T Nation

Wall Street: The Blame Game

At the beginning of the year, there were five investment banks. Now we’re down to two. Wall Street is reeling, and it looks like the treasury, and thus “we,” are going to have to pick up the pieces. But what happened and who is to blame? I thought I’d put the question to T-Nation’ers and see what you all think.

The Politico had an interesting piece this morning that inspired this thread, here are some excerpts:

[i] McCain has called for a commission to study the investment industry and recommend changes, including consolidating the various institutions charged with regulating them.

Like McCain, Obama is calling for streamlining the bureaucracy that overseas the business. But Obama also wants greater disclosure for investors and a broader definition of which businesses get regulated.

The game begins with the bankers who made bad mortgage loans, the so-called subprime loans to buyers who sometimes put no money down and underwent no background checks.

The next finger points at those who converted those loans into securities and sold them on Wall Street without correctly valuing or disclosing the risk inherent in them.

With the housing market hot, hot, hot, investment houses gobbled up them up without a worry about risk. After all, the bubble would never burst, and the money was pouring in.

As the transactions morphed and raced through the financial system, Washington was left largely in the dark.

Congress had been warned for years that Fannie Mae and Freddie Mac, the two quasi-private home lenders, were on shaky ground. But lawmakers who had long been coddled and feted by Fannie and Freddie refused to tighten oversight of them.

If they had, a tough regulator might have spied the inherent risks in the subprime market and required them to increase their cash cushion to counter future losses. And such a move would have sent a signal to Wall Street to take greater care, said an investment industry insider.

Others argue that the Federal Reserve Board should take some blame for keeping interest rates too low for too long and not seeing the threat of the subprime loan industry. [/i]

IMO this shows a distinct need for more market regulation. What do you all think?

[quote]Gambit_Lost wrote:
IMO this shows a distinct need for more market regulation. What do you all think?
[/quote]

The article leaves out a very important step. I don’t know why, but there is not one single mention of Andrew Cuomo - and by extension the Clinton Administration’s hand in pushing for the Sub prime fiasco.

http://www.villagevoice.com/content/printVersion/541234

If anything, we have seen what a meddling government can do to the markets in an attempt to legislate risk out of the equation.

Instead of more oversight, how about we just get the fed out of the home loan business? And while we are at it, maybe they could stop with the risk aversion bullshit, and allow people taking stupid risks to pay the piper?

[quote]Gambit_Lost wrote:
IMO this shows a distinct need for more market regulation. What do you all think?
[/quote]
Remove all regulation and let inefficient banks fail.

Think of the regulation that would be necessary to keep businesses from making bad investment decisions. Do you propose we regulate how much risk a company can take? Who gets to decide how much risk is acceptable…some bureaucrat?

Risk is a necessary function of the profit discovery process; giving loans to people with no job, income, or assets is a risk but when it pays off it pays off big. Why should the government regulate that if someone perceives it as a profitable decision?

Of course, when their customers default, oh well…don’t come crying to taxpayers to bail you out. Likewise, people who take loans they cannot afford cannot be bailed out either.

[quote]rainjack wrote:
Instead of more oversight, how about we just get the fed out of the home loan business? And while we are at it, maybe they could stop with the risk aversion bullshit, and allow people taking stupid risks to pay the piper? [/quote]

Agreed.


My,oh, MY!..how the words of Gordon Gekko have come back to haunt us time and time again…

"I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much!"

Greed, coupled with gutted regulation and oversight, folks…

Mufasa

Some quick points:

  1. “The Fed” refers to “the federal reserve system” or the Central Bank, not “the federal government.”

  2. From RJ’s linked article

[i]. He took actions that�??in combination with many other factors�??helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.

With that many pols at the helm, it’s no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors. [/i]

It seems your article is
a) calling for more regulation
b) suggesting the issue was bi-partisan

  1. I don’t believe this issue has been touched on yet (save from Mufasa)

The next finger points at those who converted those loans into securities and sold them on Wall Street without correctly valuing or disclosing the risk inherent in them.

What should be done about those who didn’t disclose the risk inherent in the securities? This is, I think, one of the biggest failures of oversight. And these individuals deserve much of the blame. If oversight is further removed wouldn’t we be more likely to see unscrupulous, greedy practices such as these?

  1. Nice quote Mufasa

I totally agree,Mufasa.

I posted this link in another in another thread,but this may be a more appropriate place for it.

http://www.guardian.co.uk/...article/7797708

Time will tell how this actually went down,but if the article is accurate,the behavior of the CEO is,in my mind,bordering on criminal.

Just so all are aware. Wall Street disclosed the risk in great detail when they packaged and sold mortgage backed securities. The investors, including some of the biggest investment banks, also read those disclosures when they bought them.

Nobody believed the disclosures and didn’t forsee this coming. It just seemed the worst case would never happen. Market risk was managed by pooling the investments or so it was thought.

For example the mortgage backed securities still have value. 98% of the mortgages are being paid. The problem occurs when the securities are marked to the market prices and the market adjusts the price on risk and expecations.

The value simply isn’t there and then the search for capital begins to shore up balance sheets.

Fannie and Freddie have similar issues but the main problem they have is that they simply cannot use the same business model to operate going forward. They didn’t have time to change the model, the change happened to quickly, and now they are screwed…along with others.

[quote]Gambit_Lost wrote:
Some quick points:

  1. “The Fed” refers to “the federal reserve system” or the Central Bank, not “the federal government.”

  2. From RJ’s linked article

[i]. He took actions that�??in combination with many other factors�??helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.

With that many pols at the helm, it’s no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors. [/i]

It seems your article is
a) calling for more regulation
b) suggesting the issue was bi-partisan

  1. I don’t believe this issue has been touched on yet (save from Mufasa)

The next finger points at those who converted those loans into securities and sold them on Wall Street without correctly valuing or disclosing the risk inherent in them.

What should be done about those who didn’t disclose the risk inherent in the securities? This is, I think, one of the biggest failures of oversight. And these individuals deserve much of the blame. If oversight is further removed wouldn’t we be more likely to see unscrupulous, greedy practices such as these?

  1. Nice quote Mufasa [/quote]

My only point in referencing that article was to show that your article completely ignores the guy who got the subprime thing going.

The Fed can do nothing but fuck shit up. All one needs to do is look at their abysmal track record to see that even more fed regulation of the markets will be more of the same.

The government’s role is not to hold the hands of those too stupid to invest wisely. If the investment vehicles are illegal, then the sellers of those instruments should be punished. But the derivitive market is not illegal. Anyone so ignorant that they can’t see the inherent risk in investing in loans that are made to people too poor to afford the loan should lose their money.

Social Darwinism. It is far more efficient than do-gooder politicians.

[quote]LIFTICVSMAXIMVS wrote:
Gambit_Lost wrote:
IMO this shows a distinct need for more market regulation. What do you all think?

Remove all regulation and let inefficient banks fail.

Think of the regulation that would be necessary to keep businesses from making bad investment decisions. Do you propose we regulate how much risk a company can take? Who gets to decide how much risk is acceptable…some bureaucrat?

Risk is a necessary function of the profit discovery process; giving loans to people with no job, income, or assets is a risk but when it pays off it pays off big. Why should the government regulate that if someone perceives it as a profitable decision?

Of course, when their customers default, oh well…don’t come crying to taxpayers to bail you out. Likewise, people who take loans they cannot afford cannot be bailed out either.[/quote]

A society that wants to destroy itself desperately and for the sake of the world, cannot be truly stopped. This supreme act of sacrifice is being done with no self-interest at all, which makes it truly moral (to have any interest whatever in the outcome makes the act immoral). Calling for the country to reverse what it considers a moral purpose, absolute sacrifice for no reason, is irrational. They won’t do it.

This is one situation where I’m all for equality, everyone is fuckin’ responsible for this mess.

The two others I didn’t see listed (sorry if I missed them) are;

  1. The monoline insurance companies. Most investors that purchased the securities also insured the investment. However, these companies only did 1 (or 2) thing(s). The one being insuring subprime mortgage securities and the second was insuring public debt issuances (such as cities).

  2. The damn people that took out the mortgages. Somehow these “victims” always escape blame.

[quote]rainjack wrote:
Gambit_Lost wrote:
Some quick points:

  1. “The Fed” refers to “the federal reserve system” or the Central Bank, not “the federal government.”

  2. From RJ’s linked article

[i]. He took actions that�??in combination with many other factors�??helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.

With that many pols at the helm, it’s no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors. [/i]

It seems your article is
a) calling for more regulation
b) suggesting the issue was bi-partisan

  1. I don’t believe this issue has been touched on yet (save from Mufasa)

The next finger points at those who converted those loans into securities and sold them on Wall Street without correctly valuing or disclosing the risk inherent in them.

What should be done about those who didn’t disclose the risk inherent in the securities? This is, I think, one of the biggest failures of oversight. And these individuals deserve much of the blame. If oversight is further removed wouldn’t we be more likely to see unscrupulous, greedy practices such as these?

  1. Nice quote Mufasa

My only point in referencing that article was to show that your article completely ignores the guy who got the subprime thing going.

The Fed can do nothing but fuck shit up. All one needs to do is look at their abysmal track record to see that even more fed regulation of the markets will be more of the same.

The government’s role is not to hold the hands of those too stupid to invest wisely. If the investment vehicles are illegal, then the sellers of those instruments should be punished. But the derivitive market is not illegal. Anyone so ignorant that they can’t see the inherent risk in investing in loans that are made to people too poor to afford the loan should lose their money.

Social Darwinism. It is far more efficient than do-gooder politicians.

[/quote]

RJ,
I agree with you almost entirely on this issue. I believe in free capital markets. But let’s also remember that unregulated markets can be a shitstorm. Hence how we got Enron. Even before they put everything off balance sheet they were creating their own markets. If they had a trade that was underwater in an illiquid market, they’d spend more shareholder money and buy more of the asset and mark it up to that new price, show a profit to the street and be rewarded with an increasing stock price.

If we want reduced regulation, we have to accept that it will also lead to an increase in the amplitude of both the asset bubbles and their eventual bursting. The higher the volatility the worse the average investor’s returns will be, inately they will do the wrong thing: sell on fear and buy on greed.

I personally think that we need some common sense in creating a regulatory structure and then make it strict. Violate “x” leverage ratio, you fail, no bailout. Can’t find capital, oh well, you knew the damn rules. And for god’s sake, no more implicit guarantees. It’s either their or it’s not. Isn’t time we stopped allowing our govermental entities to do things half assed?

[quote]Gambit_Lost wrote:

Like McCain, Obama is calling for streamlining the bureaucracy that overseas the business. [/quote]

Freudian slip on motherfucking dbol.

According to Nancy “facelift” Pelosi, it’s ALL BUSH’S FAULT! All these Wall Street shenanigans. ALL OF IT, ALL BUSH’S FAULT!
http://www.cnbc.com/id/15840232?video=857175221&play=1

[quote]skaz05 wrote:
According to Nancy “facelift” Pelosi, it’s ALL BUSH’S FAULT! All these Wall Street shenanigans. ALL OF IT, ALL BUSH’S FAULT!
http://www.cnbc.com/id/15840232?video=857175221&play=1[/quote]

She is a cunt. Plain and simple. Is she going to demand that Biden give back the millions he made on F&F?

Nope. Bush is to blame for everything that has happened. Never mind the fact that the Clinton admin was where the subprime fiasco began. But it’s all Bush’s fault.

The left has had control of both houses for a year and a half - can anyone point to a piece of legislation that was introduced by the dem leadership to address this?

[quote]rainjack wrote:
skaz05 wrote:
According to Nancy “facelift” Pelosi, it’s ALL BUSH’S FAULT! All these Wall Street shenanigans. ALL OF IT, ALL BUSH’S FAULT!
http://www.cnbc.com/id/15840232?video=857175221&play=1

She is a cunt. Plain and simple. Is she going to demand that Biden give back the millions he made on F&F?

Nope. Bush is to blame for everything that has happened. Never mind the fact that the Clinton admin was where the subprime fiasco began. But it’s all Bush’s fault.

The left has had control of both houses for a year and a half - can anyone point to a piece of legislation that was introduced by the dem leadership to address this? [/quote]

Agreed, I also think the dumbasses that took out loans for homes they couldn’t afford should be held accountable. Whatever happened to not spending every dime and living within your means.

AIG just got bailed out for $85 billion.

We the people… take care of your fuck up.

[quote]ajcook99 wrote:

RJ,
I agree with you almost entirely on this issue. I believe in free capital markets. But let’s also remember that unregulated markets can be a shitstorm. Hence how we got Enron. Even before they put everything off balance sheet they were creating their own markets. If they had a trade that was underwater in an illiquid market, they’d spend more shareholder money and buy more of the asset and mark it up to that new price, show a profit to the street and be rewarded with an increasing stock price.

If we want reduced regulation, we have to accept that it will also lead to an increase in the amplitude of both the asset bubbles and their eventual bursting. The higher the volatility the worse the average investor’s returns will be, inately they will do the wrong thing: sell on fear and buy on greed.

I personally think that we need some common sense in creating a regulatory structure and then make it strict. Violate “x” leverage ratio, you fail, no bailout. Can’t find capital, oh well, you knew the damn rules. And for god’s sake, no more implicit guarantees. It’s either their or it’s not. Isn’t time we stopped allowing our govermental entities to do things half assed? [/quote]

Nicely said.

Too low interest rates for too long leached discipline out of the market - banks and consumers could now take any risk, make any stupid decision they wanted, because they could always count on borrowing more, no matter what the current state of their assets. This is where the problem lies.

[quote]katzenjammer wrote:
Too low interest rates for too long leached discipline out of the market - banks and consumers could now take any risk, make any stupid decision they wanted, because they could always count on borrowing more, no matter what the current state of their assets. This is where the problem lies.

[/quote]

Interest rated being low had little to do with this. People getting home loans who had absolutely no business doing so is the problem.

The government tried to make housing more affordable by backing these home loans with your tax dollars. There was a ton of money to be made by selling these loans, and nefarious lenders were more than willing to sign people up into homes they could not afford.

Now the tax payer has to bail out the companies who bought these loans, insured these loans, and sold them in their CDO’s.