Fannie, Freddie, and the New Red and Blue
It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling. Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year. We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.
Over the Christmas holiday a nasty thing happened: Tim Geithner’s Treasury Department decided to lift the cap on aid to the Government-Sponsored Entities, Fannie Mae and Freddie Mac, apparently in response to Obama administration fears that the two agencies would become insolvent. The cap was raised from $200 billion on each and government backstopping of the mortgage market will apparently now extend into infinity for at least three years, through 2012.
The move has already inspired a mini-firestorm, with several outlets delving deeply into the recent history of the GSEs and uncovering some disturbing new facts. Chief among those were an analysis of the GSEs by a former chief credit officer of Fannie named Edward Pinto, who found that Fannie and Freddie routinely mismarked subprime or Alt-A (a sort of purgatory class of nonprime risky mortgage, resting between subprime and prime) mortgages as prime. The Wall Street Journal explains:
In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.
This is a damning fact and if true certainly supports the Journal claim that the GSE actions were a “principal cause of the financial crisis.” But having established this, the Journal then goes in this direction:
Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.
Sometimes I’m amazed at the speed with which highly provocative information like this GSE business can be converted into distracting propaganda in this country. In the right hands Pinto’s analysis of the GSEs — just like the revelations in the past few years about practices at AIG, Moody’s, Countrywide, Goldman Sachs, the Fed, and, hell, let’s add the offices of Senator Chris Dodd — would have been a starting point for a deeper investigation into a financial system that is clearly a complex and intimate symbiosis of state and private corruption.
For what we’ve learned in the last few years as one scandal after another spilled onto the front pages is that the bubble economies of the last two decades were not merely monstrous Ponzi schemes that destroyed trillions in wealth while making a small handful of people rich. They were also a profound expression of the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit were brilliantly fused in a kind of ongoing theft scheme that sought to instant-cannibalize all the wealth America had stored up during its postwar glory, in the process keeping politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.
That is a terrible story and it is also sort of a taboo story, since we don’t really have a system of media now that is willing or even able to digest that dark and complicated truth. Instead, our media — which has always been at best an inadvertent accomplice to these messes — is basically set up to take every revelation about the underlying truth and split it down the middle, feeding half to one side of the political spectrum and one half to the other, where the actual point is then burned up in the useless smoke of a blame game.
The essentially complicit nature of the two ruling political parties was in this way covered up for decades, as the crimes of the Democrats were greedily consumed as entertainment by the Limbaugh crowd while the crimes of the Bushies became hot-selling t-shirts and bumper stickers for the Air America listenership. The abiding mutual hatred the red/blue groups shared consistently prevented any kind of collective realization about the structure of the overall scheme.
What worries me is that we’re now reverting to the same old pattern with the financial crisis story. We’re starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades. The side blaming the government tends to belong to the free-marketeer class and divines in safety-net purveyors like the GSEs and in the Fed’s money-printing fundamental corruptions of the capitalist ideal, while the side blaming the bankers tends to belong to the left-liberal tradition that focuses on greed and seeming absence of community conscience among the CEO class as primary corruptors of the social contract.
In the former view the government is to blame for punting on its oversight responsibilities and for corrupting the financial bloodstream with market-altering guarantees, while in the latter view the bankers are at fault for lobbying the politicians to make exactly the same moves. The antigovernment folks like to focus on the irresponsible (and typically low-income or minority) home-borrower and their political allies in Washington as chief villains, while the anti-banker crowd looks at the massive personal profits and outsized influence of the executive class and waves the Cui bono? stick in that direction.
Both sides are right and both sides are wrong. I know that sounds like pox-on-both-their-houses pundit sophistry. But the point is that if you focus on one side and not the other, you miss the entire point. That’s why I get freaked out when I see an important story like this GSE thing come out, and have it be immediately accompanied by arguments that “market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system,” as though the irresponsibility of the government agency precluded similar (and, I might add, intimately related) abuses on the private side.
I mean, really — market observers were unaware of the number of subprime mortgages infecting the system? Are we to understand that nobody caught on when outstanding mortgage debt grew by $3.7 trillion between 2003 and 2005, nearly equaling the entire value of all American real estate in the year 1990? They didn’t notice when subprime mortgages went from 3% of all mortgage lending in 1997 to 20% of the market in 2003? They didn’t notice when the volume of Alt-A loans and home equity loans surged through the early part of last decade?
Now I know that that’s not what Peter Wallison of the Journal is saying here; he’s saying that even if the market saw that increase in subprime loans, even those numbers were understated thanks to Fannie and Freddie’s deceptions. But the inference that the market was hoodwinked by the GSEs is absurd. It was plain to most everyone in the financial services industry that there was a bubble going on last decade, that something deeply fucked up was going on with the mortgage markets — just as it was plain to everyone in the late nineties that something was wrong with the stock markets, when companies like Theglobe.com with annual sales under $5 million could have a $5 billion stock valuation.
Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar’s loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious and extended from coast to coast, sinking one lender after another in Ponzoid debt and indictments.
Then there were the countless deceptions that emerged from the securitization process, the bad math that allowed banks like Goldman to do $474 million mortgage deals where the average equity in the home was just 0.71 percent, and sell 93% of that deal as investment grade paper.
Are we really to believe that the people who did those deals didn’t know what total crap they were selling? That the people who used CDO-squareds to magically turn BBB investments into AAA investments didn’t know how nuts that was?
There were the ratings agencies, who accepted all that bad math and slapped AAA ratings on crap mortgage-backed securities in exchange for the continued largess of the banks upon whom they were financially dependent — the same ratings agencies that later sputtered and coughed up bullshit my-dog-ate-my-homework excuses for mismarking mortgages, with the Moody’s revelation that a computer error caused them to misapply AAA ratings to billions’ worth of MBS being the comic low point.
Then further along in the chain you had crooks like the folks at AIG, who took advantage of the basic nonexistence of derivatives regulation to issue billions in guarantees for these mortgage investments that they had never had any intention of paying off, to say nothing of actually having the ability to do so. And of course underwriting the entire enterprise was the implicit guarantee of Alan Greenspan’s Fed, which made it known time and time again that its modus operandi was to refuse to recognize the existence of bubbles until after they blew up, at which point it would rush in and clean up the mess, bailing out all the chief actors out with easy money.
Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs to the Fed to the banks to the ratings agencies to the lenders. I don’t think it’s really controversial to say that, but it does seem like there’s an argument brewing about what that across-the-board complicity means.
My own personal feeling is that our recent bubbles weren’t much different than pyramid scams and lotteries; they’re the handiwork of an essentially regressive and deeply cynical political organization that systematically hoovers up taxes and investment money mainly from middle-class suckers, where it eventually gets eaten in short-term cashouts and mostly blown on sports cars and tropical vacations and eye jobs for the trophy wives of Wall Street executives. Crackonomics: take literally all the spare money from four square city blocks and turn it into one tricked-out Escalade.
For me the basic dynamic of the mortgage bubble is some Ivy League dickwad hawking a billion dollars of securitized subprime mortgages to a pension fund, and then Hobie-sailing off into the sunset with a bonus after they all blow up. Of course my seeing it that way might have a lot to do with my own personal psychological prejudices, and I get that some other person with different hangups might choose to focus on Barney Frank deciding to “roll the dice on home ownership” with the GSEs.
But what I don’t see is how anybody can say that all of this happened because Fannie and Freddie rigged the game to get Mexicans in homes, and then the banks and the ratings agencies just reacted organically to the corrupted market and helped the bubble along through no fault of their own. That’s just another (albeit more convincing) version of the early attempt to pin the disaster on the Community Reinvestment Act, which in turn is just another way of playing the red-blue blame game, which in turn is missing the point.
This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.
p.s. Just to get this out of the way, I love Zero Hedge, and Marla Singer has been really nice to me personally. I just don’t completely agree with this particular thing. I don’t see any reason why focusing blame on the banks and the ratings agencies and AIG was “fundamentally flawed,” because, well, shit, they were to blame. The fact that Fannie and Freddie now get to jump in the pigpen with them doesn’t change that for me.
I think in the end what we’re going to find is that all the relevant actors had their own motivations for getting involved in the bubble. Two and now three presidential administrations let the Fed overheat the economy for political reasons that should be obvious. Alan Greenspan, hell, he did it because he loves seeing himself on magazine covers and wanted to keep getting invited to the right Manhattan parties. There were congressmen that converted the expansion of cheap credit into low-income votes. The bankers and lenders went along because the system of compensation on Wall Street is fucked and rewards short-term thinking while ignoring long-term consequences.
To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future. When it comes to bubbles, It Takes a Village, and blaming the whole mess on the “socialist” aims of a pair of government agencies seems off base — particularly since the Randian protocapitalists running the banks benefited every bit as much from this socialism as actual homeowners, and perhaps even more, when one considers that homeowners get foreclosed upon, while bonuses are forever.
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This gets to the heart of it:
“We’re starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades”
I have to admit my first thought when reading your first paragraphs was a sort of “Oh shit, more ammunition for the right wingers claiming that all of the housing bubble was caused by “the government forcing poor people to buy homes they couldn’t afford” as they tend to put it.
“Don’t even go there” I was thinking, just because it’s so abused and misconstrued, as you acknowledge.
I do think the whole thing can certainly still be seen as a problem of regulation, but more in the sense of implementation than in the sense of passing the laws or regulations, it was a lack of enforcement and oversight more than anything else.
One fairly clear refutation of the “the bubble was all because of Fanny/Freddy loaning money to unworthy people” meme is that housing bubbles happened all over the world, and Fanny Mae and Freddie Mac don’t operate all over the world. There are similar programs in other countries, but no one is trying to blame the worldwide housing bubbles on them.
Or, in fact I maybe some people are. (I live in France, I should check here. Most likely the same accusations are being made, I would bet). But that just demonstrates even more clearly that it can’t possibly be the fault of “government agencies” all over the world, in some wild coincidence of making the same errors and engaging in the same malpractice at the same moment.
Anyway this I entirely agree with:
“This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed.”
Amen brother. The market reacted like a market: Huge, hungry, voracious even, and something that will consume whatever you let it until it’s way past time to stop. It’s like a animal in which all of the synapses or genes or nerve pathways that regulate when to stop eating have been surgically removed, so it will literally just eat and eat until it explodes, like Mr. Creosote.
You wrote: “The market reacted like a market: Huge, hungry, voracious even, and something that will consume whatever you let it until it’s way past time to stop.”
Was it actually a market if there was an unlimited supply of financial products being sold — a supply that had no relationship to the underlying real assets? How is price set if supply is infinite? What is the price of air?
In response to another comment. See in context »Well, the money came from somewhere. In other words, people who were making loads of money were actually making it, and some, many in fact, ran off with their winnings before it all crashed, which is one of the parts that has people most angry.
I mean it’s a fair point but sort of a different discussion; the whole complicated issue of over-valuation of assets. But that was only one part of what caused the financial collapse.
In a way it gets into a rather metaphysical discussion of what a “market” is, I was thinking after I wrote my post earlier. People often want to draw comparisons between “the market” and some living entity, the invisible “hand” of the market of the free market fundamentalists and so on.
To which you could respond well, yes, but living beings have built-in regulatory systems, for example the ones that keep them from eating to the point where they die. So fine, the market is a living thing, but that includes a regulatory system, the governmental systems that are made from the same social interactions that create the market.
I’m not actually sure you can even separate the greed that would cause a financial institution to destroy itself by selling overvalued or even non-existent assets and the greed that would drive someone to sell too many of something that did exist but had other dangers, arms say, or dangerous products. Regulation is there to avoid destroying either yourself or your customers through risky practices, but those can be all sorts of risks, not just the ones involved here.
In response to another comment. See in context »“It’s like a animal in which all of the synapses or genes or nerve pathways that regulate when to stop eating have been surgically removed”
They absolutely were surgically removed. The free market tried to do exactly what it was supposed to, which is reallocate resources based on new information. Regulators stopped capitulation and erected the scaffolding in no time flat, yet construction sits idle. The problem is that the information was suppressed to the point of boiling over all at once.
No amount of “regulation” will ever solve these problems. That’s not to say regulation/oversight is unnecessary or irrelevant; but the free-market monkeys have a point – markets can digest information and allocate resources much more efficiently than the long arm of government.
One caveat,
information must flow timely and freely. It is only through (as) equal (as possible) access to information that we can begin to understand where resources flow and why.
Our infrastructure is out-dated. Information Technology allows the propagation of instantaneous results yet we still file 10k’s quarterly, and revise our numbers months later.
We need to open the transactional stream to the power of the crowd. The SEC or any other entity can never hope to police the entirety of our economy effectively.
We have to build a regulatory mechanism built on immediate self-reporting and crowd-sourced analysis. Release raw aggregated data online in real time (or at least weekly) and let investors develop the tools to digest it.
free flow of information regardless of consequences breeds adaptability and resiliency.
Protectionism breeds weakness.
In response to another comment. See in context »wahttob
In response to another comment. See in context »If this is a sleazebag contest– government wins-Carter (passed CRA Act) & Clinton(Treas. regs.) forcing banks to make social justice loans (non p.c.-loans to minorities who couldn’t afford loans)while ACORN & NACA held banks hostage who wouldn’t. HUD (Clinton) pressured GSEs (FM & FM) to purchase egalitarian loans (non p.c -loans to minorities who couldn’t afford loans) from banks to make room for more collectivist loans (non p.c-loans to minorities who should never been given a loan because they had no job). Congress (FHEFSS Act)weighed in mandating 45% of loans purchased from banks be liberal utopian loans (non p.c.-loans to minorities who had poor credit and no income). Treasury(Clinton) provided banks with taxpayer $ to make more social justice loans (pc-minority loans to those with no income no jobs). Dems-Dodd, Frank, Schumer etc. and FM Execs(mostly Dems)resisted oversight (the former) and cooked the books to enrich themselves (the later)-knowing that when their liberal scam collapsed-the taxpayer would be billed. And the Fed. and Wall Street run a close second.
To paraphrase “The Incredibles,” when everybody is guilty, then nobody is guilty.
Thanks for this, Matt. But honestly, we don’t even have the leadership in this country to put a few measly regulations in place to, for example, put caps on bonuses earned off the backs of taxpayers–how will we ever find uncorruptable politicians to unravel this tangled web you describe? It makes my head hurt. I think it’s this sort of hopelessness and feelings of helplessness that make voters want to run and hide rather than cast another meaningless ballot. Until we get serious in this country about banning lobbies and private campaign contributions, I don’t see how the average citizen can stand up for their rights and representation in Washington that doesn’t involve violence. All the letters to Congress in the world are impotent compared to a few (million) well-placed dollars in campaign coffers.
Here’s the question I’ve found myself asking in the wake of this disastrous attitude toward the financial meltdown: Can it really still be said that the Democrats are the lesser of two evils, at least on matters of market regulation? Naturally I don’t think the Republicans could do any better, but for what may be the first time I genuinely wonder if they could’ve possibly done any worse. Because the only difference I see at this point between the Republicans and Democrats is an overt policy of deregulation vs. a covert policy of deregulation (going back to Clinton signing the Glass-Steagall repeal) with some patronizing lip service about cracking down in the form of a conference-call photo op.
I understand there are other issues on which Dems could rightfully claim to be a slightly lesser evil (and what a proud honor that is), but I’d be curious to see if the Eric Alterman’s of the world would really go to bat with that argument on this specific matter.
In response to another comment. See in context »I agree with the direction you’re going, carnivorousdanus, as it is usually under the dems that the most egregious legislation is passed: it was under Reagan that a portion of Glass-Steagall was removed (Depository Institutions Act of 1982), and it was under Reagan that the Office of Privatization was established (Exec. Order # 12615) to privatize everything, but the bulk of the privatization of many agencies and the DOD took place under Clinton, as did the passage of NAFTA, GATT, China into the WTO, the Telecommunications Act of 1996, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000!
And it will probably later be said, that it was under Obama that the so-called “healthcare reform” act was passed, moving $1 trillion to the greedy hands of those healthcare insurance bandits.
In response to another comment. See in context »I think it’s a mistake to look solely at who was president when the legislation was passed. Not to suggest that doesn’t matter *at all*, but, for example, most (all?) of those bills signed by Clinton were passed by a Republican congress.
The CMFA, in particular, was tacked on to an omnibus spending bill passed right at the end of the year. Obviously, the president can always veto (though that would be tricky with an important omnibus), but it’s too simplistic to just look at who was president at the time.
In response to another comment. See in context »Absolutely. A lot of time is still being spent by the Democratic administration fixing things that Bush did, such as making social services and whanot easier to obtain.
And remember that Clinton had a bunch of criminals hanging over his head, who, assumedly when he stepped the slightest bit out of line, quickly made a semen-stained dress appear.
In short, the Democrats screw us with the big stuff, yes, but the Republicans are total monsters without any pretense of social conscience whatsover.
Another thing. Obama did say at one point — almost in coded fashion — that he wanted to hear what the people thought; whether or not he was making mistakes. A months-long protest clogging the streets of Washington would send the message, if that’s honestly what he’s waiting for.
And that, in a nutshell, is the last remaining grain of Hope(tm) I have remaining. Aside from that, given the Afghanistan surge, the continuance of rendition, the deep soul-kissing with Goldman, etc., it’s pretty much Bush Lite with a hearty side of charitability.
In response to another comment. See in context »Morganbird, you’re absolutely right, and I didn’t mean to imply such a reductive approach to accountability. The Glass-Stegall repeal was, of course, proposed by Gramm in the Senate and Leach in the House (both Republicans), and passed by the Republican majority. I’d still point out that Democrats across the board rolled over on it with very few exceptions.
My point was more that, given their complicity (which is probably too kind a word), the Democrats have lost any claim to higher ground on the issue. And this started most egregiously under Clinton’s neo-liberalism. And despite the Republican majority, I think it’s perfectly fair to burden Clinton with a great deal of blame for the repeal simply for failing to exercise his power of veto.
There’s an insidious defense amongst the Democratic apologists that they don’t really want to pass the kind of legislation they pass, they’re just so hapless against this “brilliant” Republican machine. But given their track record when they actually are in total control of the Congress and White House, what conclusion can one draw other than that this is exactly the kind of policy they’ve always set out to do?
In response to another comment. See in context »You make quite a few good points, inmyhumbleopinion. American history (Revolutionary War, numerous strikes, etc.) has show that it often does take violence and blood on the ground for regular people to get the attention of the monied class.
To remind them that they can’t continually accumulate assets forever without taking care of the wants and needs of “the little people”. We are not a monarchy, empire, dictatorship where the citizens can be abused with no repercussions.
In response to another comment. See in context »I’m a big fan of voter-owned clean and IRV (often combined to make one big happy)elections, so I’ll post a few links that I may have already posted before:
(http://www.publicampaign.org/)
In response to another comment. See in context »and
(http://instantrunoff.com/)
[...] Matt Taibbi: Fannie Mae and Freddie Mac were bad, it is true, but there is still plenty of blame to go around [...]
Matt, have you ever heard the saying “Life is too important to be taken seriously”? This economic bullshit we are currently living through makes me believe that phrase is more true than ever before.
Because, when faced with such corruption and just plain human nastiness, with Wall Street (and the government) showing a reckless disregard for the “common people”, sometimes all we can do is laugh.
Or we may go crazy.
I’m glad to see someone is not afraid to call a spade a spade. Every time I read an article on mainstream media it shocks me. How blatantly this all is playing out and no one sees a problem with it. They just laugh it off like it’s some kind of joke. Even some of those quacks have a hard time reporting the story with a straight face. It’s hard to teach your kids to be honest, accountable people when everything they’re exposed to is corrupt!
The only way you’re going to sell the complex version of this to the American public is if you write it up as a primetime drama and air it for an hour every week. Otherwise it’ll get the same soundbyte treatment everything else does – as you basically point out. Folks have an amazing appetite for detail when it’s intriguing or interesting, but any fact that can even remotely be viewed as political is now viewed through a lens eagerly distorted as conveniently as possible by the average voter. There is no point at which things become apolitical anymore, it’s dead and buried until whatever massive event happens that wakes everyone the fuck up (and, amazingly, this last year wasn’t it).
[...] This post was mentioned on Twitter by lewisdvorkin, stateofaffairs, TWT TRICK CARS, TRICKOUT CARS, cf bateman and others. cf bateman said: RT @trueslant Fannie, Freddie, and the New Red and Blue – Matt Taibbi – Taibblog – True/Slant http://bit.ly/7PUzgj [...]
First Monday of twenty ten and I’ve already learned (relearned) some new words:
Alt-A
class of nonprime risky mortgage between subprime and prime
GSE – Government-Sponsored Entities
Fannie Mae and Freddie Mac
Cui bono?
To whose benefit?
Crackonomics
take all the spare money from four square city blocks and turn it into one tricked-out Escalade
protocapitalist
a system whose primary driving force was the incessant accumulation of capital
____________
My knee jerk reaction is to think, “Who will punish the bad guys and make them pay for the damage they’ve done?”. You know, who’ll uphold the social contract?
But after reading articles such as this, I realize there are no good guys. There is no one watching out for the best interests of the USA as a whole and middle class/working/poor people in specific.
There aren’t even many impartial observers who can point out when the political ideology ends are being played against each other. What better cover of distraction to allow the shenanigans to continue?
The last sentence is the most painful:
particularly since the Randian protocapitalists running the banks benefited every bit as much from this socialism as actual homeowners, and perhaps even more, when one considers that homeowners get foreclosed upon, while bonuses are forever.
Your punishment in the financial melt down depends on your location of the income spectrum. Who wouldn’t prefer to be punished with bonuses?
Regarding “cui bono?”, the French version of that is “a quoi bon?”, (“to what good?” literally) and it’s used more commonly in everyday conversation than ours which is more a legal term.
Serge Gainsbourg wrote a song called “L’aquoiboniste”, which in French comes out as a play on “Trombonist” or something, about someone who says “Eh, what’s the use?” to everything, extreme apathy in other words.
http://www.youtube.com/watch?v=4yo9Y0WRUqc
In response to another comment. See in context »Thank you for sharing such a *chanson douce/chanson caustique*
I loved this:
Un Aquoiboniste
Qu’a pas besoin d’oculiste
Pout voir la merde du mon-de
A quoi bon
C’est un aquoiboniste
Un faiseur de plaisantristes
Qui dit toujours a quoi bon
A quoi bon
Un Aquoiboniste
Qui me dit le regard triste
Toi je t’aim’,les autres ce sont
Tous des cons
Not sure about the association with trombonist, but I can think of a few that would fit what you’re suggesting.
In response to another comment. See in context »You’re welcome.
Well, the song title is definitely a word play on a “something-iste” like a “pianiste” or a “guitariste” or, most directly “tromboniste” just because that has the shared “bon” sound. Not that it was any commentary about those who play the trombone, no.
In response to another comment. See in context »Maybe some onomatopoeia on trombonist/bonist, but I just got that the song sings different characterizations of someone who has given up on trying. The guitar metaphor
>Un aquoiboniste
Un modeste guitariste
Qui n’est jamais dans le ton
A quoi bon
Compares the aquoiboniste to a crappy guitarist who can’t even manage play in tune.
It’s funny, on 1st hearing, even though I had your set-up, I kept hearing “aqua-boniste” – someone who loves water or makes it fun or something. It’s a witty enough song that I’m tempted to download. I can play it for frustrated students in their hour of need.
In response to another comment. See in context »“Blame the Banks” ultimately also means, “Blame the Government” as well – only the blame is for insufficient regulation. You can’t blame the banks for doing lawful business.
The only thing that the bank-hating side of the argument can really blame them for is the achievement of “regulatory capture”, that is, controlling their own regulators through lobbying.
The government-hating side, of course, is really complaining about too MUCH regulation, the banks being “forced” to make bad loans to poor people.
I don’t think one needs to get into long economic proofs that this wasn’t so; you just need to look at how enthusiastically they sold and pushed those bad loans. If they were being forced to make them by idealist, lefty regulators, they would have made them with a maximum of reluctance, gritted teeth, and foot-dragging. And there would be unsuccessful lobbying efforts they could point to where they tried to escape the poisonous requirements.
I don’t disagree that blame is shared all around – you achieve regulatory capture with campaign donations and junkets, nobody held a gun to the government’s head. My point is that the mechanisms of the corruption all run through a choke-point on the government side, the regulators and the Fed.
The solution is thus clear if difficult: regulatory capture must be undone and the Fed made responsive to the long-term needs of the larger public, not the short-term needs of Wall Street.
I’d start with a major staff turnover, something Congress could probably push for successfully if they had enough pressure put on them by their voters.
Sure. Except that a lot of this had nothing to do with regulatory capture at all. A lot of this was private lenders making bad loans, then private banks securitizing them and, using mismarkings of private ratings agencies, selling them to institutional suckers.
I would argue that while the mortgage bubble involved quite a lot of state participation/guarantees, it wasn’t a whole lot different in its particulars from the equity bubble, which was basically private entities fleecing private investors. In both cases the regulators stood idly by and did nothing, but the operating dynamic was private capital turning fraudulent/bad investments into private profits. It seems to me that what made mortgages such a logical pick to reinflate the bubble was that with so much saved wealth destroyed in the previous scheme, the next bubble had to involve borrowed money, and government sponsorship of “home ownership” was an easy way to make that happen.
What I take issue with is the notion that the bubble was caused by some socialist/government scheme to give homes to poor people. In my mind the poor people were incidental to the larger scheme, the same way wrecked cars are incidental to insurance fraud.
In response to another comment. See in context »Even worse, people (poor or otherwise) didn’t get as many houses as there were financial products sold! You wrote in RS July 9-23: “58 percent of the loans included little or no documentation — no names of the borrowers, no addresses of the homes, just zip codes.”
Mortage-backed securities without mortgages.
In response to another comment. See in context »Just last week, the primary dealers sold $576 billion more of them than they could deliver. Meanwhile, Treasury is spending taxpayer dollars to take them inside: another $9 billion last week.
One grows infinitely tired of this “regulatory capture” talking point/meme crapola!
Just go back several years to observe the fraudulent collusion between JPMorgan and Enron (JPM’s $2.6 billion in falsely identified loans-as-commodities-trades), and so many other banking and accounting frauds among the banksters, insurance companies (AIG and Brightpoint, then AIG’s largest insurance swindle in history, the writing of endless CDSes) and biopharmaceuticals (Eli Lilly, Pfizer, HCA, etc.).
This was criminal fraud, perpetrated on the middle and working classes, as ultimately it is we who are saddled with all that debt they peddled.
And wait until the full story on the real reasons for all those pervasive student loans – at such high levels – finally makes it into the popular consciousness.
Again, the basis for endless securitizations for university cronies and their corporate elites.
In response to another comment. See in context »Thanks for the correction. I clearly have too much faith the power of government. I unthinkingly assumed that something the size of a bank – I mean, christ, I’m Canadian, we only have five banks, and the smallest is larger than some of our provincial governments, economically – that a BANK under proper regulation would basically be committing fraud as a business model..that would never happen.
Fraud will out, eventually, at least really large frauds. There must have been a lot of lying to themselves going on? “There will be some losses, but its so complicated it’ll never come back to us.”, or even “The house values will ALWAYS keep going up, so this isn’t fraud.”
Unless they actually predicted the outcome we have today: everybody would know they were defrauded and it would still be impossible to DO anything about it.
In response to another comment. See in context »Matt. I love you and your contributions to helping people understand this crisis have been very appreciated. But you are dead wrong on this one. Fannie and Freddie bailouts $110 billion. Way more than we’ve spent bailing anyone else out. And it’s said they will cost us $400 billion when it’s all said and done. And you don’t think there was regulatory capture. The FED is the banking industry’s primary regulator and Alan Greenspan encouraged alternative mortgage products. Fannie and Freddie own or guarantee 40 percent of the $12 trillion in U.S. residential mortgages. Lending is about deploying capital in the safest possible way and our government has proven they are not capable of making those decisions. How can you say this wasn’t a socialist scheme. Take the peoples money to guarantee loans to people who can’t afford them. That is socialism. If Fannie and Freddie account for 40% of the market that is a socialist scheme.
In response to another comment. See in context »nobody in govt gave poor people money to buy CRE or CDSs…and the CRE implosion is not done…I would hope after AIG/GS et al meltdown, it should be obvoius that private businesses can recklessly trash an economy in like no poor, pissed off redneck could ever hope to, and CRE proves that small, medium and big businesses can be be way more reckless in their purchases, with way more money, than poor homeowners. Housing was leading edge our collapse, but no way that alone would have done such damage if banks, investment banks, were not so leveraged in all aspects.
In response to another comment. See in context »Your assessment is actually correct and the reason I know that is because I myself have knowledge of the financial/mortgage industry. What’s puzzling to me is why such inconsistancy in your assessment of all matters.
You ran around like a man who hair was in flames in a crowded theatre yelling fire! so you could perpetuate the falsehood you continue to spew which alledges that the President is a sellout because of his help as it pertains to Wall Street,etc.
The fact that you do have a clear understanding about what really happended as it pertains to the Morgage Industry and the secondary market,leads me to believe that you recognize why the administration help the large banks and AIG which is a Insurance Corp.
Keeping it simple:Had the President not helped in the financial matter,Americans would be even worst off,unemployment rates would be higher,more jobs would be lost,foreclosure rates would be higher,more people would be without healthcare,etc.
I could go on but instead I say to you as someone that’s familiar with the President background I know he’s not a sell out. You are just playing the class war card because you know it’s an attention magnet.
I along with many find your deliberate disrespect of the leader of the free world repulsive. Unfortunately it could be said that if Obama was white would people like you feel so free to say such derogatory things about him.
Although I agreed with your assessment of the mortgage mess the fact that you’ve told an outright lie about the President you really don’t have a lot of credibility. It’s okay to have an opinion but when you try to pass it off as facts there is when your journalistic integrity has been set aside. Unlike many I can cut through the spin of pundits,etc.
I’ll end my comment by asking ‘What’s The Difference Between A Paid Lobbyst,A Political Talk Show Host,A Journalist,Pundits,A Editor-In-Chief of a blog,And A Contributor to a blog?None,because a paid lobbyist may use bribery as a means to and end,while the others uses fear mongering and threats.
In response to another comment. See in context »*Correction: to my comment which was ‘if people like Matt Taibbi would be making such derogatory remarks such as calling Obama a sell out if he was white.’ Because of the President physical appearance I sometimes forget he is white and black.
What I should have said if the President physical appearance, meaning skin color was white would people like Matt feel so comfortable in speaking in such a disrespectfull manner about the leader of the free world.
In response to another comment. See in context »Spot-on! Matt wrote: ” The side blaming the government tends to belong to the free-marketeer class and divines in safety-net purveyors like the GSEs and in the Fed’s money-printing fundamental corruptions of the capitalist ideal, while the side blaming the bankers tends to belong to the left-liberal tradition that focuses on greed and seeming absence of community conscience among the CEO class as primary corruptors of the social contract.
In the former view the government is to blame for punting on its oversight responsibilities and for corrupting the financial bloodstream with market-altering guarantees, while in the latter view the bankers are at fault for lobbying the politicians to make exactly the same moves” , but I agree much more strongly with this :
“The government-hating side, of course, is really complaining about too MUCH regulation, the banks being “forced” to make bad loans to poor people.”
Isn’t it funny how, before the bubble burst, we NEVER heard the now much-touted right-wing meme about how Socialist Big Brother government was FORCING those poor bankers to make bad loans? And I still have yet to hear any confirmed stories of actual bankers’ firsthand testimony of being “forced” to issue loans against their own better judgment. Anyone on the “right” who compalins about government falling down on the regulatory job is crying crocodile tears, as they’ve been doing all they can for decades to de-regulate where they could, and weaken enforcement where they couldn’t. We can blame both banks and government for what’s happened, but there is only ONE ideology responsible: “Free” Marketism.
In response to another comment. See in context »Absolute bullshit. While it is abundantly true that regulators suck, congress is corrupt, and any problem of this magnitude has multiple inputs the private sector committed fraud. Law and regulation is replete with anti-fraud statutes. They were violated and yet no-one is in jail. This is an outright pass by our so-called outraged public officials on the private perpetrators.
In response to another comment. See in context »Unfortunately this analysis is correct. The housing bubble makes the dot-com madness seem almost rational; at least there were some (mostly laughable) business plans and perhaps a coil of fiber optic that got built out. There may have been bad actors but it did not play out as left vs. right wing so much.
When San Diego and Orange County homes started to become offered with 100% loans the fact that the local media did not have a local correspondent call it for what it was (mania/ponzi etc) is negligence. This bubble has allowed people to back load their political leanings onto whom they consider the bad actors. There are so many to go around that it’s easier to divide up the pool as one’s biases see fit.
There’s no point in trying to argue rationally anymore. The name of the game is making ideological points for one’s side, and the truth, which hurts, be damned. To paraphrase Voltaire, the Randians make me long to go on all fours.
Mr. Taibbi,
Everything you wrote is dead-nuts on, thank you. However, you have pointed out half of the problem. The flourishing of bubbles, scams, and Ponzi schemes over the last two decades is not the result of personality flaws or intellectual shortcomings of individuals on Wall Street or among the economic regulatory bodies. These men and women are not fools or stupid, they understand that these devices are only short term sources of profits, ones that are ultimately corrosive to the long term health of the US economy. The fundamental problem is that there is no alternative outlet for investors.
Imagine you have 100 million dollars to invest and you want the greatest return that is save and legal, where do you put your money. Legitimate, legal investments in the US pay hardly anything at all. Nancy Miller has two excellent posts on how poorly traditional investments have done.
http://trueslant.com/nancymiller/2009/12/31/splash-safe-landing-for-the-economy-but-too-much-was-lost/
http://trueslant.com/nancymiller/2009/12/20/the-00s-the-biggest-loser-of-all-for-stocks/
The WSJ reported that the first decade of the 21st century was the worst performing decade in two centuries of stock market history. Washington and Wall Street are only too aware that there is an investment crisis. This is main reason that they have been repealing regulatory safeguards and turning a blind eye to Wall Street shenanigans, this is the only way to create a profitable outlet for investors. I am sure that they are all thinking that these are just transitional allowances until some more substantive, longer term solution comes along. There is little doubt that the real estate bubble was a direct result of economic regulators trying to alternative investment opportunities following the “dot.com” bubble / bust.
How many communities in this country once had thriving industries but are now dependent on casinos and tourism? Wall Street has made the same transition, it was once a place where investors met manufacturers to build industry. Speculation and gambling were always a part of Wall Street but since the 1930’s they were just a side-show, now they are the show.
With the lose of our industrial base, where else can investors get a competitive profit except through bubbles, scams, and Ponzi schemes.
Sure. Except they’re not making profits. They’re losing money, great masses of it in fact.
What you’re talking about is compensation. There is no way to make high short-term profits when there are no easy investment opportunities. But when you can take some homeless person, give him a mansion, then sell his debt to a pension fund for real money, there’s a profit for you! Not a real profit, mind you, but a real bonus comes out of it.
I get that there weren’t many obvious high-returning investment opportunities suitable for all that money. But there were some that panned out, and there were probably a lot more that were never discovered because too much energy was expended simply trying to steal the crumbs still lying around. What if all of that money had gone into alternative energy companies? Into education? Border security? Aerospace research? Biomed? We might be sitting on a pile of cancer cures and solar generators instead of worthless IOUs. 9/11 might not have happened. We might not be at war. Who knows?
This story was always about the changed priorities of the investor class. Instead of taking chances on the industry and imagination of the American people, they decided to just steal the stuff those Americans already have. That’s the difference between bubbles and forward-thinking economics. Hell, that’s why we supposedly pay bankers so much — it’s their jobs to take money and use it to create new businesses that haven’t even been developed yet. To let them off the hook because there was nothing to invest in but savings accounts… to met that’s more an reflection of their general incompetence to do their jobs correctly.
In response to another comment. See in context »Mr. Matt,
You make, as always, the greatest of points. What if they had amortized for the infrastructure of the company, the country and the future? But they didn’t.
And they did, in fact, sometimes make money as well as save money, because the tax structure was altered over the preceding thirty-some years — thus allowing for private equity firm leveraged buyout “pump-and-dumps” — money flowing to debt — and the tax situations involving all those securitizations and their fantasy finance in credit derivatives. (SIVs, SPEs, SPCs, SPREs, offshore finance centers, etc., etc.)
But your point in the responding post still is the most salient; what if investment for the future, and the actual spreading of wealth (which is the principal engine behind real progress – both technical and socioeconomic) — took place instead of the further concentration of unearned wealth.
In response to another comment. See in context »“I get that there weren’t many obvious high-returning investment opportunities suitable for all that money.”
It was the other way around: these so-called investments created the money.
In response to another comment. See in context »Matt,
I agree, your essay was dead-on. As a large fixed income investor representing ‘real’ investors, I can attest to the fact that investors knew, but many simply avoided buying mortgages backed by crap loans. That’s not the issue. The fundamental issue is the Wall Street model for packaging and selling securitized mortgage packages was to find the sucker. The entire economics of a securitization depended on finding the expensive execution. When one class of buyers dried up, or blew up, Wall Street re-crafted the entire package in an effort to create a new product for a new sucker. Wall Street knew they were piling shit on the doorstep of dumbass institutional investors, and they kept piling on the steam because they made money doing it. Does it surprise you that some of these investors were in Germany? They didn’t know shit about the US mortgage market, but they wanted yield. There is a saying in the bond market, “buying yield versus keeping yield”. These guys bought the promise of yield. The bond market remains a market of Caveat Emptor. When Caveat Emptor runs unchecked, and everything goes FUBAR, regulators, management, Board of Directors, and shareholders all failed. That’s the issue. As a society, we let this happen. There aren’t many Matt Taibbi’s smart enough, mad enough, and civic-minded enough to evoke change in their respective sphere’s of influence. But I’m being polyannish… it’s always about power and money.
Where I disagree with you is your reply to daivdlosangeles, where you free form a response to his concern regarding high-returning investment vehicles. In reality, investment mandates are awarded to managers based upon a specific market skill. You are starting from a flawed assumption when you assume a fixed income mandate can be invested in venture capital endeavors like alternative energy or biomed. There are trillions of dollars dedicated to the bond market. Some of these mandates are earmarked for taking credit risk, interest rate risk, macroeconomic risk, etc. The lines get blurred when say, an interest rate risk mandate can only achieve an acceptable rate of return by pushing the envelope. This includes buying a sham AAA-rated investment. The only blame here is that the investment manager did a poor job, and Wall Street gladly took advantage of the manager’s backsliding.
Bottom line, the entire system had holes in it. You can’t blame a single area. As a country, we are acting more like the Romans towards the end of the Roman empire, giving away bread and circuses. Without civics and good government, the housing boom, Wall Street corruption, and the rape of the American taxpayer is to be expected.
In response to another comment. See in context »Mr. Taibbi,
They are losing money NOW but for many years there were huge profits being made in these bubbles and scams, at least for a while. Tract home builders made billions of dollars selling houses during the housing bubble. AIG, Goldman Sachs, &c made huge profits selling derivatives and the like.
You asked:”What if all of that money had gone into alternative energy companies? Into education? Border security? Aerospace research? Biomed? We might be sitting on a pile of cancer cures and solar generators instead of worthless IOUs.”
My answer:People did invest in those things, millions and billions dollars were invested. That is exactly my point, all of the good, legitimate investments were already taken. It is not that the legitimate investment arena does not exist, it does, but it was saturated. There are only some many good ideas out there that are ready for large scale investment. Further, these investments are not gigantically profitable, at least not for a long time, and sometimes not at all. For each Viagra (CHA-CHING!!) there are thousand duds. Even overseas, how many more steel mills can be built in China and still make a profit?
This is the nature of the crisis, profits need to converted into investments to make more profits. If they are not, it is just money. Money is taxable and just sits in the bank. This is why the issue of executive compensation is not real, if a corporation did get rid of it’s profits quickly enough, it just became money and taxable. If they give it away as bonuses, it is no longer taxable.
Investors simply ran out of places to invest, especially in this country. So rather than let the economy just sit there, the wizards of Washington and Wall Street created the environment that encouraged bubbles and scams, they allowed some place to invest that made profits, albeit only for a few years – but hey, it was better than nothing. It created some jobs, some prosperity, shallow and narrow it is true but what was the alternative?
In response to another comment. See in context »With all due respect, Matt; there is no such thing as profit. Never mind the intricate arguments of fractional lending requiring an ever-expanding money supply and the absolute inability to tender interest in excess of principle which doesn’t exist.
As the most pragmatic level, profit; specifically that which is extricated from net revenue to fulfill some personal incentive or bonus, serves only to rob productivity from an otherwise efficient system.
It is the equivalent of continuously extracting oil from a running engine, even as we turbocharge it. It’s simply a mis-allocated resource.
You’ve got your hand on the pulse better than most but I disagree that the priorities of the investment class have changed. They have not. This country, and our financial system has always embodied what I like to call free-lunch economics. Namely exploiting anyone and everyone to peddle worthless gimmicks and warez on the back of intense branding and salesmanship. I believe the old adage applies: shit can’t sell itself.
It has never and will never have anything to do with creating notional value or general improvement. Quite the opposite in fact, as the mechanisms of control are dependent on the predictability of the dispersed herd mentality and the continual systematic depreciation of the static state over time. It requires some massive irrelevant interaction (such as mining for natural resources) measured by dubious accounting. No value is created or destroyed, it is simply transferred.
The very nature of equity financing is precisely the pursuit of greater returns than can otherwise be gained without risk – with the specific intention of selling out to the greater fools just in the nick-of-time.
Banking, by definition is predicable and boring. No company in any industry can grow by more than a few percentage points per annum without creating lasting tangible value for the system at large. It is impossible, except on paper; as evidenced by the myriad array of financial wizardry techniques and cosmopolitan investment devices.
Fact is, if you are chasing an excessive return, you are chasing the intentional destruction of some other fool’s proprietary interest. Some may call that natural selection, but others would call it an ostensible division of faux-social castes delineated by the selective propagation of prescient information and intellectual capital.
Either way, it must be construed as what it is – speculation. Not investment. Capital – and more importantly equity – is not a store of value.
In response to another comment. See in context »Mr. Taibbi, I’m going to go out on a limb here and say there should be no investor class in the first place, that the existence of institutional investors at all is a major contributor to our current socio-economic reality’s absolute fuckedupness. I’ll start with my model of how I think things should be then point out the most significant divergences and their ramifications. I’ll finish by praying to whatever deity will listen for boulders to fall from the sky onto the heads of everyone who has ever gotten rich from institutionalized theft.
My ideal for investment is a wealthy man, or a group of organized people who together have enough money to fund an enterprise, putting their own money on the line to buy into a business or investment (real property or commodities) with which they are intimately familiar so that they understand the risks they are taking and so they are confident in the likelihood of success and factors which may contribute to the enterprise or investment’s success or failure.
This model provides a basis for sound, consistent growth by forcing investors to be EXTREMELY CAREFUL with their investments – that’s the principal component lacking from the current model. What institutional investors do is gamble. You can tell me all you want about SEC filings, blue sky laws, audit inquiries, and all of the other disclosure and regulatory regimes that exist, but these investors are NOT intimately familiar with the companies in which they’re investing. They’re familiar only with paper filings, usually fraught with misrepresentations. The institutions that consistently profit do so by cheating, whether through market manipulation (w/ government complicity and support) or computerized frontrunning or whatever other methods are available.
Nor are they gambling with their own chips, a fact which requires no lengthy explanation. Other people give the banks their money to manage, and it is all insured by the support of taxpayers. So it’s easy to see how the element of EXTREME CAUTION is here completely lacking, and in fact has been totally abandoned in a fatalistic orgy of spend-’til-the-big-one-hits (and it will hit soon if there is any justice in this world).
So on that note I send out my sincere prayers to God, Allah, Krishna, Vishnu, Wotan, Thor, Mercury, Satan, Baal, Tammuz, Jesus, Yahweh, Jupiter, Ares, Shiva, Athena, Zeus, and all of the many other gods I’ve overlooked that boulders fall from the sky and onto the heads of all bankers, politicians, insurers, and anyone else getting rich from institutionalized theft, and all of those who support them, and also pharmaceutical company managers for good measure. While I’m certain there are good people among these groups, I do not wish for them to be spared. I would joyfully give loyal service unto my death and beyond for the deity who can accomplish this for me.
In all sincerity,
Mike Brewster
In response to another comment. See in context »Like the point on malinvestment…Just an example, I’m a boring old civil engineer. The ivy league school I went to started up a “financial” engineering program to go along with the boring sutff like computer sci, mechancial engineering, electrical engineering etc…Not sure how financials became an engineering subject. Why did they do this? But of course, the grads were gobbled up and made fabulous bling! Off doing some slimy HF trading or magical securization or some such. I’m sure it provided great value to society, similar to some chemical engineer working on weaponization of white phosphorous. Apparently this financialization of an economy is common phenomenom after a solid economic boom, like we had in 50s and 60s. Think of where investments and ivy league grads went before financial “innovation”. Money pouring into deception is of no benefit, except for the fact, I guess Wall Street did export a lot of fraud, probably one our biggest exports along with guns and hollywood movies.
In response to another comment. See in context »I agree in general with your points above and realize your question about where to invest $100 million was probably rhetorical.
But since you asked, I’ll ask another question which is not aimed at you personally, just an observation. If a person has $100 million, why do you they to invest in anything at all? Isn’t that enough to live comfortably on? Even a small return on $100 million is pretty big money. If somebody told me I could have a 1% return on that per annum in perpetuity I think I’d take that deal. Hell, even a tenth of a percent return is more than the vast majority of people make in a year.
Many of the problems we are facing with this financial crisis come from the fact that people who are already filthy rich seem to feel that they have some natural right to use that money to make even more and that there should always be investments with high rates of return for them to take advantage of.
In response to another comment. See in context »Above should read “…why do they need to invest in anything at all?”
In response to another comment. See in context »Hello lymanalphablob,
You asked “Why invest the 100 Million dollars at all?”. That is what investors do, they invest. If the money is not invested, it is just that, money. It is then taxable and just sits in the bank. It is the iron law of capitalism that capital, i.e. investments, seek the highest return. That 100 million dollars, if not invested, will rather quickly disappear while if invested, can grow into a billion dollars.
In the free market economy, it is grow or die.
In response to another comment. See in context »If $100 million will disappear quickly if not invested then I’ve obviously been going to the wrong parties for many years. That is simply untrue. If a person deposits money into the bank it does not simply get taxed until it disappears – the interest it earns get taxed and the principal stays right where it is providing it doesn’t get spent.
I stand by my point that there is really no “need” for an individual to invest $100 million when they could live quite comfortably off the interest. Things like pension funds are a different story. As it stands now they have to invest and turn a profit to keep the deal they made with their employees for retirement. But even that is not sustainable in the long term as people live longer and companies continue to get bigger so each pension fund has more and more people it needs to take care of.
The “need” for perpetual growth is the fatal flaws of the capitalist system because you simply cannot have constant growth in a finite world. Something has to give eventually and we are seeing that happen right now. The entire system has to change. Unfortunately I have little hope that this will be done voluntarily through change in leadership from the voters and new regulation from new elected officials. The oligarchs are too entrenched and I suspect we’ll see the rats continuing to grab for every nickel they can as the whole system eventually collapses because nobody has the political will to make the necessary changes.
In response to another comment. See in context »The problem is rampant greed.
“Imagine you have 100 million dollars to invest and you want the greatest return that is save and legal, where do you put your money. Legitimate, legal investments in the US pay hardly anything at all.”
I imagine that if I had $100 million to play with, I could invest it at 1% and live very comfortably on $1 million/year interest. But not the billionaires. I’ve heard of hedge funds that were offering up to 30-40% ROI.
How much is enough for these people?
In response to another comment. See in context »I am confused by something re: “The fundamental problem is that there is no alternative outlet for investors.”
There seems to be a hidden assumption here, namely, that people with 100m$ have a right to (high) profit(s).
To start, what I learned in HS about economics was that you took risks, and the interest you got on your investments were proportional to that risk (give or take). However, I always understood this to mean that you could also lose money, which, assuming not everything in a given portfolio bombs, means your returns will be lower, but not negative.
Continuing from this fairly basic rule, it seems rather odd that those $100m investors are complaining about the fact that the returns were too low for their liking. Why is this a valid point at all? Is it because they didn’t know that the people they were comparing their returns to were fraudsters, or just because they felt that “if they can get away with fraud, why can’t we?”?
If they’re comparing their to those things we now call bubbles, sure, they’re making less, but that’s just because you can more easily cheat people out of money than by doing hard work yourself (by finding good investment opportunities).. but if you invalidate the “data points” that represent those fraudulent investors (for short, “banks”?), I doubt they could still say they were doing “bad” per se.
What seems to be going on in your example, however, is that they just feel it is fair to conclude that “they’re not getting high enough returns” when they’re comparing their profits with those ‘others’.
Moreover, isn’t it possible that that “investment crisis” you mention was exacerbated specifically because (by) everyone (was) moving towards “higher-return” investments (e.g., hedgefunds going locust on companies by buying them up using borrowed money, then selling off the good parts, and then saddling the company they bought up with the loans they took out to buy them with?)
“With the loss of our industrial base, where else can investors get a competitive profit except through bubbles, scams, and Ponzi schemes.” < Probably by either investing in those countries where those companies went (if indeed an "industrial base" is a good source of profits), or by inventing something new to be the "base" of your economy.
In response to another comment. See in context »Matt, Love your work on GS.
Goldman Sachs Conspiracy: The proof is in “The Partnership.”
The fact that Goldman Sachs re released their book, one year after it’s original copyright date of Sept of 2008, in response to conspiracy theories, proves that the theories have some validity. It’s suspicious enough that the book, a 100 years in the making, was released just one month before the stock market crash. Yes, in the newly revised “Introduction” chapter, Goldman Sachs uses the word conspiracy. I am thrilled that the few of use that wrote on the subject had such an impact that Goldman Sachs found it nesscecary to re release their book.
They also added a last chapter entitled “A Perfect Storm” of course after they could see how Paulson’s inspired plot to crash the markets, and then loot the US Treasury played out. This new last chapter (released one year later) is preceeded by a chapter entitled “Before the Storm.” How cute is that? “Before the Storm” and a “Perfect Storm.” Well get this.
The 1st version came out one month before the stock market crash, and so them using the title “Before the Storm” many months before the crash, making Goldman look a hell of a lot smarter than anyone else. And the fact that they used the word “Before” in the heading of the last chapter of the book, insinuates that they were planning to re release their book after the crash?
What are your thoughts?
Patrick the Painter
goldmansachsExposed.blogspot.com
Another outstanding post, Mr. Taibbi, with the usual excellent comments. However, I’m pretty sure this still only accounts for half(?!) of the story! Surely we must also hold accountable all those “honest AmerciCONs” who were “flipping” homes for outrageous profits (at some other person’s expense) for the preceding decade (or longer) and thereby artificially inflating the value of any and every property. Moreover, the mortgage lenders were/are not “faceless” corporations but conglomerations of “employees” who faithfully wrote the corrupt and potentially illegal contracts without thought or regard to their own complicity and culpability. What about the appraisers who facilitated these “deceits?” All only had “eyes” toward their own individual bottom-line and “job security” so why should they care about the outcome for the poor sucker, er, customer, they were facing. Just as the Frontline program regarding Bernie Madoff made clear, at least to me, not one of his accomplices ever “thought” to question the legality, let alone the ethics, of their operation. Bernie TOLD them it was “all good” so it MUST be, right?
What about the rest of us (yes, me too) who for more than a few decades have allowed ourselves to be bamboozled and myth-tified into voting-in ever more corrupt and narcissistic “representatives” much to our own detriment? I have no idea what “the cure” might be as even the most astute and aware of us seem susceptible to the manifest manipulations perpetrated from the seats of power. Regardless, judging from the news regarding droughts, floods, fires, crop-failures, etc. from around the world, perhaps nature is providing its own “cure.”
Maybe you’ve touched on why so many people keep the topic of the financial system collapse at arms length, colinc. In addition to the fact the industry speaks it’s own foreign language, most US adults have their hands dirty at some level.
For instance, although I’ve directly stayed out of the mortgage crisis mess, I did contribute to the melt down in other ways. I campaigned and helped elect candidates who are obviously complicit in keeping the whole mess going. People who repeatedly champion the wants of the investor class over the long term health and well being of the USA or the majority of its citizens. Using the power granted by voters to enforce the social contract to enact policies against the long term best interests of society.
The system government is so self-perpetuating in favor of the rich and the powerful, it’s hard to see how there could be a turn around. At least in my lifetime.
In response to another comment. See in context »Thanks, devans00!
I concur with your views, too. Perhaps this was at least part of Kucinich’s message a while back to “Wake-up, America!” Alas, in the age of “politically-correct” speech, where vague, ambiguous euphemisms and “spin” replace precise speech and “facts,” I see little hope that our shared situation will change for the better any time soon. Moreover, most of what Mr. Taibbi reports, taken in conjunction with articles on Baseline Scenario, FT and other places, I only see a change toward “worse.”
In response to another comment. See in context »I have never owned real-estate but once attempted that as a career in the mid-70’s. It took me about 9 months to learn just how “corrupt” and “unethical” that industry was, even then, before I quit. Alas, I didn’t “learn” until about a decade ago just how corrupt, unethical and self-serving most corporations are. In fact, I only find it increasingly apparent that the entire fabric of our society and culture are based on nothing more than outright fraud(s) to keep 90+% us nothing more than indentured servants of those in possession of the most “wealth.”
In case you haven’t seen it, about a year or so ago the Institute for Policy Studies had a report on CEO compensation and how it has “evolved” from roughly 1970 through 2006. In brief, average CEO “pay” went from about 20-times the “average American wage” (in ‘70) to more than 400-times in ‘06! Moreover, some CEO’s, especially those of the largest financial and insurance companies were hauling in more than 1,000-times the “average American wage.” Alas, most everyone I try to inform replies with “Well, it is what is. What are we going to do?” I have some ideas on that but, again, most don’t like it as it means they won’t be able to buy that next, new, shiny gadget!
BTW, I’ve never owned any other “equities,” either, as I see that, too, as “support” for the continued decimation of the “natural world” to the detriment of all life on this rock. Someday I might do a little research that I think will show that the CEO of any publicly-traded company made more money, annually, than all the dividends paid, combined. I can’t see how “that” could be construed as an “investment.” Seems more akin to just throwing money away or sending it to some televangelist to build their next mega-church. What a waste.
Anyway, thanks again and hope you have a “good” year, however you may define it.
Thanks, Man.
I’m not a finance industry person but I like to glean what knowledge I can from articles by Matt Taibbi, Zero Hedge (run by the Fight Club crew, apparently), Huffington Post and other outlets. I always double my understanding of the article by reading the comments.
I figure if I’m going to get screwed by forces out of my control, I might as well learn how its done.
In response to another comment. See in context »I feel exactly as you do Devansoo. As a 25 year old working his way through college I find the only weapon I have to wield in this world is my mind(Being financially handicapped with not many assets to speak of and no rich family that helps pave my road for me, all I can do is observe and learn).
Gleeming as much as I can from Matt Taibbi et al. I can at least become aware of the monstrous world that seeks to work me to death in the credit mine of America all in the good name of good quarterly reports.
In response to another comment. See in context »“HAFA” – Foreclosure Warning Dead Ahead!
Under the Radar – a bit – came this ditty at the end of November. Coupled with the “unlimited” Fannie and Freddie “credit line”, this may presage a veritable collapse in house prices this coming spring and summer – along with a massive “dump” of inventory.
“HAMP”, the Treasury’s program to “prevent” foreclosures, did not originally appear to have a “stick.” Well, here’s the stick folks – for those who cannot qualify for a modification, or who “blow it” while on a trial program and simply don’t get a permanent change servicers are in fact required to offer short sale or “deed in lieu” alternatives when they make sense.
http://market-ticker.denninger.net/archives/1811-HAFA-Foreclosure-Warning-Dead-Ahead!.html
Above link did not post properly. Need to copy and paste it…
The Taibbi never disappoints!!!!!!
But of course, it is ALWAYS gamed, framed and designed to be TEAM ONE versus TEAM TWO, that’s the entire design, going back almost forever. It must always be a sports (or other form) type of contest. It must always fit the winner-loser construct. (Never mind that the same individual — or organizations — own both TEAMS!)
In the Puget Sound region of Washington, a quasi-governmental transportation agency has virtually almost every legal firm in the state on retainer. This isn’t for egalitarian purposes, but so a conflict-of-interest will be in effect and none of these firms can sue this agency for corruption or malfeasance.
So too with the US congress — with the corruption so widely spread, THEY have little to worry about from the Kucinichs or (former Rep.) McKinneys or DeFazios, and in the other body as well, since only the Dorgans or Feingolds or Sanders will present any pushback.
And as long as people listen to that “engineered consent” from the foundation-sponsored NPRs (and other media formats) and their guests from those foundation-financed “think tanks” — then they will sheepishly go along with the overmind attitudes.
50,000 (plus) foundations + 5 corporate-controlled media + 40,000 D.C. lobbyists = prevailing reality
A simple equation, bearing extraordinary results: almost total domination….until the sheeple awaken (if they ever shall?).
And the end result: all those debt-financed billionaires, who still have some morons (and no other term suffices) still believing they “earned” their fortunes.
Selling snake oil, or debt, yields the same end result for the same crime.
Goodo Puddo! You got the track of today in hand and it really seems more like what happened a lot in the the 19th Century, fiscal-wise. Yea, the end of the 20th was a mess 80s onward but after the Great D things were kinda restful financially, so to speak. But that 19th Cent was topsy-turvy hell bent for election bad fundamentals most the way through. And we made it through… Nice piece, buddo…then again, those same biggies probably own your rag (RS) and’ll have you liquidated a la Stalin (It’s not me, it because of the cause…). There is no hope…then again, I think even Billy Bob Thornton could become a future Canadian citizen…
Da Best…
C
You are mostly correct IMHO, but didn’t you foget at least one other bad actor in cahoots with all this mayhem… The Cheerleading Financial Press?!
All those pundits and CEO’s and insiders where pushing this crap on people like a 3AM infomercial to cash in on get rich quick schemes if you just spend $199 bucks on a set of CD’s and kindergarten grade workbooks.
I’d say collusion is a pretty good word for what went on.
Everyone colluded to ride that horse until it dropped dead under them, knowing that Uncle Sam was going to have a fresh ride at the ready. That’s exactly what happened.
However, the notion that the best and the brightest of Wall Street were deceived by the hacks at Fannie Mae and Freddie Mac is absurd. They were, after all, selling their outlandish trash to those GSEs, too. The banksters have been getting their share of attention because they’ve been taking Treasury and Fed largesse and then thumbing their noses at everyone.
But, if it’s true that those aforementioned best and brightest had rings run around them by the numbnuts at the GSEs, it begs two questions: a) why do they then think that they’re now indispensable, and b) why do they think they deserve outlandish bonuses after being punked by the dweebs at the GSEs? Seems to me they want it both ways–can’t be poor deceived morons and masters of the universe simultaneously.
That’s why the banksters have been getting most of the attention–and that attention is not undeserved. Is this a systemic problem? Oh, yes, indeed, and there’s plenty of blame to go around, and yet, none of the colluding participants want to accept any of that blame. The banksters have just been more egregious about it, especially considering the amount of lobbying in which they’ve engaged in order to set us up for the next pile-driving.
We’d be a lot better off if the FBI returned those several-hundred-odd agents transferred to counter-terrorism duty back to white-collar crime-fightin’. And have Bill Black give `em all a pep talk on criminogenic environments….
No question both sides are to blame. Liberals bought votes by encouraging sub-prime lending. Conservatives/wall st. said Hell yea we’ll do that. We’ll make a fortune on this crap. We can overrate the CDOs, dump them on unsuspecting pension funds(working americans), and bet against the CDOs by purchasing CDSwaps. Then when the bubble pops we bone the average American again by terrorizing our way towards a bail out, TARP and the inevitable inflation that our “lender of last resort” The Fed will impose through quanitative easing. It’s called “in your face Kleptocracy.” They don’t even try to dress it up much anymore…..why??? They don’t have to….
“Nothing to see here, go back to your 34 bowl games and when you’re done watching those then tune in the NFL playoffs.” Oh and don’t forget the free porn sites on the net.
[...] Everyone Was at the Party Here’s a snippet from Matt Taibbi’s latest but the full article is here: [...]
In the 1960s I worked for a guy that had $100 million in stock – personal, not family money. The rumor was the family trust had many, many times that much.
The only other thing I remember was that we had to do a report on how many pencils each person used that week.
The moral is that some of the rich never get enough money for themselves and begrudge peanuts for anyone else. And this particular cheapskate was in the Social Register and renowned by Wall Street. Imagine the focus of the new rich and how callous they must be – beneath the facade.
Nice little essay, Matt.
Your main insight, and it is profound (by the standards of the MSM), is that the left/right divide is not the correct prism with which to separate out the important elements of the housing debacle.
Thank you for pointing this out.
I believe something more fundamental, frightening and dangerous is going on: our “elites” have abandoned the public good. By this I mean that those who tend to find, gain, and keep power in both private industry and government are best seen as a single group (with plenty of group infighting, of course). This group’s main goal is to keep power, gain wealth, and protect themselves.
When looking at a system, don’t ask what it claims to have as a goal. Look at what it DOES. What our system DOES is to redistribute wealth from the middle class to the wealthy class, while giving out enough welfare benefits to the underclass to prevent revolt.
Furthermore, the complexity allowed by computers, technology, and the Internet has been a huge enabler of the ponzi schemes and investment vehicles that have destroyed us.
I would also posit that old-fashioned Burkean conservatives don’t exist in the USA, and that they would a valid and important critique of the system (if they existed – well Pat Buchanan might be one): our elites have no sense of responsibility to local communities and home-towns, because they no loyalty. They are not really from ANYWHERE. The new ruling class is mobile and not tied to the fate of real communities.
The decay of democracy into this kind of drained, denatured, managed democracy was foreseen by many, including Thomas Jefferson, Spengler, etc. If Jefferson is right, maybe the only remedy is to rise up and start over.
Regardless, if there is any hope at all of justice and a peaceful redress of the systemic (and systematized) corruption of our economy and political system, it is only because of the courage of a few journalists and pundits such as you.
Thanks…
Yeah but Matt you have to take a little responsibility as well for the failure to take a deeper look at the GSEs. Remember in your famous exchange with Byron York, when he brought up Franklin Raines you cried racism.
That’s when I thought, Uh-oh. They’re not gonna have a freaking clue if they don’t understand the GSEs, and if the media aren’t gonna let that conversation happen because Raines was a minority, then they’re not gonna have a freaking clue.
The State regulators were ready to stop the predatory lenders when Bush over-ruled the states and insisted they accept the predatory loans.
They targeted the minority where 7 out of 10 qualified for prime loans, but were pushed into sub-prime.
The ratings agencies could have put a stop to the bundling as AAA ratings, properly rated them, and no one would have bought the CDO’s and bankrupted their pension funds.
The CDO’s had to fail or the Insurance Goldman Sachs bought “in case they failed” wouldn’t have paid off. Groan, what a country.
The poor minority home-owner did not mortgage his house 30 times over, but the banks did.
great post once again. i really like your style, if i incorporate your style into my own writing, please don’t sue me.
this is a bit of a side note, but when you wrote about Greenspan wanting to get invited to the right parties in Manhattan, I had this (unwelcome) vision of Greenspan blowing rails. Nothing wrong with that, but it sure is funny to think about.
Truth man, truth!
Matt,
I’m confused by something.
As I understand things, Fannie and Freddie play only in the secondary market for mortgages. That is, neither GSE originates any mortgage loan, they only buy mortgages AFTER somebody else has made the loan. See Barry Ritholtz’s “Bailout Nation” for further details.
From that perspective, the WSJ’s claim that the GSEs were primarily responsible for the financial crisis has no merit even if you accept Fannie’s 15-month old admission, which I’ll grant you. However Fannie/Freddie mischaracterized the mortgages they bought, they did not make the bad loans that helped spark the crisis and cannot be held responsible for doing so (NOTE: subprime was too small to cause the crisis; it was the securitization of subprime that inflated the size of the problem to a point where things could explode). The folks at ZH are smart enough to know this (and I’m sure they do), so they’re talking their book if they argue otherwise (and they tell all of us to assume that they are talking their book).
Nevertheless, something is still rotten in Denmark. Why did Fannie mischaracterize the loans it had purchased? Was it, perhaps, to nominally stay within guidelines it was supposed to follow when purchasing loans on the secondary market? Was Fannie already trying to bailout the banks through the back door?
That’s the real issue in the Xmas Eve Massacre: a backdoor bailout of Wall Street not subject to Congressional oversight. When you really look into it, I think you’ll agree.
In the meantime, I’d suggest spending more time at the Baseline Scenario, Calculated Risk, Barry’s the Big Picture, Yves’ Naked Capitalism, Jesse’s Cafe Americain, and Mish’s site (just to get a full spectrum of politics in there). ZH has a lot of provocative stuff, but it just isn’t a reliable starting point. You’re probably just smarter than I am, but I need the perspectives that these other bloggers bring to bear to understand whether ZH is spot-on or full of it.
taojonesing — The loans wouldn’t have been made in the first place if Fannie/Freddie had enforced solid full doc, old school underwriting. If they’d stopped buying poorly/fraudulently underwritten loans, the lenders wouldn’t have had a choice but to straighten up and fly right.
In response to another comment. See in context »An astute observation, to be sure – but I still find the argument absolving GSE’s of responsibility to be completely irrelevant.
Such idiosyncrasies are analogous to a mafioso money laundering facility. Regardless of where the business originates, it is still fraudulent.
FRE/FNM’s secondary securitization simply provides a veil to absolve our government of responsibility in perpetrating a ponzi scheme under the guise of mediating public and private interests. It’s not even a clever one at that.
Bottom line is, these GSE’s serve no tangible (let alone beneficial) purpose.
In response to another comment. See in context »I love everything about Mish except his economic anarchy/libertarian-thing that all rules and regulations are bad, but he does rightly point out the govt interference as issues with it. Mish is also sensible about people walking away, and generally on the side of regular folks.
ZH is useful though…and many commenters there are beyond partisanship, although Marla has issues…
In response to another comment. See in context »taojonesing – Fannie and Freddie matter because they dominate the secondary market for mortgages. In order for a loan to be saleable in that market, it must meet the underwriting requirements the GSEs set – if it doesn’t the lender will not be able to sell the loan on at a profit.
That said, the “admission” in Fannie’s Q3-2008 10Q that some of its Prime loans share characteristics with sub-prime loans is not what Wallison and Pinto make it out to be and shouldn’t come as a surprise to anyone – it certainly doesn’t to them, they’re just using the opportunity to grind their loans-to-poor-black-people-are-the-problem axe. All the 10Q says is “we classify loans as sub-prime or Alt-A if they were sold to us as sub-prime or Alt-A”. This has always been their policy, has not changed and everyone involved always undersood this. Prime loans can have “characteristics” of sub-prime loans (like low FICO scores, high LTV ratios and lack of docs) if there are compensating factors – there’s a whole complicated slew of guidance from the GSEs on what is and is not acceptable and while this has tightened up since 2008 it has not fundamentally changed.
In response to another comment. See in context »Mr Taibbi-
Taking Pinto’s comments as fact suggests you really don’t know what you are talking about. Pinto is a right-wing hack (as is Wallison). He has simply reconstructed the definiton of “subprime” to include a broad set of loans that were never considered subprime prior to his redefinition.
Pinto and Wallison are the chief mouthpieces of the WSJ-led campaign to try to blame the subprime crisis on the GSE affordable housing goals and the Community Reinvestment Act.
This is not to say that there were not major problems with the GSEs, but they were primarily ones of lack of regulation (on leverage, etc.) and on being pushed OUT OF buying loans (and into investing in subprime MBS) after the 2003 accounting scandals. The latter provided the vacuum into which subprime rushed.
You have credibility problems as it is. This just made things a whole lot worse in that regard.
At least Matt’s responses are kept clear. It seems an article like this brings out all the ersatz Krugmans with their hocus-pocus and one can see why the bottom line is blurry as everyone has a row-to-hoe. (Whew, and what boring books they would write.) I wonder what % would be Madoff given the chance…in the final reckoning. He had all the answers once too, real smart guy. But he gave in to money lust. No way to foresee just who will go down that path and too bad Frost did not spring on that arch type…just for laughs.
Reading your essay and all of the responses got me thinking about 2 things: stochastic process and cancer.
stochastic: random (http://en.wikipedia.org/wiki/Stochastic)
stochastic process: According to M. Kac and E. Nelson, any kind of time development (be it deterministic or essentially probabilistic) which is analyzable in terms of probability deserves the name of stochastic process.
(http://en.wikipedia.org/wiki/Stochastic_process)
Even random activity takes on a greater pattern when observed as a whole. Ant colonies are a good example. So does growth in a petri dish, which often starts with a lot of growth, then dying out as things get too big, then new growth; repeat.
cancer: a class of diseases in which a group of cells display uncontrolled growth (division beyond the normal limits) (http://en.wikipedia.org/wiki/Cancer)
Why the general public doesn’t get the idea that unlimited financial growth is just as dangerous for our economy as cancer is bad for our physical health is somewhat beyond me. I guess people don’t like to think that far ahead. All of the entities mentioned in your post and the comments above certainly helped people look at short term gain for long term pain.
Matt…, I can find no writer that has a better handle on this massize quiet screwing all the 9-5ers have been getting for the past 20 plus years. The only flaw I cdan see in your analysis is your yearning to hate on the bankers more than the politicians. It’s like claiming that one turd doesn’t stink as bad as another. Politicians are rats. Bankers are pigs. Which is worse? For you pigs are obviously worse. No accounting for taste, I reckon.
[...] 01/04/2010 robertecrump Leave a comment Go to comments Chief muckraker Matt Taibbi drops another one, this time taking on the collapse of the housing market and the convergence of interests [...]
(1) “Alan Greenspan, hell, he did [got involved in the bubble(s)] because he loves seeing himself on magazine covers and wanted to keep getting invited to the right Manhattan parties.”
I mean, you really think that was a motivation? I’d say status-quo bias more than ego. Do you think that, his desire to remain in good standing with the financial community kept him from taking action adverse to the financial industries (short term) self-interest. Whereas, for example, someone with a reputation for willing to “take on” financial interests [Eliot Spitzer, Elizabeth Warren] would’ve done better? Yah, probably.
(2) Given what you’ve written about all these (intermediate and recent) financial gains being illusory, and given what Simon Johnson (“outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.”_http://www.theatlantic.com/doc/200905/imf-advice et. al. have written you reckon we’re in for a Second Crash?
Indians…that’s what people want. Cause they didn’t have property issues. Oh yea, some wars over hunting grounds and tribal expansion, but nothing within the tribe. There was no land ownership. And you shit in the woods. Ah, but…coming up against cities with large populations in one place saw them go their way…until casinos. Now, given the network of gambling they are creating, it should be around 2025 that they start closing the noose, right?
Ah, derivatives, lovely derivatives were developed by a smart guy from Harvard, if I remember right. Which, if true, makes certain schools the fountain of…eternal avarice. Can they be cleansed?
It’s nice to talk about all the various organizations dealing with the economy but where do they get their backbone, their moxie, the ideas …the schools that send them their employees with new thoughts.
Economic organizations or laws are not usually in and of themselves evil. It’s the people who are in them/use them who create or do not create a climate of ethics.
Matt – you are dead on – -but what are we the public supposed to do?
Ive contacted my senator and representatives about banker bonuses on no less than 5 occassions – -and non of them even respond to my letters.
Seriously what is a citizen of an democracy to do – when the Senators and Representatives literally ignore the outrage? GMAC just got another $3+ Billion and we are now up to over $7 Trillion in US Marketable Debt
Congress is literally stonewalling the public while handing out our money?
What can we tangibly do about it?
[...] – Taibbi on Fannie, Freddie and the New Red and Blue. [...]
Ah, what is wrong with socialism? Let me tell you…and now I’ll bite my tongue…it all depends on how you handle it, like a rattlesnake.
I knew an old Piney down in the Pine Barrens of NJ. He lived with a 5 foot rattle snake. Ate with it, slept with…everything. I would sit and talk with him and the snake would sit next to us rattling. Big rattler… It had been hurt by a car as a baby snake and he healed it and kept it. However, he only fed it dead rats he had shot. He did not want it excited…you know, striking at moving things. Well, socialism is like that snake. You gotta know how to handle it. Every time I hear about some business owner who either divides up his company and gives the workers cash shares or sells the company to workers my heart gets warm. It just does…but it takes a certain set of circumstances and mentalities to do that. When it is not handled right, the snake will strike. As Comrade Stalin has shown us.
And I say this as someone who has spend most of his life working for himself, subcontracting…I never had to go to offices on mass transit or what Thorn Smith called the “slave galleys to success”. So yea, I like capitalism too. But then again I don’t like taxes all the time. Other times I figure they are important to keep the infrastructure of civilization going. Not too many economists talk about “civilization”. They just figure its always there and go on talking about money matters. But it is all part and parcel of keeping us intact…money and our culture must combine. Otherwise we’ll end up repeating the history of Easter Island that grew overcrowded and the people turned on one another. Or become a Mad Max sequel…
Here’s a good rundown of how a credit bubble in housing forms and how it infects everything it touches: http://mhanson.com/blog
prices ==> increased credit ==> prices ==> until prices or credit growth can’t be sustained and it blows up.
If it doesn’t load the 12/6 entry the post will be in the margin.
[...] Fannie, Freddie, and the New Red and Blue Matt Taibbi [...]
[...] Fannie, Freddie, and the New Red and Blue – “To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future.” [...]
The GSEs, Fannie, Freddie, subprime lending, and every other thing that you mentioned are merely symptoms of a greater malady.
Good post!
Always remember: the Red – Blue noise is good to keep the lower class distracted while the “Masters of the Universe” picks their pockets.
Good comment Matt. While I agree that there is plenty of blame to go around on the GSEs, this has really been the show of Barney Frank, Chris Dodd and Barrack Obama since 2004. Listen to the excellent interview with Charles Calomiris from Columbia yesterday on Bloomberg’s “On the Economy” with Tom Keene yesterday. Charles is talking $800-$1T in losses to the taxpayer thanks to the GSEs. This is why, for example, WFC does not have to absorb the risk from $1T in OBS residential loans in securitizations vehicles. All GSE guaranteed. But this is just part of the problem when you look at all of the other claims on the full faith and credit. Rock on. — Chris
Are all those people who spent $400-1000 a square foot for a condo or X-bedroom house in Miami/LasVegas/Naples/Phoenix/SanDiego/ex-rubs of LosAngeles (now selling for $150-250/sqft) not the taxpayers? Why do we not see that a bailout of the GSEs is a bailout of the taxpayers by the taxpayers.
In response to another comment. See in context »[...] Fannie, Freddie, and the New Red and Blue (Matt Taibbi) [...]
[...] Investment – Real Time Economics – WSJThe end of the revolution is nigh | The EconomistFannie, Freddie, and the New Red and Blue – Matt Taibbi – Taibblog – True/SlantEconomist’s View: Fed Watch: Out of the Gate with a BangDouble-Dip Risk Seen in Stall Speed [...]
About half-way through this post I though Mr. Taibbi was bringing a refreshing viewpoint — that “It Takes a Village to make a bubble.”
But in the end Mr. Taibbi falls back to the trite position that it was the Evil Bankers that created this debacle and everyone else were innocent bystanders (or just the “wrecked cars”).
The origins of the property bubble can be clearly traced to Clinton era policies that wanted to increase mortgage lending to poorer people. This resulted in direct pressure on Fannie Mae and Freddie Mac to purchase and/or guarantee subprime loans. This pressure was maintained by a cadre of congressman — Barney Frank being the poster child.
Greenspan’s post-stock market crase low interest policies were the ignition point that really got housing prices moving. The Bush administration only encouraged the concept of an “ownership society”, while failing to bring meaningful regulatory reform over the Fannie/Freddie beast (thank you very much Mr. Frank and Mr. Dodd, and by the way, Mr. Dodd, how do you like your “Friend of Angelo” loan terms from Countrywide?).
Installing an inept Christopher Cox as SEC Chairman led to the steamrolling by investment banks on the critical issue of proper leverage ratios (though it is funny that the resulting collapse of investment banks forced Mr. Paulsen to clean up a mess that he contributed to).
It was only at this point that bankers do what is to be expected — acted like greedy pigs and take a trend and milk it to the maximum effect.
The crucial point is that the pig pen they jumped into was ALREADY occupied — by Fannie, Freddie, Mr. Frank, Mr. Dodd, and a myriad of other politicians who profited from campaign donations and other payoffs.
Wall Street can’t manufacture a bubble — the only profit from it once it’s triggered. And in this instance, used gross levels of leverage to take it to extreme heights.
This is the point where I think Mr. Taibbi doesn’t get — he suggests that bankers knew this was a house of cards from the beginning and it was a conscious fraud. If so, why was Chuck Prince holding onto so much of the crap securities when the music ended and everyone stopped dancing? This holds true for Merrill Lynch, Bear Sterns, and Lehman Bros. Only the truly incompetent, when playing a game of “hot potato”, are still in the game, holding a lot of potatoes when it ends.
I think in the final analysis, these bankers were just as stupid and imprudent as Clinton-era HUD officials, OFHEO regulators, Christoper Cox, Alan Greenspan, rating agency analysts, and, let’s not forget, the people who, on limited and inconsistent incomes, actually thought it was a sound decision to buy a $500,000 home and to stuff it full of HDTVs.
Subprime borrowers were not innocent bystanders. They were offered a loaded gun and dared to play Russian Roulette. They could have easily walked away but instead chose to spin the revolver and to pull the trigger.
When I see congressman and regulators hauled in front of a government sanctioned investigative committee (like a 9-11 commission), I’ll believe we have reached the Red-Blue blame consensus advocated by Mr. Taibbi.
But for now, I don’t see why he is so concerned that the Randian protocapitalists are winning the spin war.
Did you not his article. To the extent regulators failed it was because they were captured. But there are many things that got out of control without any government invovlement or interference. How about derivatives, credit default swaps….shoot they are so beyond regulation they don’t even have a open to public transparent market. And yet is was they risky “insurance” policies that blew at AIG when Lehman rightly failed, and it was the AIG death spiral that really brought us to the brink. Did govt try to subsidize poor people to buy CDS? Really, govt did interfer, govt did abdict their policing power on Wall Street, leaving it like financial version of Jaurez MX, anarchy, impunity. And private hand, rich, insiders did bad too. If you keep thinking this is all govt, jsut as Matt said we are screwed. It is a trap we are in, we keep thinking if it is all Dems it will be better, or if it is all Repubs, it will be better. Well, Repubs had total control from 2000-2006 and all the deregulation got us exactly what. I’m not denying Clinton start alot of the worse de-regulation, despite being a progressive I can be very critical of Dems bad acts…why can’t Repubs ever do the same, I can’t even libertatians to admit this….your comments really make think we as a population can never unite against our common enemey, parasites that want to be above the law while the rest of us are under the thumb of unfair laws.
In response to another comment. See in context »It would be easier to understand your viewpoint if you could write a coherent and correctly spelled sentence.
Exactly which unfair laws are suppressing you?
Progressive policies were the origin of this debacle, which Matt’s article fails to acknowledge.
Otherwise, he does a pretty good of identifying all of the guilty parties — Republicans & Dems, bankers & politicians, regulators & credit analyst, etc. etc. etc.
The list of who isn’t to blame is much shorter.
But you can’t include the people that signed a mortgage for which on day one they knew they couldn’t pay, or for that matter, didn’t know how much they would need to pay. If you don’t understand the contract, don’t sign it. This isn’t rocket science.
In response to another comment. See in context »Well Mr. Taibbi, you made the guys suffering foreclosure sound so innocent while they hardly are. It’s true bankers, corrupted politicians, regulators and so on have been myopic and focused on their short-term goals and therefore should all be blamed. I’m all for that.
Still it takes two to dance. Had these homeowners thought through of it, they could have figured it out that these mortgages are really risky and puts lots of pressure on their personal finance. But no, they too were myopic. They too willingly drank the koolaid believing housing price would forever go up, zero downpayment would be great, option arm payment would save money and what not jackpot insanity that’s out there during those crazy years. Now they are upside down in their personal finance. Who to blame? It’s all other people’s fault?
We did have lots of renters who acted responsibly and stayed out of the housing nonsense. Well now the renters are charged to clean up the mess for the irresponsible people.
This nation has really become hopelessly corrupted and immoral from top to bottom. I mean TOP TO BOTTOM. Everyone is trying to make flash profits at someone else’ expense and doesn’t give a sh*t about honesty, integrity and so on. When their effort goes sour, they point the finger at everyone else instead of themselves.
The “Great Post-DotCom Credit & Real Estate Bubble” was like every other financial bubble I have ever read about. By definition, it was created by a crowd, was aided by leverage, was stoked by promoters (real estate industry), saw considerable numbers of people become overnight experts, and saw a decline in the average knowledge of the average participant. It grew to epic proportions based on the belief This Time Is Different. Finally it burst, causing the last composition of the crowd to get hurt. Like the aftermath of any decent bubble, it is the injured crowd who cries foul and politicians pander to the injured crowd by blaming the people on the other side of the trade (it is never “good politics” to blame the crowd for being greedy or irrational). The WSJ saying that GSEs are primarily responsible for the financial crisis, Obama suggesting it is “Fat Cat Bankers who caused this mess we’re in” are still simple iterations of the knee-jerk political response – Duck, and Pander.
In this case, we have generally blamed banks for buying overpriced assets with too much leverage and not enough reserves/buffer, being arrogant before the fall, and requiring a bailout. We do not blame Joe Homeowner for buying an overpriced asset with too much leverage and not enough reserves, and then subsequently needing a bailout. It is acceptable (or even politically desirable) to give 20x leverage to allow Joe Homeowner to buy his house, but it is not acceptable for the bank to be 20x levered on less net exposure with greater diversication. We blame the Fed and/or Congress for not having dampened the bubble early, but we all recognize voters don’t want bubbles dampened when they are in process, they only want the look-back option. Most of all, we don’t actually want to spent serious amounts of time rationally studying the evolution of the bubble, the bursting of which caused the ‘financial crisis’, and just who could have done what differently to make it not turn out like that. Spending any serious time doing so would eventually come to the conclusion that it is nigh impossible to regulate financial stupidity in an open democratic system, to regulate personal financial decisions so that people cannot get themselves into trouble is de facto socialism, and that the only way to make serious money in such a system is to short-term ‘time the market’ because long-term returns are regulated and dumbed-down.
Time will eventually heal us, and make things clear. We will eventually all realize that just like every other bubble, someone could probably taken the unpopular (politically suicidal) step of interfering with the bubble in progress, but didn’t. Institutions in the business of making money through their business of catering to demand (banks, developers, GSEs, real estate agents) could have said demand was unhealthily high for the long-term future of the business, and they could have decided not to participate to the same extent. But they didn’t. Investors in those businesses could have stood up at shareholder meetings and said “We demand that management lower profitability and aggressiveness (in lending to, developing, owning, broking, or selling real estate) because the profits you are earning now are unjustifiably high in historic context, and are therefore unsustainable in the long-term”, but we, and our pension fund proxies did not fight to lower the short-term profitability of our investments. The media could have refrained from stoking the public further (talk of “Flip This House” becomes standard barbecue conversation-starter, real estate-related ad spend is dominant, and CNBC talking heads turn every investment into a day-trade with a sound-bite (“The Dow fell 32 points today and the homebuilders as a group fell 1% today as investors worried about the long-term prospects for the economy and its effect on housing prices”). But they didn’t refrain. Most of all, the public at large could have decided that buying homes at high single digit multiples of income, and at ridiculously high price/rent ratios, was simply not good fiscal management – even if one could get a liar loan, or zero money down, or an option ARM to make a bigger house ‘more affordable’. But many didn’t.