the blame? 

Even if the bank knows it is selling a pile of shit and separately bets against it, as long as it adequately discloses that it is selling a pile of shit, that is how our market works.  As a capitalist, you can't blame the banks.  If they fail to disclose that they are peddling a pile of shit, they are liable civilly and criminally.  So far, surprisingly, there have only been isolated (though well publicized) cases brought against the banks for misleading investors. 

Why did the banks sell piles of shit?  Because of the Wall Street compensation system that pays annual bonuses upon closed deal, regardless of whether those deals go bad.  They made a lot of money doing so.  The bankers who were more responsible and did not peddle piles of shit were fired for not making as much as their competitors.  So there was a race to the bottom to sell the most piles of shit.

Did the banks believe those deals were bad?  Yes and no.  To a certain degree, the banks knew that there would be some amount of decline in value of bonds they sold, but not to the degree that actually occurred.  One of your comments is a bit off – that the deals were designed to work in a market that never faltered.  That is not quite right.  They were designed for some level of decline, but not the catastrophic level that occurred.  It is an open question as to how stinky the bankers thought their piles of shit were.

I don't find the banks totally blameless, but there are many others to blame:

The investors.  These are not your mom and pop investors, but very sophisticated pension funds and others.  Astoundingly,  I would hear at conferences that they were "chasing yield," which meant that they were seeking higher returns, which meant that they were looking to buy, in my view, risky shit.  Which is why the bankers could sell them a pile of shit.  Further, many of the investors also suffered from the generational issues.  The younger ones did not think that real estate would go down because they never lived through a market crisis and the older ones did not understand the complexity of the new-fangled deals that were being done.  So these sophisticated investors, while thinking they were taking on some risk, took on more risk than they thought.  In their defense, partially, they were buying rated securities.

The rating agencies, along with the complicit investors, also deserve a lot of the blame.  From the early 1990s to the mid 2000s, the deals were getting riskier and more complex, yet the agencies were giving these deals higher ratings.  It was the rating agency imprimatur that allowed the banks to turn a pile of shit into golden nuggets.  Once again, the blame was due to compensation. The banks would shop around to the various agencies to get the best ratings, creating a race to the bottom.  If the ratings were too low, the agencies would not get paid or would not get future deals.  The "false" ratings colored the market and left the regulators asleep.

But the blame goes further.  The deals could not get done without inflated appraisals on properties.  Once again, appraisers felt the need to give inflated appraisals in order to get future business from the mortgage companies, making them co-conspirators. As someone who refinanced his house several times, I always found it interesting that the appraisal always came out to an amount which allowed the bank to lend me the amount requested.

Then there is the public.  Although there is some percentage of homeowners who needed the money for medical emergencies or other legitimate reasons, for about a decade, the American public treated their homes as ATMs.  Nobody forced anyone to take out a loan. Yes, there were some folks who were duped and took out adjustable rate loans that they did not understand, but who gets the blame for public ignorance? Many of these same people then took some of the proceeds and were further ripped off by unscrupulous auto salesmen or timeshare companies.  Are we also blaming them?  And the people ripping off the public were not the Wall Street banks necessarily, but rather the local mortgage companies and local banks.  

Then there was the government to the degree you noted, but in my view the government was more asleep than complicit.

More on ratings agencies from another reader:

Once upon a time, agencies like S&P and Fitch were paid by people interested in buying the rated securities. But nowadays, the originator of the bond (or MBS or CDO or CDO squared) pays for the ratings. Since these agencies compete for business, a perverse incentive was introduced into the ratings system which distorted the legitimacy of their judgments. Add to that the truly oceanic complexity of many of the mortgage and credit-backed securities being floated, and you get a failed rating system in which special statistical analyses of a pile of faulty loans lead to excellent ratings. You get enough shit in a bucket and there’s going to be some gold in there somewhere.

Another shifts that blame a bit more:

The federal government is at fault for allowing the issuers of these securities to pay for their ratings.  There is no reason why rules are not in place, via the SEC (although the FDIC, OCC, or OTS could also be involved) that prohibit this. Investment ratings should be purchased on the open market such that would-be buyers of MBS investments pay an agency to rate the risk of potential securities to be purchased. You would not buy a home certified to be in excellent condition if said certification were performed by a home inspector selected and paid by the seller of the property.  Why should securities purchased by public and private pension and retirement plans, foundations, or the insurance companies from whom you and I buy home, life, and auto insurance be treated any differently? (Refer to this article by Thomas Donlan for an explanation of how the SEC's treatment of S&P, Fitch, and Moody's makes it complicit in allowing the financial crisis to happen.)

More reader input here and especially here.

The latest Cain story contains no sexual assault. Just two $400 bottles of wine, and a whole bunch of creepy. But the thing I mentioned when this story first broke – that sexual harassment is almost always a pattern of behavior, not a single act – seems to me increasingly relevant. We have very credible accounts now of Cain's abuse of power to get sex. Many of his sex-objects are audience members or lower level staffers or volunteers or fans. He's not usually a gauche creep, as in his alleged sexual assault on Sharon Bialek. But he is still a creep:

Donna Donella, 40, of Arlington, said the USAID paid Cain to deliver a speech to businessmen and women in Egypt in 2002, during which an Egyptian businesswoman in her 30s asked Cain a question.

"And after the seminar was over," Donella told The Washington Examiner, "Cain came over to me and a colleague and said, 'Could you put me in touch with that lovely young lady who asked the question, so I can give her a more thorough answer over dinner?'"

Donella, who no longer works for USAID, said they were suspicious of Cain's motives and declined to set up the date. Cain responded, "Then you and I can have dinner." That's when two female colleagues intervened and suggested they all go to dinner together, Donella said.

These women immediately got it. When will the GOP?

(Photo: On Capitol Hill, met by crowds of media, Republican Presidential Candidate Herman Cain discusses the current healthcare system with House Republican lawmakers at a press conference, and later with other members of the GOP at the Capitol Hill Club behind closed-doors, on November 2, 2011. By Melina Mara/The Washington Post via Getty Images.

"Uh oh. I asked a woman to dinner once. There goes my political career," – James Taranto on the fifth Cain accuser.

“When the godfather of neoconservatism, Irving Kristol, wrote Two Cheers for Capitalism, he intentionally held back from giving it a resounding three cheers. He knew there were downsides, and that conservatives had to be honest about these in order to address them adequately. But the conservative message about capitalism today glosses over these facts, proposes no principles of justice, and fails to engage—let alone persuade—our fellow citizens who worry about our economic order. Conservatives writing in defense of democratic capitalism need to spend less energy fighting off communism, and more energy developing a conservative vision of social justice, painting a picture of what a better capitalism could look like. If conservatives don’t, the only alternatives will be coming from the Left. And that would be an injustice,” – Ryan T. Anderson, The Witherspoon Institute, in a highly critical review of Pete Wehner’s and Arthur Brooks’ Democratic Capitalism.

Reading the original, I am struck again in particular by Arthur Brooks’ insulation from the actual dilemmas we are now facing: the question of whether one sector, the financial one, has become essentially part of a rentier class with a recklessness problem; the reality of such accelerating economic inequality that the political system itself, rested on a strong middle class and representative (not bought and paid-for) democracy, is at risk; the impact of globalization on the Western countries, and how it too has both relatively impoverished the working classes while heaping massive rewards on the few. I’m not saying the left has the answer on these questions. I am saying these questions are what we need to be grappling with. And the conservative movement has close to nothing to say on them.

In many ways, I regard this contemptible circus of a GOP primary campaign as a reflection of this deeper intellectual collapse. When you are reduced to writing entire books on why capitalism is better than communism – in 2011, for Pete’s sake – and believe you are somehow contributing to a debate, rather than reinforcing an irrelevant orthodoxy, you are so deeply part of the problem, you have no way to fix it. Same, I believe, with a GOP front-runner dedicated to increasing “defense” spending regardless of the external threats.

Someone needs to tell these people that it is no longer 1983.

Question? askandrew@thedailybeast.com Video archive here.

"That a direct requirement for most Americans to purchase any product or service seems an intrusive exercise of legislative power surely explains why Congress has not used this authority before–but that seems to us a political judgment rather than a recognition of constitutional limitations. It certainly is an encroachment on individual liberty, but it is no more so than a command that restaurants or hotels are obliged to serve all customers regardless of race, that gravely ill individuals cannot use a substance their doctors described as the only effective palliative for excruciating pain, or that a farmer cannot grow enough wheat to support his own family.

The right to be free from federal regulation is not absolute, and yields to the imperative that Congress be free to forge national solutions to national problems, no matter how local–or seemingly passive–their individual origins," – the US Court of Appeals, DC Circuit (pdf).

“Mitt Romney is not the George W. Bush of 2012 — he is the Harriet Miers of 2012, only conservative because a few conservative grand pooh-bahs tell us Mitt Romney is conservative and for no other reason. That is precisely why Mitt Romney will not win in 2012. But no worry, once he loses, Republican establishment types will blame conservatives for not doing enough for Mitt Romney, never mind that Mitt Romney has never been able to sell himself to more than 25% of the GOP voters. It’s not his fault though, it is the 75%’s fault.

Mitt Romney is going to be the Republican nominee. And his general election campaign will be an utter disaster for conservatives as he takes the GOP down with him and burns up what it means to be a conservative in the process,” – Erick Erickson.

So the Tory establishment and the Poujadist pummeler agree.

Wilkinson fears it is:

As long as the Occupy movement remains without acknowledged leaders who can credibly distance it from the worst behaviour of its least reasonable affiliates, the movement will increasingly come to be defined by its most egregious episodes. And if the sort of bad behaviour we've seen in Oakland and Washington doesn't soon come to an end, OWS could easily end up more albatross than asset to the left.

A critique.

He tells the truth on an open mic. Obama tells it as well: "I have to deal with him all the time." Tonight's November 22's foreign policy debate for the GOP looks likely to be centered on how strongly the candidates can back a lying, foreign prime minister in a neo-fascist coalition over their own president, desperately trying to prevent Israel from unilaterally launching World War III. In a world of 7 billion people, the GOP's foreign policy reaches its most emotionally intense in fusing US policy with a country of 7 million people thousands of miles away, with no serious strategic importance to the US, and, in some ways, a strategic liability.

But Sarkozy is a problem for the GOP. He cannot be described as an anti-Semite, even by the usual suspects. He is for an aggressive interventionist foreign policy. He is the most pro-American French president in memory. But he can see who Netanyahu is; and how dangerous his fundamentalist-dominated government can be to world peace. Why cannot the American right?