Lest We Forget: Why We Had A Financial Crisis
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/sites/stevedenning/>
[]
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/sites/stevedenning/>Steve<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/sites/stevedenning/>
Denning
,-
http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/
It is clear to anyone who has studied the
financial crisis of 2008 that the private
sector’s drive for short-term profit was behind
it. More than 84 percent of the sub-prime
mortgages in 2006 were issued by private lending.
These private firms made nearly 83 percent of the
subprime loans to low- and moderate-income
borrowers that year. Out of the top 25 subprime
lenders in 2006, only one was subject to the
usual mortgage laws and regulations. The nonbank
underwriters made more than 12 million subprime
mortgages with a value of nearly $2 trillion. The
lenders who made these were exempt from federal regulations.
Recommended by Forbes
How then could the Mayor of
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/places/ny/new-york/>New
York,
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/profile/michael-bloomberg/>Michael
Bloomberg say
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.capitalnewyork.com/article/culture/2011/11/3971362/bloomberg-plain-and-simple-congress-caused-mortgage-crisis-not-banks>the
following at a business breakfast in mid-town
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/places/ks/manhattan/>Manhattan
on November 1, 2011?
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. Now, I’m not saying
I’m sure that was terrible policy, because a lot
of those people who got homes still have them and
they wouldn’t have gotten them without that. But
they were the ones who pushed Fannie and Freddie
to make a bunch of loans that were imprudent, if
you will. They were the ones that pushed the
banks to loan to everybody. And now we want to go
vilify the banks because it’s one target, it’s
easy to blame them and Congress certainly isn’t going to blame themselves.”
Barry Ritholtz in the
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story_1.html>Washington
Post calls the notion that the US Congress was
behind the financial crisis of 2008 “the Big
Lie”. As we have seen in other contexts, if a lie
is big enough, people begin to believe it.
Even this morning, November 22, 2011, a seemingly
smart guy like Joe Kernan was saying on CNBC’s
Squawkbox, “When the losses at Fannie and Freddie
reach $200 billion… how can the ‘deniers’ say
that Fannie and Freddie were enablers for a lot
of the housing crisis. When it gets up to that
levels, how can they say that they were only into
sub-prime late, and they were only in it a little bit?”
The reason that people can say that is because it
is true. The $200 billion was a mere drop in the
ocean of derivatives which in 2007 amounted to
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.thoughtyoushouldseethis.com/post/12973350613/roger-martin-on-fixing-the-game>three
times the size of the entire global economy.
When the country’s leaders start promulgating
obvious nonsense as the truth, and the Big Lie
starts to go viral, then we know that we are
laying the groundwork for yet another, even-bigger financial crisis.
The story of the 2008 financial crisis
So let’s recap the basic facts: why did we have a
financial crisis in 2008? Barry Ritholtz fills us
in on the history with an
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story_1.html>excellent
series of articles in
the<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/places/dc/washington/>Washington
Post:
* In 1998, banks got the green light to
gamble: The Glass-Steagall legislation, which
separated regular banks and investment banks was
repealed in 1998. This allowed banks, whose
deposits were guaranteed by the FDIC, i.e. the
government, to engage in highly risky business.
* Low interest rates fueled an apparent boom:
Following the dot-com bust in 2000, the Federal
Reserve dropped rates to 1 percent and kept them
there for an extended 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).
* Asset managers sought new ways to make
money: 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.
* The credit rating agencies gave their
blessing: The credit ratings agencies Moody’s,
S&P and Fitch had placed an AAA rating on these
junk securities, claiming they were as safe as U.S. Treasurys.
* Fund managers didn’t do their homework:
Fund managers relied on the ratings of the credit
rating agencies and failed to do adequate due
diligence before buying them and did not
understand these instruments or the risk involved.
* Derivatives were unregulated: Derivatives
had become a uniquely unregulated financial
instrument. 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 SEC loosened capital requirements: In
2004, the Securities and Exchange Commission
changed the leverage rules for just five
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/wall-street/>Wall
Street banks. This exemption replaced the 1977
net capitalization rule’s 12-to-1 leverage limit.
This allowed unlimited leverage for Goldman Sachs
[GS], Morgan Stanley, Merrill Lynch (now part of
Bank of America [BAC]), Lehman Brothers (now
defunct) and Bear Stearns (now part of
JPMorganChase–[JPM]). These banks ramped leverage
to 20-, 30-, even 40-to-1. Extreme leverage left
little room for error. By 2008, only two of the
five banks had survived, and those two did so with the help of the bailout.
* The federal government overrode
anti-predatory state laws. In 2004, the Office of
the Comptroller of the Currency federally
preempted state laws regulating mortgage credit
and national banks, including anti-predatory
lending laws on their books (along with lower
defaults and foreclosure rates). Following this
change, national lenders sold increasingly risky
loan products in those states. Shortly after,
their default and foreclosure rates increased markedly.
* Compensation schemes encouraged gambling:
Wall Street’s compensation system wasand still
isbased on short-term performance, all upside
and no downside. This creates incentives to take
excessive risks. The bonuses are extraordinarily
large and they continue–$135 billion in 2010 for
the 25 largest institutions and that is after the meltdown.
* Wall Street became “creative”: The demand
for higher-yielding paper led Wall Street to
begin bundling mortgages. The highest yielding
were subprime mortgages. This market was
dominated by non-bank originators exempt from most regulations.
* Private sector lenders fed the demand:
These mortgage originators’
lend-to-sell-to-securitizers model had them
holding mortgages for a very short period. This
allowed them to relax underwriting standards,
abdicating traditional lending metrics such as
income, credit rating, debt-service history and loan-to-value.
* Financial gadgets milked the market:
“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.
* Commercial banks jumped in: To keep up with
these newfangled originators, traditional banks
jumped into the game. Employees were compensated
on the basis loan volume, not quality.
* Derivatives exploded uncontrollably: CDOs
provided the first “infinite market”; at height
of crash, derivatives accounted for 3 times global economy.
* The boom and bust went global. Proponents
of the Big Lie ignore the worldwide nature of the
housing boom and bust. A
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.mckinseyquarterly.com/newsletters/chartfocus/2009_10.htm>McKinsey
Global Institute report noted “from 2000 through
2007, a remarkable run-up in global home prices occurred.”
* Fannie and Freddie jumped in the game late
to protect their profits: Nonbank mortgage
underwriting exploded from 2001 to 2007, along
with the private label securitization market,
which eclipsed Fannie and Freddie during the
boom. The vast majority of subprime mortgages
the loans at the heart of the global crisis
were underwritten by unregulated private firms.
These were lenders who sold the bulk of their
mortgages to Wall Street, not to Fannie or
Freddie. Indeed, these firms had no deposits, so
they were not under the jurisdiction of the
Federal Deposit Insurance Corp or the Office of Thrift Supervision.
* Fannie Mae and Freddie Mac market share
declined. The relative market share of Fannie Mae
and Freddie Mac dropped from a high of 57 percent
of all new mortgage originations in 2003, down to
37 percent as the bubble was developing in
2005-06. More than 84 percent of the subprime
mortgages in 2006 were issued by private lending
institutions. The government-sponsored
enterprises were concerned with the loss of
market share to these private lenders Fannie
and Freddie were chasing profits, not trying to meet low-income lending goals.
* It was primarily private lenders who
relaxed standards: Private lenders not subject to
congressional regulations collapsed lending
standards. the GSEs. Conforming mortgages had
rules that were less profitable than the
newfangled loans. Private securitizers
competitors of Fannie and Freddie grew from 10
percent of the market in 2002 to nearly 40
percent in 2006. As a percentage of all
mortgage-backed securities, private
securitization grew from 23 percent in 2003 to 56 percent in 2006.
The driving force behind the crisis was the private sector
Looking at these events it is absurd to suggest,
as Bloomberg did, that “Congress forced everybody
to go and give mortgages to people who were on the cusp.”
Many actors obviously played a role in this
story. Some of the actors were in the public
sector and some of them were in the private
sector. But the public sector agencies were
acting at behest of the private sector. It’s not
as though Congress woke up one morning and
thought to itself, “Let’s abolish the
Glass-Steagall Act!” Or the SEC spontaneously
happened to have the bright idea of relaxing
capital requirements on the investment banks. Or
the Office of the Comptroller of the Currency of
its own accord abruptly had the idea of
preempting state laws protecting borrowers. These
agencies of government were being strenuously
lobbied to do the very things that would benefit
the financial sector and their managers and
traders. And behind it all, was the drive for short-term profits.
Why didn’t anyone say anything?
As one surveys the events in this sorry tale, it
is tempting to consider it like a Shakespearean
tragedy, and wonder: what if things had happened
differently? What would have occurred if someone
in the central bank or the supervisory agencies
had blown the whistle on the emerging disaster?
The answer is clear: nothing. Nothing would have
been different. This is not a speculation. We
know it because an interesting new book describes
what didhappen to the people who did speak out
and try to blow the whistle on what was going on.
They were ignored or sidelined in the rush for the money.
The book is
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.amazon.com/gp/product/1849541434/ref=as_li_ss_tl?ie=UTF8&tag=stevdenndotco-20&linkCode=as2&camp=217145&creative=399373&creativeASIN=1849541434>Masters
of Nothing: How the Crash Will Happen Again
Unless We Understand Human Nature by Matthew
Hancock and Nadhim Zahawi (published in 2011 in
the UK by Biteback Publishing and available on pre-order in the US).
In 2004, the book explains, the deputy governor
of the Bank of England (the UK central bank), Sir
Andrew Large, gave a powerful and eloquent
warning about the coming crash at the London
School of Economics. The speech was published on
the bank’s website but it received no notice.
There were no seminars called. No research was
commissioned. No newspaper referred to the
speech. Sir Andrew continued to make similar
speeches and argue for another two years that the
system was unsustainable. His speeches infuriated
the then Chancellor, Gordon Brown, because they
warned of the dangers of excessive borrowing. In
January 2006, Sir Andrew gave up: he quietly retired before his term was up.
In 2005, the chief economist of the International
Monetary Fund, Raghuram Rajan, made a speech at
Jackson Hole Wyoming in front of the world’s most
important bankers and financiers, including Alan
Greenspan and Larry Summers. He argued that
technical change, institutional moves and
deregulation had made the financial system
unstable. Incentives to make short-term profits
were encouraging the taking of risks, which if
they materialized would have catastrophic
consequences. The speech did not go down well.
Among the first to speak was Larry Summers who
said the speech was “largely misguided”.
In 2006, Nouriel Roubini issued a similar warning
at an IMF gathering of financiers in New York.
The audience reaction? Dismissive. Roubini was
“non-rigorous” in his arguments. The central
bankers “knew what they were doing.”
The drive for short-term profit crushed all
opposition in its path, until the inevitable meltdown in 2008.
Why didn’t anyone listen?
On his
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.ritholtz.com/blog/2011/11/dissecting-the-big-lie-update/>blog,
Barry Ritholtz puts the truth-deniers into three groups:
1) Those suffering from Cognitive Dissonance
the intellectual crisis that occurs when a failed
belief system or philosophy is confronted with proof of its implausibility.
2) The Innumerates, the people who truly
disrespect a legitimate process of looking at the
data and making intelligent assessments. They are
mathematical illiterates who embarrassingly revel in their own ignorance.
3) The Political Manipulators, who cynically know
what they peddle is nonsense, but nonetheless
push the stuff because it is effective. These
folks are more committed to their ideology and
bonuses than the good of the nation.
He is too polite to mention:
4) The Paid Hacks, who are being paid to hold a
certain view. As Upton Sinclair has noted, “It is
difficult to get a man to understand something,
when his salary depends upon his not understanding it.”
Barry Ritholtz concludes: “The denying of
reality has been an issue, from Galileo to
Columbus to modern times. Reality always triumphs
eventually, but there are very real costs to it
occurring later versus sooner .”
The social utility of the financial sector
Behind all this is the reality that the massive
expansion of the financial sector is not
contributing to
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://stevedenning.typepad.com/steve_denning/2011/01/why-are-bankers-paid-so-much.html>growing
the real economic pie. As Gerald Epstein, an
economist at the University of Massachusetts has
said: “These types of things don’t add to the
pie. They redistribute itoften from taxpayers to
banks and other financial institutions.”Yet in
the expansion of the GDP, the expansion of the
financial sector counts as increase in output. As
Tom Friedman
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.nytimes.com/2011/10/23/opinion/sunday/friedman-one-country-two-revolutions.html>writes
in the New York Times:
Wall Street, which was originally designed to
finance “creative destruction” (the creation of
new industries and products to replace old ones),
fell into the habit in the last decade of
financing too much “destructive creation”
(inventing leveraged financial products with no
more societal value than betting on whether
Lindy’s sold more cheesecake than strudel). When
those products blew up, they almost took the whole economy with them.
Do we want another financial crisis?
The current period of artificially low interest
rates mirrors eerily the period ten years ago
when Alan Greenspan held down interest rates at
very low levels for an extended period of time.
It was this that set off the creative juices of
the financial sector to find “creative” new ways
of getting higher returns. Why should we not
expect the financial sector to be dreaming up the
successor to sub-prime mortgages and
credit-default swaps? What is to stop them? The
regulations of the Dodd-Frank are still being
written. Efforts to undermine the Volcker Rule
are well advanced. Even its original author, Paul
Volcker,
says<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/sites/stevedenning/2011/11/15/big-bad-banks-part-3-applying-the-science-of-cheating/>
it has become unworkable. And now front men like
Bloomberg are busily rewriting history to enable the bonuses to continue.
The question is very simple. Do we want to deny
reality and go down the same path as we went down
in 2008, pursuing short-term profits until we
encounter yet another, even-worse financial
disaster? Or are we prepared to face up to
reality and undergo the phase change involved in
refocusing the private sector in general, and the
financial sector in particular, on providing
genuine value to the economy ahead of short-term profit?
And see also:
<http://www.forbes.com/sites/travisbradberry/2016/02/09/10-ways-to-spot-a-truly-exceptional-employee/http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/>The
Dumbest Idea In The World: Maximizing Shareholder Value
____________
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Please consider seriously the reason why these elite institutions are not discussed in the mainstream press despite the immense financial and political power they wield?
There are sick and evil occultists running the Western World. They are power mad lunatics like something from a kids cartoon with their fingers on the nuclear button! Armageddon is closer than you thought. Only God can save our souls from their clutches, at least that's my considered opinion - Tony
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