What caused the financial crisis? The Big Lie goes viral.
By Barry Ritholtz
<http://www.washingtonpost.com/barry-ritholtz/2011/03/31/AFWBwIBC_page.html>,
Published: November 5
http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html
I have a fairly simple approach to investing: Start with data and
objective evidence to determine the dominant elements driving the market
action right now. Figure out what objective reality is beneath all of
the noise. Use that information to try to make intelligent investing
decisions.
But then, I'm an investor focused on preserving capital and managing
risk. I'm not out to win the next election
<http://www.washingtonpost.com/politics/campaigns> or drive the debate.
For those who are, facts and data matter much less than a narrative that
supports their interests.
One group has been especially vocal about shaping a new narrative of the
credit crisis and economic collapse: those whose bad judgment and failed
philosophy helped cause the crisis.
Rather than admit the error of their ways --- Repent! --- these people
are engaged in an active campaign to rewrite history. They are not, of
course, exonerated in doing so. And beyond that, they damage the process
of repairing what was broken. They muddy the waters when it comes to
holding guilty parties responsible. They prevent measures from being put
into place to prevent another crisis.
Here is the surprising takeaway: They are winning. Thanks to the endless
repetition of the Big Lie.
A Big Lie is so colossal that no one would believe that someone could
have the impudence to distort the truth so infamously. There are many
examples: Claims that Earth is not warming, or that evolution is not the
best thesis we have for how humans developed. Those opposed to stimulus
spending have gone so far as to claim that the infrastructure of the
United States is just fine, Grade A (not D, as the we discussed last
month), and needs little repair.
Wall Street has its own version: Its Big Lie is that banks and
investment houses are merely victims of the crash
<http://www.washingtonpost.com/wp-srv/business/risk/index.html>. You
see, the entire boom and bust was caused by misguided government
policies. It was not irresponsible lending or derivative or excess
leverage or misguided compensation packages, but rather long-standing
housing policies that were at fault.
Indeed, the arguments these folks make fail to withstand even casual
scrutiny. But that has not stopped people who should know better from
repeating them.
The Big Lie made a surprise appearance Tuesday when New York Mayor
Michael Bloomberg, responding to a question about Occupy Wall Street
<http://www.washingtonpost.com/local/occupy-wall-street-hits-dc/2011/10/06/gIQAOe4RRL_gallery.html>,
stunned observers by exonerating Wall Street: "It was not the banks that
created the mortgage crisis. It was, plain and simple, Congress who
forced everybody to go and give mortgages to people who were on the cusp."
What made his comments so stunning is that he built Bloomberg Data
Services on the notion that data are what matter most to investors. The
terminals are found on nearly 400,000 trading desks around the world, at
a cost of $1,500 a month. (Do the math --- that's over half a billion
dollars a month.) Perhaps the fact that Wall Street was the source of
his vast wealth biased him. But the key principle of the business that
made the mayor a billionaire is that fund managers, economists,
researchers and traders should ignore the squishy narrative and,
instead, focus on facts. Yet he ignored his own principles to repeat
statements he should have known were false.
Why are people trying to rewrite the history of the crisis? Some are
simply trying to save face. Interest groups who advocate for
deregulation of the finance sector would prefer that deregulation not
receive any blame for the crisis.
Some stand to profit from the status quo: Banks present a systemic risk
to the economy, and reducing that risk by lowering their leverage and
increasing capital requirements also lowers profitability. Others are
hired guns, doing the bidding of bosses on Wall Street.
__
<http://www.washingtonpost.com/business/economy/the-dows-5-best-and-worst-days/2011/09/09/gIQAoE5yMK_gallery.html>
They all suffer cognitive dissonance --- the intellectual crisis that
occurs when a failed belief system or philosophy is confronted with
proof of its implausibility.
And what about those facts? To be clear, no single issue was the cause.
Our economy is a complex and intricate system. What caused the crisis? Look:
?Fed Chair Alan Greenspan dropped rates to 1 percent --- levels not seen
for half a century --- and kept them there for an unprecedentedly long
period. This caused a spiral in anything priced in dollars (i.e., oil,
gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).
?Low rates meant asset managers could no longer get decent yields from
municipal bonds or Treasurys. Instead, they turned to high-yield
mortgage-backed securities. Nearly all of them failed to do adequate due
diligence before buying them, did not understand these instruments or
the risk involved. They violated one of the most important rules of
investing: Know what you own.
?Fund managers made this error because they relied on the credit ratings
agencies --- Moody's, S&P and Fitch. They had placed an AAA rating on
these junk securities, claiming they were as safe as U.S. Treasurys.
. Derivatives had become a uniquely unregulated financial instrument
<http://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101403343.html>.
They are exempt from all oversight, counter-party disclosure, exchange
listing requirements, state insurance supervision and, most important,
reserve requirements. This allowed AIG to write $3 trillion in
derivatives while reserving precisely zero dollars against future claims.
. The Securities and Exchange Commission changed the leverage rules for
just five Wall Street banks in 2004. The "Bear Stearns exemption"
replaced the 1977 net capitalization rule's 12-to-1 leverage limit. In
its place, it allowed unlimited leverage for Goldman Sachs, Morgan
Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks
ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very
little room for error.
.Wall Street's compensation system was skewed toward short-term
performance. It gives traders lots of upside and none of the downside.
This creates incentives to take excessive risks.
. The demand for higher-yielding paper led Wall Street to begin bundling
mortgages
<http://www.washingtonpost.com/wp-dyn/content/article/2008/12/15/AR2008121503561.html>.
The highest yielding were subprime mortgages. This market was dominated
by non-bank originators exempt from most regulations. The Fed could have
supervised them, but Greenspan did not.
. These mortgage originators' lend-to-sell-to-securitizers model had
them holding mortgages for a very short period. This allowed them to get
creative with underwriting standards, abdicating traditional lending
metrics such as income, credit rating, debt-service history and
loan-to-value.
. "Innovative" mortgage products were developed to reach more subprime
borrowers. These include 2/28 adjustable-rate mortgages, interest-only
loans, piggy-bank mortgages (simultaneous underlying mortgage and
home-equity lines) and the notorious negative amortization loans
(borrower's indebtedness goes up each month). These mortgages defaulted
in vastly disproportionate numbers to traditional 30-year fixed mortgages.
?To keep up with these newfangled originators, traditional banks
developed automated underwriting systems. The software was gamed by
employees paid on loan volume, not quality.
?Glass-Steagall legislation, which kept Wall Street and Main Street
banks walled off from each other, was repealed in 1998. This allowed
FDIC-insured banks, whose deposits were guaranteed by the government, to
engage in highly risky business. It also allowed the banks to bulk up,
becoming bigger, more complex and unwieldy.
?Many states had anti-predatory lending laws on their books (along with
lower defaults and foreclosure rates). In 2004, the Office of the
Comptroller of the Currency federally preempted state laws regulating
mortgage credit and national banks. Following this change, national
lenders sold increasingly risky loan products in those states. Shortly
after, their default and foreclosure rates skyrocketed.
Bloomberg was partially correct: Congress did radically deregulate the
financial sector, doing away with many of the protections that had
worked for decades. Congress allowed Wall Street to self-regulate, and
the Fed the turned a blind eye to bank abuses.
The previous Big Lie --- the discredited belief that free markets
require no adult supervision --- is the reason people have created a new
false narrative.
Now it's time for the Big Truth.
--
JAI
RAC-LA
https://lists.riseup.net/www/admin/newplanet-newlives
http://revolutionaryautonomouscommunities.blogspot.com/
http://www.pmpress.org/content/article.php?story=JohnAImani
[Non-text portions of this message have been removed]
------------------------------------
---------------------------------------------------------------------------
LAAMN: Los Angeles Alternative Media Network
---------------------------------------------------------------------------
Unsubscribe: <mailto:laamn-unsubscr...@egroups.com>
---------------------------------------------------------------------------
Subscribe: <mailto:laamn-subscr...@egroups.com>
---------------------------------------------------------------------------
Digest: <mailto:laamn-dig...@egroups.com>
---------------------------------------------------------------------------
Help: <mailto:laamn-ow...@egroups.com?subject=laamn>
---------------------------------------------------------------------------
Post: <mailto:la...@egroups.com>
---------------------------------------------------------------------------
Archive1: <http://www.egroups.com/messages/laamn>
---------------------------------------------------------------------------
Archive2: <http://www.mail-archive.com/laamn@egroups.com>
---------------------------------------------------------------------------
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/laamn/
<*> Your email settings:
Individual Email | Traditional
<*> To change settings online go to:
http://groups.yahoo.com/group/laamn/join
(Yahoo! ID required)
<*> To change settings via email:
laamn-dig...@yahoogroups.com
laamn-fullfeatu...@yahoogroups.com
<*> To unsubscribe from this group, send an email to:
laamn-unsubscr...@yahoogroups.com
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
