by hilzoy
"In late January, as Treasury Secretary Geithner prepared his proposal for handling the banking crisis, administration officials avoiding seeking input from Wall Street. "Those people are tainted," said one aide at the time. "Why would we consult the very executives who got us into this mess?" (…)
The administration's initial approach contrasted with those of the last two White Houses. Robert Rubin left Goldman Sachs Group to become one of Bill Clinton's top economic advisers, and convinced the new president that what was good for Wall Street was good for America. Under President George W. Bush, the administration "looked up to and admired Wall Street," says one banker. "The Obama folks don't even like us.""
"Meanwhile, Treasury Secretary Timothy Geithner and his colleagues worked the phones to try to line up support on Wall Street for the plan announced Monday. (…) Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun "slow-walking" the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions."
"But as the furor intensified, Mr. Obama's words to Congress — "we cannot govern out of anger" — seemed to take on less importance. Last week, he was asked by reporters on the White House South Lawn whether anger was getting in the way of pushing through banking reforms. "I don't want to quell anger," he replied. "I think people are right to be angry. I'm angry."
Bankers were shell-shocked, especially when Congress moved to heavily tax bonuses. When administration officials began calling them to talk about the next phase of the bailout, the bankers turned the tables. They used the calls to lobby against the antibonus legislation, Wall Street executives say. Several big firms called Treasury and White House officials to urge a more reasonable approach, both sides say. The banks' message: If you want our help to get credit flowing again to consumers and businesses, stop the rush to penalize our bonuses."
"Not to sound naive about this, but the absence of patriotism that galls. The lack of responsibility is sickening. These bankers delivered an almost mortal wound to the American economy. Their actions threw millions out of work and wrecked the retirement savings of tens of millions more. It is no exaggeration to say that they will cost us more than 9/11. (…)
That we even need a new raft of compensation regulations strains the boundaries of credulity. It makes you question the values of your countrymen. They were the principle beneficiaries of a decade-long bubble that they inflated. These Ivy League bundles of privilege were given every possible advantage and then took yet more than that. They took the advantages of high school seniors applying to college this year or entering the workforce next year. They took the advantages of seniors who had saved for retirement and parents who had invested to build their own business. And now they're refusing to help defuse the bomb at the center of our economy unless we pay them retention bonuses. Worse, they're threatening to flee the scene of the crime and make money off the carnage. That, it's been argued, is why we need to keep paying meeting their demands: Because we need them working for us rather than against us. It's chutzpah as the Yiddish define it: A child who kills his parents and then begs for lenience because he's a pitiable orphan. It's shameful."
what to say — these are not good people. but… i do think they’re ultimately rational people in the sense that money comes first, and they’ll end up doing things that they think will make them money.
so, while it’s utterly despicable and blackmailish, it’s hard to believe the threats are very credible. if they think they can make money, they’ll help. if they don’t, they won’t.
i don’t think patriotism has ever — or will ever — motivate these people (or lack thereof). it’s all money — that’s their world.
I’ve got,
Ninety thousand pounds in my pyjamas,
I’ve got forty thousand French francs in my fridge,
I’ve got lots of lovely lire,
Now the Deutschmark’s getting dearer,
And my dollar bills would buy the Brooklyn Bridge.
There is nothing quite as wonderful money,
There is nothing quite as beautiful as cash,
Some people say it’s folly,
But I’d rather have the lolly,
With money you can ma-ake a splash.
There is nothing quite as wonderful as money
(money money money)
There is nothing like a newly minted pound
(money money, money)
Everyone must hanker for the butchness of a banker
It’s accountancy that makes the world go ’round
(round round round)
You can keep your Marxist ways
For it’s only just a phase
For it’s money makes the world go round
(money money money money money money money
money money)
I believe you are fortunate that Obama seems able to keep his eye on the larger goal steering the ship of state through the storms rather than dealing with the sins already committed, and apparently being committed. And important that there are others who will remember and at appropriate time mete out punishment.
I have no idea whether the Geithner plan will work, but isn’t it a great advantage if it can be carried out without needing to get congress to produce new legislation?
At the same time I think it would be salutary if Geithner discovered that there was one bank that failed the stress test, and was nationalized- excellent object lesson for the rest of the Wall Street gang, and provide practice for Treasury/Fed, a test run so they are up the learning curve if they have to nationalize all the deadbeats.
I think an ear
Is there any reason why these Wall Street ghouls shouldn’t be facing charges of treason? I mean, are there seriously no laws with language that would cover holding the country and the government hostage?
Bankers are in it for the money, big shocker. In their defense, however, “patriotism” is an even more deplorable motivation than greed. I know if somebody told me that I should put my own financial interests aside out of “patriotism’, I’d tell them where to go.
A few objective points, though:
1. ‘Patriotism’ is an even more meaningless concept in an industry as international as banking and finance.
2. Various institutions have been resisting taking the government dollar before the whole AIG bonus thing blew up: bonuses are one of several reasons for fearing the government’s dollars – the major one being the fear that politicians will interfere with deals after the fact, a danger that the furor over AIG seems to have proved real. Don’t expect the media to consider this angle though.
3. The stress-test is probably useless anyway, apparently, but one thing it certainly does is give a government that’s now proved itself untrustworthy a good look at your internal operations.
“…considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.”
Awesome. If they can get private money to stay afloat I’m all in favour of it. Although one wonders where this capital was hiding while they’ve all been crying pauper back when bailouts were free. What, there’s suddenly no crisis of lending now?
Byrningman “2. Various institutions have been resisting taking the government dollar before the whole AIG bonus thing blew up”
I’d ask for a cite on that but y’know what? Good. Taking a bailout is not meant to be a preferred option.
You don’t get to screw people over, send a lynch mob after them, arrange for them to be in fear of their lives, AND still have them be your friends and allies.
Not even if they deserved it, which most of them don’t.
I’m beginning to wonder if Obama is all there, if he really thought it would go down any other way.
I’m not in the slightest surprised that the bankers’ principal concern is their compensation. Money, and the power that it buys, are the only values Wall Street recognizes.
If they can dodge this bullet, they will have learned nothing. We’ll then just have to wait for the next batch of “innovative products” that Wall Street cooks up to fleece us.
Obama the “pragmatist” is turning Obama the reformer into a joke. Is anyone surprised we haven’t heard much about “stress tests” these days?
Unless there’s another huge shoe Obama has yet to drop, we’re being sold out to Wall Street, again.
Both the stress tests and the attempts to get credit flowing again are essential parts of our attempt to solve the enormous economic problems we now face, problems that these very firms are largely responsible for.
I realize it’s conventional wisdom and very fashionable at the moment, but is the bolded bit really true? Because you (and others) are hanging a great deal of outrage on this claim.
It seems to me that the plausible causes of the current economic climate are:
1. A housing bubble. Folks who work on Wall Street aren’t responsible for that. We are. We paid too much for our homes, and we speculated too much, we took on too much risk. (The “predatory lending” claim is good at deflecting blame from ourselves — i.e., it’s good scapegoating — but there is a complete absence of credible figures or, even, incredible evidentiary support. It’s nothing but a white-toast bun. Where’s the beef?)
2. A supply shock, in the form of a massive increase in the cost of oil. Folks who work on Wall Street aren’t responsible for this at all.
3. Significant manufacturers — particularly, the big three — with an unsustainable long term model. Again, folks who work on Wall Street aren’t responsible for this.
4. Speculation by Wall Street investors. Yes, here is where some folks on Wall Street made bad, terrible, maybe even criminal bets. But these bad bets didn’t cause the downturn; they magnified the downturn. Without at least #1 — which fed them — they wouldn’t have gone sour as the did. Without #1 and #2, we probably wouldn’t have the current severe recession (it’d be milder).
The blame for the current economic crisis lies with us as much as — if not more than — some rapacious other who lives far away.
It’s difficult to accept, but there it is.
The housing bubble was created by Wall Street. It was the result of absurdly easy credit, and the whole point of extending such credit was to create more paper that could be leveraged 30-to-1 and bet against in “credit default swaps.”
The oil bubble was also created by Wall Street – too much money in control of the top 1% and not enough productive uses for that money meant that a lot of it was invested in commodities. Do you really think that legitimate supply-and-demand changed that much over a six month period? It was all speculation.
If punishment is not meted out now when the bankers are despised by the public and dependent on government life support, it will never be meted out. Even if the short-term results are worse, the only way that Main Street will ever recover is if the political power of Wall Street is decisively crushed.
Obama’s Laugh???
What most people are not discerning is, is that Pres. Obama is somehow aiding us in facing this “shadow” or darkness of greed in our society. He is not trying to Hide it or Cover it up! Ironically, he is being blamed for not trying to Fix it in a hurry, so it will not be Exposed….. But to truly fix it, we must face it, identify it and generate enough public consensus so that it can be changed. That is how change is made. That is why I see Pres. Obama as really a true change agent. True and lasting change can only come from the people, demanding change. That is why Obama can laugh, he knows that the fat cats’ days of unchecked greed and speculation are numbered!
Now GOP’s new buzz word is “unsustainable”, however, what was really “unsustainable” as the recent events so adequately portray is that George Bush’s Iraq War, tax cuts to the wealthy, jobs going over seas, tax breaks to companies that shipped jobs over seas, deregulation of banks and insurance companies, and more (which I will leave to the experts to flush out), is the really true Unsustainable and break down and collapse of our economic system, fabric of society (bridges, roads, jobs, education), you name it, he failed in all aspects of this society. There are “tent” cities popping up all over United States because families can no longer sustain to live in a house because they no longer have a job!
This new buzz word “unsustainable” is a hoax, disingenous and hypocritical. Remember, they want Pres. Obama to Fail!
And lastly, let’s be Clear, George W. Bush’s first year in office was spent more at the Ranch then in Washington. Where was the Party of No’s outrage then? May be if George had spent more time in D.C. working, they would have been more alert about the signs leading to 9/11, just a thought…..
We paid too much for our homes, and we speculated too much, we took on too much risk.
it takes two to make a bad mortgage.
Joe Homeowner should’ve known he couldn’t pay that mortgage, in the long run. but Ollie The Originator should’ve known it was a bad load to write in the first place. nobody walks into a bank and forces a banker to write a bad load at gunpoint.
the bubble couldn’t last forever; someone was going to get caught holding that note. which is why Ollie The Originator sold those mortgages as quickly as he could make them: to make sure he wasn’t holding the note when the music stopped.
Von, the financial system is certainly culpable in multiple ways in the housing bubble, as Josh G notes. The truly astonishing thing would have been if cheap easy money had *not* led to a wave of home buying, with said wave driving up prices, because ordinary consumers were somehow more prudent than the Fed and the financial system. But that’s what you’re implying when you say it’s the fault of home buyers and not lenders, that home buyers could reasonably have been expected to be more prudential than the institutions providing credit.
The price of oil, both up and down, has been moving significantly because of speculation, not changes in underlying demand.
The “unsustainable model” of manufacturers also had a lot to do with a long period of easy credit, which fueled high levels of debt. More importantly, it was sustained by the near-total breakdown of shareholder capitalism as a system, where the fundamentals of most companies stopped having any meaningful relationship to their share prices. Again, that comes back to Wall Street, or to the highest reaches of corporate culture: that’s why performance and economic fundamentals stopped mattering, and why there was no one left (not long-term shareholders, not investment advisors, not corporate boards) to push back on the disconnect between manufacturers and their foundational markets.
Glad you concede that “bad bets” by Wall Street have something to do with it. I think it goes a bit beyond “magnify the downturn”. When speculative bubbles pop, the damage is sometimes limited just to the speculators and their immediate partners. Sometimes it affects several sectors of the economy enough to produce ripple effects. But the situation we’re in now is as dire as it is because the entire global financial system has been at risk of sudden, total catastrophic collapse. The “bad bets” you’re talking about are what have made this crisis far more complex and dangerous than an ordinary speculative bubble or an ordinary business-cycle downturn. To just say, “Oh, sure, that made things a little worse” is to pretty much miss the entire point of the current situation.
WTF… why would i misspell “loan” as “load” twice ?
Joe Homeowner should’ve known he couldn’t pay that mortgage, in the long run. but Ollie The Originator should’ve known it was a bad load to write in the first place. nobody walks into a bank and forces a banker to write a bad load at gunpoint.
Yes: by definition, bubbles require at least two actors (a buyer and seller) to act irrationally. It didn’t appear irrational to either at the time, however, because both come to regard the housing market as a futures market. Prices had gone up, they would continue to go up.
Of course, neither Howie the Homebuyer or Ollie the Originator are on Wall Street. They’re your neighbors, they’re middle class, and they are legion. Which is why it’s incredibly fashionable to write things like folks at certain Wall Street Firms “are largely responsible for” the current economic mess. Because it’s easier to blame someone else.
Josh G.,
The housing bubble was created by Wall Street. It was the result of absurdly easy credit, and the whole point of extending such credit was to create more paper that could be leveraged 30-to-1 and bet against in “credit default swaps.”
The “absurdly easy credit” that you say is responsible for the housing bubble was caused by the Federal Reserve, if anyone, and supported by politicians on both sides of the aisle.
The oil bubble was also created by Wall Street – too much money in control of the top 1% and not enough productive uses for that money meant that a lot of it was invested in commodities. Do you really think that legitimate supply-and-demand changed that much over a six month period? It was all speculation.
Speculation in a futures market! Egads, no! (The really interesting part of your comment is your claim that there were “not enough productive uses for that money” that ended up in commodities. If true, it means that we’re facing a depression.)
If punishment is not meted out now when the bankers are despised by the public and dependent on government life support, it will never be meted out. Even if the short-term results are worse, the only way that Main Street will ever recover is if the political power of Wall Street is decisively crushed.
Yes. Crush Wall Street. And The City, while you’re at it. (London is probably more powerful than New York.)
“A supply shock, in the form of a massive increase in the cost of oil. Folks who work on Wall Street aren’t responsible for this at all.”
My impression was that the Bush govt did nothing to counter the upward price. eg the strategic oil reserve. I assumed this was to benefit the oil industry.
Timothy, you’re blaming everything on easy credit which is primarily the Fed’s fault (tie for second: Congress and the White House).
Regarding oil “speculation”: Oil cannot be transported around the world without a futures market. The futures market is the market for oil. Those futures markets react to news regarding future supply. There was a lot of bad news from a number of fronts regarding the supply of oil, and lot of which was legitimate. (Katrina, the Iraq war, the invasion of Lebanon, etc.?) The futures markets reacted. The result was a short, but very severe, supply shock.
Shane: re “2. Various institutions have been resisting taking the government dollar before the whole AIG bonus thing blew up”
I read, don’t know whether it is true that Paulsen was demanding all big banks take the initial TARP to remove the stigma:otherwise it might look as if there were banks in trouble.
Nice little attempt at exculpation there, von in your 07:42 comment – unfortunately, “Wall Street’s” hands aren’t quite so clean as you try to make out.
1. A housing bubble. Folks who work on Wall Street aren’t responsible for that.
Partly right: “Wall Street” wasn’t directly responsible; but they certainly (as Joel G. points out in the following comment)WERE for using “creative financing” to leverage the debt from said bubble into trillions of dollars of hot-air
“securities” whose collapse in value is the root cause of our current problems. Of course, “Wall Street” did also manage to rake off billions and billions of dollars in fees, etc. from trading all this ephemera: but since the “bubble” was “our” fault, I guess it’s all OK with you. And btw, do you really disbelieve that there has been any “predatory lending”?? REALLY??
2. A supply shock, in the form of a massive increase in the cost of oil.
Yes – a massive increase fueled (obviously) by market speculation which has recently collapsed into a massive drop. But what does this even have to do with the current financial crisis?
3. Significant manufacturers — particularly, the big three — with an unsustainable long term model.
True enough: but what then would you imagine to be a “sustainable” model – close every factory in the US and ship the jobs off to low-wage havens? Malaysia? Bangladesh? And what, if anything has “Wall Street” done to arrest the decline in the American manufacturing sector?
4. Speculation by Wall Street investors. Yes, here is where some folks on Wall Street made bad, terrible, maybe even criminal bets. But these bad bets didn’t cause the downturn; they magnified the downturn.
OK, here I’ll agree 100%. Except that the downturn has been “magnified” into the most serious international financial crisis in a generation. And the agents of that magnification aren’t some abstracted “rapacious other” – but the players in a industry (finance) whose mismanagement and irresponsibility have come back to bite ALL of us: not just “Wall Streeters”.
Dang! I find myself agreeing with von? It must have been something I ate.
Or maybe it’s because he has a point. The bottom line is that it’s all nice and easy to blame an unregulated derivatives market for everything. But the bottom line is that the housing bubble caused this mess, and we’re all responsible. Not just wall street. All of us. Add to that the negative savings rate of our population, and you have a toxic bubble ready to burst.
It’s easy to blame wall street and get really angry at the physics nerds who made dumb inapplicable math models, but I know plenty of people who were ecstatic about their ARMs and their 0% credit cards five years ago. I told them they were playing with fire, and they said they’d just refinance! They should have known better. We all should have known better. There is no free lunch, and now we all get to eat the sh*tpile.
I think Toles summarizes it well:
Toles
“the fact that they are making these threats not over some large issue of principle, but over their bonuses — that’s just breathtaking.”
Hm, I think this is a serious misreading of what ought to count as a principled objection. For Wall Street the ability to be paid bonuses is a principle of how labor relations work. The objection of Wall Street to a punitive bonus tax is about as principled as the reaction of auto workers or teachers would be to the claim that the current crisis necessitates to abolition of collective bargaining and seniority. Calling that a ‘shameful lack of patriotism’ would misunderstanding where auto workers and teachers are coming from, and so it this interpretation of Wall Street.
There are lots of things that can and ought to be fixed with Wall Street, but abolishing bonuses is way way overbroad, as overbroad as abolishing auto or teachers unions. Trying to do this indicates an outsider’s lack of understanding of the industry.
Johnny Canuck, Bush could have drained the strategic oil reserve dry and still not had a significant impact on prices. We would then be left with no strategic reserve.
Bush made the right call on that one, even though it was unpopular.
Of course, neither Howie the Homebuyer or Ollie the Originator are on Wall Street. They’re your neighbors, they’re middle class, and they are legion.
the people working the desks at the local branches are local, certainly. but lending policies and mortgage products aren’t designed on the fly by the people at the desk in the supermarket branch. and things like “liar loans” and “subprime lending” weren’t driven by Main St; that came from Main St’s desire to profit from Wall St’s hunger for more and more loans to bundle, slice and leverage.
there’s a flow. but what’s driving the flow isn’t the pressure of homeowners forcing money into the system; it’s the vacuum of Wall St sucking money through the lenders.
Look: I don’t think that Wall Street is exclusively responsible. I think that the Fed has a lot of blame, not just for the easy money part but also for failing to use their regulatory powers. Etc.
But I think that Wall Street has a lot more responsibility for the housing bubble than von seems to. Securitizing the loans created a huge market for mortgages. The fact that everyone seemed to think that securitizing them and slicing them up into tranches was a good way of dealing with their riskiness meant that the same people who constituted the huge market for mortgages also stopped caring about the quality of those mortgages in the way they ordinarily might have.
When you have an apparently bottomless market for mortgages and quality is not an issue, it’s not a big surprise that a lot of people issued some pretty dreadful rewards, and made out like bandits for doing so. Supply and demand.
By the way, let’s be clear: I am not excusing certain actors on Wall Street for dreadful, even criminal calls. I don’t have any warm fuzzy feelings for the folks at AIG. But any explanation of the current economic crisis that doesn’t include John Q. Public as first among the “guilty” is gravely incomplete.
And I use the term “guilty” loosely: No one intends a bubble, much less a crash. Even most of the “bad” speculators on Wall Street didn’t have an evil intent. They didn’t know they were being idiots. They certainly didn’t want to lose their jobs (and many of them have.) They looked at a system that was sustaining and profitable for nearly a decade and kept making the same bad bets.
Even most of the “bad” speculators on Wall Street didn’t have an evil intent.
I don’t think they were sitting around twirling their moustaches, if that’s what you mean, but they were completely indifferent to the perils of their actions, and that’s evil enough for me.
They didn’t know they were being idiots.
They weren’t being idiots, though. They were being rational profit-maximizers, at least in the short term; and those who jumped ship early did exactly what (their version of) capitalism commanded them to.
I don’t think they were sitting around twirling their moustaches, if that’s what you mean, but they were completely indifferent to the perils of their actions, and that’s evil enough for me.
You realize that a lot of these folks now have no jobs, right?
They didn’t know they were being idiots.
I refuse to believe in stupidity on such a vast scale that it threatens the economy, but for a decade never caused any personal inconvenience to the perpetrators. What are the odds of that?
And I use the term “guilty” loosely: No one intends a bubble, much less a crash. Even most of the “bad” speculators on Wall Street didn’t have an evil intent. They didn’t know they were being idiots.
This is called “gross negligence”. I wouldn’t try it as a criminal defense.
This happened the classic way that bubbles and schemes work. The people on Wall Street weren’t stupid. If you talked to them a few years ago, most of them would have told you that something was going to happen and this couldn’t last. But then everybody figures that they could unload their investments, take their gains, and get out of the markets before the crap hits the fan. Of course, by definition everyone can’t do that, and it looks like almost nobody did.
Bubbles, like cons, mostly work not because the participants think that the game is legitimate but because they think they’re the ones screwing everyone else.
We’ll have to agree to disagree. Wall Street deserves blame for derivatives, but companies like Freddie Mac and Fannie Mae, easy money from the Fed, and loose oversight in Congress surely deserve more of the blame for the lack of quality in mortgages.
On this one, you had me up to the “made out like bandits” bit. I don’t know who on Wall Street is making out like a “bandit” in the sense that they are profiting from another’s loss. These people may still be making more money than you or I have or will see in our lifetimes, but they are making significantly less than they have or would have and an unbelievable amount of thier wealth (assets) has evaporated.
Von: I don’t know, but at the time, I undestood the Obama campaign that simply not adding to the strategic oil reserve, or a modest 10% reduction, during the speculative oil bubble, might have broken it.
“There are lots of things that can and ought to be fixed with Wall Street, but abolishing bonuses is way way overbroad”
It’s actually quite a bit worse than “abolishing” bonuses, since that implies a prospective action which they could adjust their own behavior to cope with, maybe go into another line of work, or retire, or insist on being paid a regular weekly paycheck. What’s happening is that they have already performed the work for which it was agreed in advance that they would get the bonuses, and now the agreed upon compensation for the work they’ve already performed is being retroactively gutted.
They’ve been told, in effect, that they’d be fools to ever again think they could count on getting paid for their labor, and that they can’t even rely on being allowed to keep what they were paid in years past. Under the circumstances, the sensible thing for them to do isn’t just find another line of work, it’s to flee the country before the government thinks to go after their pay from further back.
At the risk of repeating common knowledge for the nth time, that is simply, factually, not true. Actually, rather than repeat ad nauseum the facts, let me ask you this: What makes you think prospective home owners know better than banks what they can afford to pay on a mortgage?
That’s an honest question. My personal experience is that I over-rated my ability to pay on a mortgage, the bank over-ruled me(this was 1997-1998) . . . and they were right. For all the usual depressing reasons dealing with large numbers of random actors.
The “absurdly easy credit” that you say is responsible for the housing bubble was caused by the Federal Reserve
Is “easy credit” the same as “low interest rates”? The Fed can cause the latter, but that doesn’t make it inevitable that Countrywide and Wells Fargo will lend hundreds of thousands of dollars to people with no jobs or assets.
Under the circumstances, the sensible thing for them to do isn’t just find another line of work, it’s to flee the country before the government thinks to go after their pay from further back.
“the circumstances” being the effects of a bill that hasn’t been to the Senate yet and that the President is signaling that he’s not terribly interested in signing ?
@Hilzoy,
Those tranches could actually be good things: the idea is that they could open up decent lines of credit to folks who are marginally below the qualifying line, thus opening up an avenue for equity building for lower class citizens.
It’s important to distinguish between (1) bundling credit and (2) Ratings arbitrage and predatory ARM lending. (1) is not necessarily bad, and could go a ways to allow for growth in savings/equity in poorer households. (2) should be criminalized, and a lot of it is already illegal.
@ScentOfViolets,
The problem is that banks did not only take advantage of asymmetric information. They also took advantage of consumer greed. I know plenty of well off people who bought into no downpayment ARMS. I told them that they were crazy, but they all said they’d sell or refinance by the 5 year adjustment. We now see how that worked out. Von is right, the public is not guilt free in this debacle.
Andrew Sullivan is making the same point as von and I this morning. Enough with the outrage at Wall Street fat cats. It’s time for some introspection on all of our behavior.
Aren’t there some labor unions at these banks that we could be talking about?
The only difference that makes is that they can take their time about it. The very fact that a law like this could be proposed, and taken seriously, destroys the confidence that is necessary for people to plan for the future.
Something very nasty is on the table that never was before. Don’t begin to think that doesn’t change things.
A great deal of our nation’s prosperity has rested on the fact that, while we might have stupid policies, and a pathetic savings rate, we were at least the sort of nation where you could be confident certain things wouldn’t happen. We’re not, anymore.
Expect capital and skilled workers to start moving out.
It’s time for some introspection on all of our behavior.
how much introspection is required on our part to prevent the next global insurance giant from overleveraging itself into a position where it could quite possibly bring down the world economy ?
Cleek,
I agree with you that the ratings arbitrage at AIG should never been allowed to happen. That was a huge failure of our regulatory system. But it couldn’t have happened in the first place without the surplus of consumer greed. That’s all I’m saying.
It’s usually considered bad form to agree with the premise and then turn around and deny it in your argument. Once again, how were these people supposed to know that what they were doing was unsupportable? They were loaned the money, after all. So unless you can make the case that there was outright fraud on the part of the buyer, rather than a deliberate failure of due diligence on the part of the lender, you simply haven’t got a leg to stand on.
I’d also be interested in what you think was the asymmetrical information in these transactions. I hope I’m not being overly cynical here, wherein your argument morphs from ‘greedy homeowners’ to ‘buyer beware’.
@ScentOfViolets,
I have a PhD. I am talking about dot commers, bankers, and academics who were willing to play the dice. They knew very well they couldn’t afford the ARM refinancing, but banked on (1) the market only increasing and (2) moving before 5 years. A friend of my father’s is a banker who sold his house in Walnut Creek which doubled in value and then paid cash for a retirement home in Florida. He won the bet. Another friend of mine couldn’t get out of his Cambridge condo before the interest adjustment and lost a huge sum of money and is back to renting. But all of these people knew they were gambling.
These are not poor clerks at Subway. These are professionals knowledgeably living way beyond their means. And knowing that it could all collapse if they mistimed a sale.
@ScentOfViolets,
By asymmetrical information, I meant that the banks almost always know mortgage law better than the buyers. So if there is ever a debacle with ARM adjustments, the banks know how it will go down better than the buyers. But the people I knew in this housing mess knew that they were gambling.
ItaliEx at your service.
You have a PhD, eh? Well, I’ve just about finished mine in math, so my PhD trumps your PhD any day of the week. You don’t want to go there, comprehende? Now:
You’re telling me then that the lending institutions didn’t do their due diligence chores? Or that these dot-commers(I was one) were fraudulently misrepresenting their income? Or both? If there’s fraud on the part of the buyer to conceal their cash flow problems, I’d agree with you. But even if what you say about the people you know is, er, not an exaggeration, there is simply no indication that widespread fraud had much to do with the bust.
Try again, please.
Under the circumstances, the sensible thing for them to do isn’t just find another line of work, it’s to flee the country before the government thinks to go after their pay from further back.
Bye. Seriously, if these people want to go Galt, I’ll help them pack. If Wall Streeters are seriously trying to convince the public how vital they are to the success of this country, propagating one of the worst financial crises in world history is a tough way to make your case.
“The cemeteries are full of irreplaceable men.” — Clemenceau
If that’s what you think the asymmetrical information was, then how does that explain anything, given that this has always been the case? You certainly didn’t see this happening in 1995, or 1986, or 1977, etc. I’d suggest, the same way many other people have, that the pertinent asymmetrical information might have something to do with the changes that occured in the late 90’s and onward.
Surely you as a PhD would agree 😉
“Those tranches could actually be good things: the idea is that they could open up decent lines of credit to folks who are marginally below the qualifying line, thus opening up an avenue for equity building for lower class citizens.”
That’s the sort of thinking that got us into trouble: Maybe those folks were below the qualifying line for a good reason? And the equity building in fact was debt building?
If we wanted to expand home ownership, maybe we should have looked into ways to make starter homes cheaper, instead of ways to allow poor people to get deeper into debt.
At the risk of repeating common knowledge for the nth time, that is simply, factually, not true. Actually, rather than repeat ad nauseum the facts, let me ask you this: What makes you think prospective home owners know better than banks what they can afford to pay on a mortgage?
You’re not repeating the “facts” that shall govern each, every, and all. You’re drawing a general conclusion from your own, individual experience. There’s a difference.
But, in answer to your question: Because prospective home owners know their income, circumstances, and future prospects better than any banker could. I’ll grant you that bankers usually have greater general expertise. Prospective home buyers, however, have specific expertise and, more importantly, can educate themselves to some degree regarding the bank’s general expertise. A bank, OTOH, has to rely onthe homebuyer to be honest, accurate, and complete.
Both sides have a knowledge problem, but the buyer’s knowledge problem is easier to cure.
You have a PhD, eh? Well, I’ve just about finished mine in math, so my PhD trumps your PhD any day of the week.
Erm, since you don’t actually have a PhD yet, doesn’t this mean that you lose?
I know if somebody told me that I should put my own financial interests aside out of “patriotism’, I’d tell them where to go.
And so we come to the heart of the problem.
For ‘patriotism’ please feel free to substitute ‘a decent respect and concern for how my actions affect other people’. Still feel the same way?
The blame for the current economic crisis lies with us as much as — if not more than — some rapacious other who lives far away.
No, by God, it does not.
And belay the ‘us’. I’ll thank you to bloody well speak for yourself.
Josh G: The housing bubble was created by Wall Street. It was the result of absurdly easy credit, and the whole point of extending such credit was to create more paper that could be leveraged 30-to-1 and bet against in “credit default swaps.”
Wrong, the Fed sets the price of money.
Shane: Awesome. If they can get private money to stay afloat I’m all in favour of it. Although one wonders where this capital was hiding while they’ve all been crying pauper back when bailouts were free.
Wrong on two counts. First, many institutions have been forced to take bailout money against their management’s wishes. Secondly, the bailouts are not remotely ‘free’, since precisely the topic of this thread are the strings that come with them.
Cleek: Joe Homeowner should’ve known he couldn’t pay that mortgage, in the long run. but Ollie The Originator should’ve known it was a bad load to write in the first place. nobody walks into a bank and forces a banker to write a bad load at gunpoint.
There is no equivalency in a dubious mortgage agreement. Even if the bank thinks the client is overextending themselves, ultimately that’s the client’s problem. Is the creditor’s job to sell money or to raise the debtor’s family for him?
It’s blindingly obvious that many financiers ran their companies into the ground, no arguments there. But it’s also prefectly true, as Von and others have pointed out, that bankers are not and never have been responsible for the price of money (set by the Fed), people voluntarily miring themselves in excess debt, the price of oil, Americans’ refusal to save money in a way that would ultimately raise the productivity of American industry.
I know if somebody told me that I should put my own financial interests aside out of “patriotism’, I’d tell them where to go.
“I regret that I have but one life to give to my country. But my money, I’m outta here.”
And I’ll make a WAG. If the innovators who developed our present derivative system decide to leave the country most of us won’t notice. And capital that will only invest in risk-free vehicles that pay 15%+ interest is irrelevant to the non-financial U.S. society anyway. Hasta la vista, baby.
Even if the bank thinks the client is overextending themselves, ultimately that’s the client’s problem.
clearly, it’s not the only client’s problem. we wouldn’t be having this discussion if it were.
you sell me something you know i can’t afford, it’s both our problems. but the one with the control in the transaction is you, not me. i can’t force you to sell me a bad mortgage. that’s your choice. and if you build a business around aggressively pushing and selling iffy mortgages, it’s really your problem.
If the bankers were using fraud to magnify their short-term bonuses, and setting up the entire financial system to fall apart, why the HELL should they get their bonuses for doing their jobs, when it’s now become obvious they DIDN’T do their jobs?
Hell, the companies should be suing these “masters of the universe” for breach of contract!
Instead of trying to blame poor people, or Fannie and Freddie, who didn’t start this mess, why not blame the people who, y’know, started it, encouraged it, leveraged it, and crashed the economy? I don’t give a crap about the “sanctity” of their contracts any more than these spleenweasel CEOs and Wall Street investors care about the “sanctity” of, say, union elections, workers’ contracts, or the well-being of other people.
They want to take their ball and go home, because the mean nasty government might make them face some consequences for their actions? Fine, let them go back to their million dollar mansions and suites, and console themselves with the stacks of money they’ve already skimmed off everybody’s retirement plans. We’ll all be better off. Any idiot can run a company badly, but it takes very clever idiots to wreck the entire economy. Idiots we’d be better off without.
Oh, and as for blaming our “negative savings rate” and the average worker, even leaving aside information asymmetries, there’s a reason we have a negative savings rate. Because wage growth has been flat for at least a decade. And blame for that also lies at the feet of the people who’ve obsessively fought unions, offshored decent jobs, and gutted the economy.
Who, amazingly enough, happen to overlap a lot with the “free market” crowd, the CEO crowd, and the “master of the universe” investment banker crowd.
So if you want to blame homeowners for their situation, why not look at who caused that situation in the first place.
I mean, besides it being easier to blame poor people.
Bottom line: American taxpayers are getting hosed. All so that we protect shareholders and Wall Street bonuses. Robbery. What Stiglitz said.
http://www.cnbc.com/id/29848741
Oh, and if there is any upside to be had, hedge funds and other similar investment groups get a huge piece almost risk free.
Obama has seriously disappointed.
You’ve just repeated your original formulation back at me in slightly different words. Why do they know their income, circumstances, and future prospects better than any banker could? Surely you wouldn’t apply this argument to insurance agencies, would you? And for the same obvious reasons?
Why can’t I pay $10 a year for full auto insurance coverage, including provisions for lifetime disabilities and multimillion dollar disbursements to any parties I may inadvertently injure? After all, I know I’m a very good driver. I know my own abilities and personal situation far better than any insurer, right?
If you disagree, how do you reconcile the two positions?
P.S.- given where I’m at in the program, the only way not to get one is to either be in a terrible car accident or to get drunk and ralph all over the committee at my defense(and perhaps in the latter case not even then. I know of at least one student who vomited in front of one of the committee before actually doing the formal defense, and she somehow persevered.) I know my personal situation pretty well after all 😉 And, as I said, if anyone wants to pull some sort of rank like mentioning they have a PhD, well, my guns are bigger than yours. End of story.
“My impression was that the Bush govt did nothing to counter the upward price. eg the strategic oil reserve.”
Your impression is wrong. The strategic oil reserves couldn’t have broken more than a very few dollars off the price of oil, and that is even if we completely tapped them and then 2 months later the price of oil would have been right back up. Our strategic oil reserves aren’t nearly enough to seriously tinker with the price of oil.
More generally, I think this is a problem over an empty threat. If bankers really can find private financing so they can save their bonuses, we should be freaking thrilled. We certainly shouldn’t *want* to bail them out. But they can’t. So they won’t be getting their bonuses. This is whining, not policy. Getting too worked up over it doesn’t seem productive.
The really hard question is what to we do with ridiculous numbers of silly mortgages, what do we do with ridiculous securities that were designed as if housing prices could only go up, and how do we get banks back to loaning to good businesses (I shared the anecdote of a close friend who desperately needs to expand his business, but his bank has frozen 95% of the business credit lines indiscriminately because they are running scared).
Also we need to find a way to get hundreds of thousands of lower and middle class construction workers who have been building the housing bubble into something else more useful. And we need to get tens of thousands of upper class New Yorkers out of wasteful financial company jobs and into something useful.
(Which is NOT to say that construction jobs or financial jobs are ALL wasteful. Merely that both sectors until recently have had way too much employment. The housing bubble made both sectors look much more attractive than anything else).
If some of these institutions really can get away with avoiding government funding, that is great! The rest of them can’t, so all they have is impotent whining.
“You’ve just repeated your original formulation back at me in slightly different words. Why do they know their income, circumstances, and future prospects better than any banker could? Surely you wouldn’t apply this argument to insurance agencies, would you? And for the same obvious reasons?
Why can’t I pay $10 a year for full auto insurance coverage, including provisions for lifetime disabilities and multimillion dollar disbursements to any parties I may inadvertently injure? After all, I know I’m a very good driver. I know my own abilities and personal situation far better than any insurer, right?
If you disagree, how do you reconcile the two positions?”
Because the likelyhood of you knowing your job and cash flow is much more under your control than getting hit by an accident.
Dependent and independent variables. You’d expect a math PhD to understand the difference…
These weren’t bad bets by Wall Streeters–they were the best kind of bets, the kind through which you make tens of millions of dollars with no chance of losing. They knew they were too big to fail. That’s the bottom line. They knew they had the government behind them the whole way, and they still know it.
It will be very easy to see going forward whether or not the deep problems in our political and economic systems have been dealt with. If they have been, there won’t be any more big bonuses on Wall Street. These people are bankers, and banking is not an excessively profitable business. If they’re making boatloads of money, it’s because they’re taking advantage of the crucial role that their institutions play in the economy to make wildly risky bets. They’ll have PhDs lined up 10-deep to say that the bets aren’t that risky, but they’ll be wrong. The huge profits that Wall Streeters have been making can’t be made without huge risk. If they want to take those risks and make that money, they can’t work for banks any more.
Needless to say, the article in the post does not give one the idea that Wall Street will transform itself willingly. But such a transformation is absolutely necessary for the survival of our country. Literally. If the people who run the big banks cannot or will not recognize this (or if they just don’t care), and if our political leadership is so beholden to financiers that they will not force such a transformation, then the USA is, to use a currently popular word, doomed.
And this is precisely the sort of asymmetrical knowledge that was the problem. For over a hundred years at least, right up to the turn of the century, people were able to count on the self-interest of the banks to act as a check on how much of a mortgage they were able to afford. Banks tended to loan too little, not too much, and people could safely reason that they were not biting off more than they could chew – surely the bank wouldn’t deliberately lose money by giving them a loan they couldn’t afford. Bankers just aren’t that sort of people, so the thinking went, they would never give a loan to someone if they thought there was anywhere near a good chance that they might lose money on the deal.
And this was good thinking(I know at least one person who repeated that chestnut to me in 2005 to justify their mortgage) – up until a few years ago. This was also where the asymmetry kicked in. Very few of those people knew that the lending institutions were no longer holding on to that paper and were instead selling it off to parties unknown. Of course, for the same old, same old reasons – to make money.
But the buyers didn’t know that. To them, just has it had been for their parents, their grandparents, and their great-grandparents, an indication of an affordable loan was the fact that the bank was making it at all. And if by some chance they were skeptical, they were told about ‘financial innovations’ that made risk more manageable, etc, by someone apparently much more competent in this field than they were. And who were only repeating what they saw on the ‘news’. Very few were told that they were getting a too-good-to-be-true loan because the bank would no longer be responsible for any losses. And again, this is from direct experience. I don’t think mine is much different from anyone elses.
And you know this because . . . ? btw, I would recommend, Sebastion, that you don’t use terms like dependent and independent variables if you don’t know what they mean. Which is clearly the case here, since you haven’t explained what those variables are in this instance, and why.
That isn’t an asymmetrical knowledge problem, that is an incentive problem. By making it possible to easily trade away mortgages (and yes we are looking at you as well FannieMae) we split the incentives. If you have to hold it yourself, the incentives are to be careful about the default risk. If you don’t, you can forget about the default risk and hope that the buyer won’t care too much either.
Interestingly we made mortgages easier to trade for the purpose of decreasing bank defaults. The problem we were fixing at the time was that since mortgages were local, a local downturn in the housing market would kill the local bank. By allowing trading from say a California bank to a Florida bank and vis versa they could hedge against that problem. When California prices went down, Florida ones didn’t necessarily go down, so the bank survived.
This was a good thing.
The problem is that eventually all this trading helped harmonize the housing markets. (And harmonize is almost exactly the right word. If you think of resonatating tones and harmonic feedback you are getting it). So eventually you aren’t really hedging anymore. So you’ve lost the value of the hedge AND additionally you have lost the local risk information that used to be inherent to banks holding their own loans AND you’ve lost the ability to have as much local knowledge even if you tried to pull back because the property values have become much more harmonized/coordinated across various locations.
And that is what we call unintended consequences. Ugh.
The overcompensated greedy ex of the Big Three are respnsible for the failures of the auto companies. Their determination to blame the unions is a symptom of their pathology.
It’s a pathology that we all need to look at good and hard because it is a pretty common pathology. In fact, it is American conservatism.
Way back when, from those god-awful Pilgrims, our culture got infected with the notion that material prosperity equated with virtue. God’s favor made manifest by prosperity in this world etc indicated who was among the elect. Ever since then it has been a subconscious article of faith with many Americans that the poor are depraved and degraded people who bring their poverty on themselves and the wealthy are wealthy because they are smarter annd more productive than everyone else.
And some poor people ARE depraved and degraded and responsible for their condition and some wealthy people are wealthy because of being smart and productive.
However lots and lots of smart productive people never get (and possibly don’t seek) material wealth–health care providers like me, for example! And, as evidenced by our current economic troubles, lots of very wealthy people do not deserve the compensation they get because they were neither smart nor productive.
This Social Darwinism,the secular version of the belief in the “elect”, inherited from those mean spirited Calvinists who it is our misfortune to have as cultural ancestors, has plagued our politics throughout our hisotry. Basically, this is the philosophy of American conservatism: serve the rich because they deserve it since they are by virtue of being rich inherently better than evereyone else and by serving them you will serve everyone else and if it doesn’t work then it must be the fault of everyone else but certainly not the repsonsiblity of the weatlhy. They rationalize it as belief in small government, belief in personal responsiblity, support for intitiative and so on, but what it boils down to is “You’re on your own, Jack! Everyone for themselves and may the best man win! ” The US as Titanic.
According to this philosophy it is sensible to pay humongous bonuses to the exs who run companies into the ground while blaming the lack of profit on “overpaid” unionized employees. According to this philosophy it is more important to keep the rich of Wall Street rich than to save the economy of the whole country. According to this philosophy taxing the rich is punishing them unfairly for their virtuous behavior, etc. etc etc. but shifting the tax burden on to the middle and lower classes is acceptable. According to this philosophy it is sensible to run up huge expenses financinng the military industrial complex while cutting taxes for the rich, and blame thhe resulting deficit on undeserving welfare recipients . It is OK with Republicans to funnel tax dollars into subsidies for timber companies or agribusinesses but not to programs for the homeless of the mentally ill.And so on.
Because of this stupid, anti-Christian, anti-democratic Medieval philosophy everything the government does to serve the common good is socialist or, if not socialist, then a statist attack on personal intitative.
I’m glad the our oligarchs are exposing themselves so unambiguously. I’m in favor of waving the pitchforks in the air. I’m even in favor of metaphorically stabbing a few butts. But mostly I’m in favor of changing the Overton window in this country so that the government’s legitmate role in promoting the prosperity of all citizens is no longer derailed and mired in all this crap about how bad it is to use government power to serve anyone except those that don’t need it.
Uh, there are people who comment here that have serious math credentials (I don’t include myself in this category), including at least one math Ph.D whose work I can’t begin to understand. But I only got about halfway through an MS before I called it quits.
There is no equivalency in a dubious mortgage agreement. Even if the bank thinks the client is overextending themselves, ultimately that’s the client’s problem. Is the creditor’s job to sell money or to raise the debtor’s family for him?
It’s the creditor’s job to look after his own money by ensuring that he lends it only to people with a reasonable chance of repaying their loans. The home loan originators manifestly failed to do that. They deliberately avoided the established process for vetting prospective borrowers by moving to no documentation “liar loans”. They were vigorously encouraged to do so by the companies that were securitizing loans, who actually paid “bonuses” (i.e. bribes) to originators for getting buyers into non-traditional loans. It’s ludicrous to pretend that this was somehow a process of wily borrowers taking advantage of foolish lenders.
@russell: And belay the ‘us’. I’ll thank you to bloody well speak for yourself.
Hear, hear! I’m tired of being told that “we’re all at fault” or “everyone is responsible” or “we all benefited”. I was interested in buying a home starting in about 2003, but I decided to stay away. At first it was just because I was shocked at how high prices were, but it didn’t take me long to recognize that there was a massive bubble. I avoided taking out a dumb loan to buy overpriced property, and I told everyone who wanted to talk about Real Estate that I thought there was a bubble and why. I fail to see why I should be lumped in with people who took out (or sold) liar loans in the belief that the market would keep expanding forever.
I fail to see why I should be lumped in with people who took out (or sold) liar loans in the belief that the market would keep expanding forever.
Because if we’re all at fault, the no one is to blame, so there’s no need to go looking for the perpetrators. And there’s no reason to change anything.
Of course, if we’re all really at fault, then maybe the system that we set up needs to be changed, but that’s socialist or something so nevermind.
I’m sorry, but the issue with bonuses is *not* that somehow out of vengeance we want financial managers to be paid far less.
It’s that the bonuses aren’t bonuses. If you have a bonus-based system of compensation with low base salaries and high potential compensation through bonuses earned for high performance, the entire point of that system is that it has a downside, that it imposes costs for failure, that the people who take high risks are the first to feel it if the risks were unwarranted. Part of the public outrage here is that the bonus system clearly doesn’t function like that in reality, either at the specific level of compensation or at the general level of visiting consequences most directly upon those who incurred the greatest risks.
Von notes that there are people out of work in the financial sector, and that many have seen personal wealth wiped out. But that’s a general condition throughout the economy at the moment. I suppose that the rank-and-file of the financial industry may be experiencing a slighly worse version of it, but not at all proportionate to the risks they chose to incur on behalf of their own businesses or on their own personal behalf. Moreover, the people most responsible for making those decisions at the top of many of these organizations are, I suspect, largely insulated from even those consequences, unless they happen to have stepped over the line into criminal misconduct. E.g., the decision-makers who took the absolutely biggest risks are not experiencing the absolutely biggest consequences.
When risk and consequence are this badly misaligned, that’s a general problem, and it’s not John Q. Public that is “first on the list” of the causes for that misalignment. I’ve kept my retirement money out of any stocks for some years because risk makes me queasy, but there was a brief period in October where everything I’ve saved was in peril of being wiped out because of extraordinary risks being taken by a unit of AIG. People in my community who are losing their jobs because upper middle-class homeowners in California and Nevada were heedless in buying homes with the easy money the Fed kept floating didn’t take any extraordinary risks, but they’re now in extraordinary peril.
The bonuses are a synecdoche for a series of wrenching disconnects between risk and consequence, and I’m sorry, the buck for that disjuncture stops at Wall Street’s desk, at the Fed’s offices, in Congress, not at John Q. Public’s front door.
Obama’s unconflicted support for the Paulson bailout during the campaign was a major red flag. It was clear to those who were paying attention that he was and is basically an establishment whore. But seeing the supposed “change” candidate groveling back to Wall Street like a Republican to Rush Limbaugh, under cover of a barrage of Bush-league spin, is depressing.
“It’s that the bonuses aren’t bonuses”
No, they were retention bonuses; These are the people who were hired to pick up the pieces after the folks who created the mess had left, and in order to convince them to stick around for a job everybody knew was dead end in a deteriorating job market, it was agreed that they’d be paid at the end of the job, if they stuck it out.
I think it’s a good general principle that you need more than just a PhD to pull rank around here. Like maybe a named professorship, or something.
On a related note, has anyone ever seen Hilzoy and SuperUser at the same time? I’m starting to wonder….
They deliberately avoided the established process for vetting prospective borrowers by moving to no documentation “liar loans”.
It was more than that. A number of lenders would black out income information on no-doc loan documents. They didn’t want this information even when it was handed to them, because accurate information might screw up the underwriting.
There’s a big difference between hitting a pedestrian because you’re in pea-soup fog and hitting a pedestrian because you put a blindfold over your eyes. We’re way into the latter category here.
Why you need to throw a banker against the wall once in a while:
Banks sold fraudulent loans to Wall Street. Wall Street made them into products which supposedly reduced the risk but did not. AIG-FP insured them without being able to pay the insurance. Bond rating agencies rated them AAA using horribly simplistic models, in order to satisfy the market for AAA ratings.
Many of these companies have failed, taking their shareholders wealth with them. However, the actual people at these companies have (many of them) gained ridiculously large incomes which they still have.
That’s why you have to throw a Wall Street financier against the wall once in a while, to show them you mean business.
Since a human life is valued at about $5 million to $10 million (that is what we are willing to spend to save a life), correspondingly this massive fraud means that some hangings are in order.
On a related note, has anyone ever seen Hilzoy and SuperUser at the same time? I’m starting to wonder….
Most of us know that hilzoy’s real name is Hildegarde Zoincks Superuser.
But the bottom line is that the housing bubble caused this mess, and we’re all responsible. Not just wall street. All of us.
Speak for yourself. I rent.
And yes, I think everyone involved should be punished according to their responsibility.
The irresponsible no-doc homeowner who ended up costing the bank $100,000 should get one lash of the whip.
The irresponsible loan officer who ended up costing the bank’s shareholders $10 mil should get 100 lashes.
The irresponsible Wall Street guy who ended up costing various parties $1 billion should get 10,000 lashes of the whip.
Since the latter is a death sentence, we’ll save labor by just hanging him instead.
No, they were retention bonuses; These are the people who were hired to pick up the pieces after the folks who created the mess had left, and in order to convince them to stick around for a job everybody knew was dead end in a deteriorating job market, it was agreed that they’d be paid at the end of the job, if they stuck it out.
For some, that is true. But not all. Not even close to all. Nice spin though.
And if the job market is dead, where is the incentive to leave? In other words, to where would they be going?
Brett, you know what a salary is? It’s a retention bonus. I’m getting paid a retention bonus right now. It’s my paycheck.
Now if you think that the people at the London unit of AIG needed a specific large additional salary to guarantee that they wouldn’t walk, you fail in two ways. 1) In understanding labor markets. You think that most of the people at that unit (or AIG in general) have a surplus of employment options at the moment? That they would go on the job market in a seriously depressed industry carrying a recent career record that is an intense liability because they weren’t paid large bonuses above their base salaries? How much of a risk of a mass walkout of key personnel do you think AIG (or other financial firms) are taking if they cut compensation levels while trying to keep their businesses solvent? My guess is, about the same risks of a mass walkout of scholars working on the poetry of the Italian Renaissance if there’s a salary freeze at many universities this spring.
Which points to 2): overstating the specific value of those employees. Not only do universities not have to worry about mass departures if part of what they do in the current emergency is adjust raises downward or even freeze salaries temporarily, they don’t have to worry because they have plenty of replacements waiting in line should that somehow occur. Given conditions in the financial sector at the moment, I think AIG could find replacements for personnel who find that they’re being inadequately compensated–and the argument that somehow only the people who caused this mess understand it well enough to fix it strikes me as a total myth.
Bonuses in general in the financial sector were structured as incentives for performance. If they’re incentives for performance, then they’re also exposure to risk. That’s the fundamental objective of structuring compensation in that manner. But it stopped working a while ago, mirroring the way that risk and consequence stopped being properly linked in the economy as a whole.
I eagerly await David Neiwert’s comment on the type of reaction expressed by TheWesson… 😉
problems that these very firms are largely responsible for.
I realize it’s conventional wisdom and very fashionable at the moment, but is the bolded bit really true? Because you (and others) are hanging a great deal of outrage on this claim.
It seems to me that the plausible causes of the current economic climate are:
1. A housing bubble. Folks who work on Wall Street aren’t responsible for that. We are. We paid too much for our homes, and we speculated too much, we took on too much risk.
So Lehman’s failure was not its own fault? Bear Stearns? Merrill? The near collapse of Citi? The economic problems were not caused by people who “paid too much for their homes.” They were caused by the house of cards erected by Wall Street on those purchases.
In a sensible system when people can’t meet their mortgage payments the lender(s) take a loss, and that’s that. But once you erect a paper-mache structure of MBS and CDS and who knows what, without anyone bothering to check the value of the underlying mortgage, you have the makings of a disaster. And once lots of people start making gobs of money trading these things the incentive to ask about how good thse loans are is pretty small, and in fact there’s pressure to make more loans, to build the tower higher.
Yes, some, maybe many, homebuyers acted unwisely. But it took the genius of Wall Street to take these bad decisions and turn them from a set of individual, but limited, problems into a gigantic mess.
What Bernard said.
I had similar thoughts in response to Von, but Bernard said it better.
Way up thread, Brett Bellmore:
“You don’t get to screw people over, send a lynch mob after them, arrange for them to be in fear for their lives, and still have them be your friends and allies.”
When did the rules change?
I didn’t receive the memo.
Big, fat, black mythical welfare mothers buying the thick-cut pork chops at the grocery. Even scrawny, skinny, white welfare mothers voted for Ronald Reagan on the way to the grocery to buy the thick-cut pork chops, in case the big, fat, black welfare mothers might get there first.
Air traffic controllers. Tax collectors
Various feminazis, parasites, traitors ……. Frank Luntz drew up the list for Newt Gingrich, Dick Armey and the rest of the usual suspects.
For good measure, let’s mention the entire federal workforce during the Gingrich/Clinton government shutdown …
…. then go read Wikipedia’s little write-up
on Timothy McVeigh with excerpts from his anti-tax, pro-gun, government-hate spewings, which sould like they were lifted directly from the Gingrich Revolution’s talking points …
Way before al Qaeda, Federal buildings were evacuated regularly after McVeigh because of threats by red-blooded, cold-blooded killer Americans. Way before al Qaeda, the wife’s car got the once-over by the Federal police, just to go to work to be an evil government scientist, for cripes sake.
Well, what would this list be without every utterance by Grover Norquist?
I forgive you, Brett.
You probably didn’t get the memo either about how America demonizes its internal enemies.
Way before al Qaeda, cold blooded Americans were lynching and beheading other Americans of different ethnic backgrounds – be it African, Italian, Irish or other.
hey, we’ve got red-blooded, empty-headed patriots urging armed revolution right here, right now.
You realize that a lot of these folks now have no jobs, right?
You realize that a lot of these folks saw more money in a year than I will see all of this decade, right?
No, Sebastian, it is, as I have already explained, an asymmetrical information problem because the people taking out mortgages weren’t aware that banks were routinely trading away mortgages instead of holding on to them as they had in the past. They were thus unaware that this old reliable signal – that banks making you a loan meant ipso facto that they thought you had an pretty good chance of paying back the loan – was no longer working. Iow, they didn’t know that banks didn’t have skin in the game any more. Nor did the lending institutions advertise this fact. The people who were suspicious of these good deals that their parents and grandparents never got were fobbed off with elaborate explanations about new ways of managing risk. Scientifically formulated, of course 😉 Somehow, they were never told bluntly that the lender could care less whether or not the loans were performing because they had no intention of holding on to them.
To my mind, that is a very significant bit of information to withhold. Would it have made a difference in people’s buying patterns? I don’t know. But I do know several people after the fact claiming that if they had known, they wouldn’t have behaved the way they did.
It’s really not that difficult if you just keep slogging 🙂 I’m more than twice as old as the average PhD candidate, and if I can do it in my state of advanced decrepitude, anyone can.
Kidding aside, I just want to make it clear that I really don’t hold with waving around a PhD(or indeed any other certification) like it gives the owner some special generalized authority. I only went off about mine because someone else tried to make that presumption. If somebody wants to say that their opinion about kidney stones carries more weight than the average because they’re a doctor, that’s fine. If somebody wants to claim their opinion about CDO’s, the Geitner plan, etc carries more weight than average because they’re a doctor, well, that’s where I emphatically disagree, shall we say.
It’s really not that difficult if you just keep slogging 🙂
I beg to differ (:
Again, the asymmetry at work here is that the client assumes that the bank will let him know if he is – certainly that’s been the case up until fairly recently. You’re saying that even if the bank thinks the client is overextending themselves, and even if the client is basing their evaluation on practices the bank is no longer following, and even if the bank knows this, and even if the bank doesn’t give a straight answer if the client asks flat-out what the mechanics are . . . that’s still the client’s problem.
Me, I’d say this flies perilously close to the wind, verging on outright fraud.
No, Sebastian, it is, as I have already explained, an asymmetrical information problem because the people taking out mortgages weren’t aware that banks were routinely trading away mortgages instead of holding on to them as they had in the past.
It’s also an asymmetrical information problem on the other side of the trade. One effect of securitization is to obfuscate the quality of the underlying loans. By the time you get to some highly engineered financial product like a CDO, the final buyer has no way of independently verifying the quality of the underlying mortgages. The whole situation is practically begging the mortgage originators to engage in fraud.
“because the people taking out mortgages weren’t aware that banks were routinely trading away mortgages instead of holding on to them as they had in the past.”
Speak for yourself, my bank was quite upfront about not intending to hold onto the loan.
I don’t blame the bank that let me refinance my house after the divorce, or the second bank that gave me a home equity loan. It was largely the fault of my ex, who came into our marriage deeply in debt, and a year later left it debt free, necessitating the refinancing. And to some extent it was my fault, I knew I should have sold the place, even though I built it myself on the land I grew up on, and moved into a trailer park, instead of taking on a mortgage that I could barely pay in good times.
Am I to fault the mortgage company for giving me an outside chance of holding onto the place, rather than myself for taking that chance, or my ex for making it necessary?
But I do wonder, to what extent the vast increase in divorce has contributed to the crisis: Two income families with reasonable debt levels suddenly becoming one income guys crushed by the burden is common enough it’s got to have some impact.
Interestingly we made mortgages easier to trade for the purpose of decreasing bank defaults. The problem we were fixing at the time was that since mortgages were local, a local downturn in the housing market would kill the local bank. By allowing trading from say a California bank to a Florida bank and vis versa they could hedge against that problem. When California prices went down, Florida ones didn’t necessarily go down, so the bank survived.
This was a good thing.
Agreed.
The problem is that eventually all this trading helped harmonize the housing markets.
I don’t think so. It’s not clear to me why the trading of mortgages ought to increase the correlation among housing prices in different areas. These depend, in general, on local economic conditions, the desirability of the area, etc. Those won’t change.
To me the problem is that instead of a mortgage being a single bet it became the basis of lots of bets. The securitiziation increased risk two ways.
First, it permitted huge amounts of leverage to come into play while obscuring underlying value. If you misjudge the quality of the underlying asset, and leverage to the hilt, you have problems. This is true even if the underlying assets are perfectly sensible mortgages, which do, after all, default sometimes.
Second, the CDS market enabled huge bets by non-lenders on the mortgages. It’s one thing if a bank, or group of investors, loses $100,000 when a mortgage goes bad. It’s another when there are 100 bets on the mortgage, so the loss is $10,000,000. And it gets worse when some of the losers can’t pay. Then some of the winners are in trouble too, because having useless insurance is exactly like overestimating the quality of the mortgage.
Anyway, I have a BA in math, so I must be right 😉
To elaborate, the public feels outraged because they’ve been sold a con for the best part of thirty (or more) years. The average working stiff, you tell him he’s being downsized, or that his benefits are being cut, he won’t like it. But he’ll go along with it because he believes in the system. Similarly, the average working stiff doesn’t particularly care for the outrageous compensation of certain people in his company or maybe someone he’s read about in the paper. But he thinks that maybe they really do have some super-duper skills that ordinary folks like him just don’t have. After all, Kurt Warner has something like completion percentage of something like 65 or 66%. And that’s a career completion percentage. Since he knows he’s never going to be able to match something like that, maybe the big boys really do deserve those bonuses. And so he’ll go along with it. Because he believes in the system.
But when the average working stiff sees someone fumble spectacularly and still get rewarded, spectacularly rewarded, just as if he had been doing his job well, while people like him have to eat the costs of those multi-billion dollar mistakes . . . that’s when he stops believing in the system.
That’s what people are upset about, as Wonkie also mentions up above. They’ve gone from thinking that the system, while a little hard-nosed, is basically the right way to do things, to thinking the system is set up to reward a small set of completely undeserving mooks. People who are not better than they are in some sense, but worse.
*raises hand*
I don’t have a PhD, so maybe I’m not the brightest kid in class here, but I fail to see where these are in contradiction.
It strikes me as logically sound that a problem can arise both from perverse incentives that reward nonexistent lending standards, as well as from the asymmetric information problem that inhibits the ability of consumers who are not real estate or financial experts to make informed borrowing decisions.
But, in answer to your question: Because prospective home owners know their income, circumstances, and future prospects better than any banker could.
First of all, bankers don’t (and really shouldn’t) make these decisions: simple mathematical models decide. For example, a loan may be given if the weighted sum of a prospective borrower’s credit score, annual income for the last five years, and verified assets are above some threshold. The question of how skilled bankers are at assessing borrowers is irrelevant: what matters is how good bankers’ models are at assessing borrowers.
For the average person, I think typical banker models are far better at predicting prospective borrower’s ability to repay. For starters, the models don’t suffer from cognitive biases that beset human beings when evaluating themselves. Most people are convinced they’re above average drivers and the human tendency to engage in self-deception is particularly strong when it comes to social signifiers like owning a home (“Of course I qualify for this loan because I’m a good person and homeownership is restricted to good people”).
Beyond that however, most people are innumerate. They are scared of math. They are extremely uncomfortable thinking about numbers and they lack the skills and experience needed to do so correctly. Banks don’t have this problem. There’s a reason that lots of ARM mortgages were sold with super low teaser rates: many people decide whether they can afford a mortgage by figuring out if they can cover the first month’s mortgage cost every month. That is a really dumb algorithm, but if you’re functionally innumerate, it is probably the best you can do.
I’ll grant you that bankers usually have greater general expertise. Prospective home buyers, however, have specific expertise and, more importantly, can educate themselves to some degree regarding the bank’s general expertise.
I really don’t see how we can expect significant numbers of prospective homeowners to develop the mathematical fluency needed so that they can realistically assess mortgage vendor claims on their own. People won’t attend math classes for a year in order to get their own mortgage. Now, if you want to suggest that no one should be able to sign up for a home mortgage without retaining their own attorney/CPA who has a legal obligation to explain to them what their mortgage will actually cost, I can sign onto that idea, but I don’t think that’s what you’re saying.
von, you once mentioned that your father is an econ prof and your brother has a math (or econ?) phd from MIT, right? Might I suggest that this level of mathematical fluency is extraordinarily uncommon? The average person is befuddled by fractions, let alone the complexities of risk analysis involving variable interest rate loans with negative amortization. Heck, the average person doesn’t quite understand that credit card debt will grow dramatically if you only make the minimum payment.
A bank, OTOH, has to rely onthe homebuyer to be honest, accurate, and complete.
This is completely wrong. A bank can rely on credit scores. It can demand to see tax returns for the last few years. It can require that when prospective borrowers list assets that they own, they must also provide paperwork proving that they really own those assets. Now, some borrowers will go to great lengths to deceive the banks, but we have a word for that: fraud. And while that was a problem, a much bigger problem was the use of stated income stated asset loans where the bank simply refused to verify anything.
Brett, let me say that you have some rather unusual experiences. No, I am not speaking just for myself. Not only does this seem to be a national phenomenon in general, I also know a few people, smart people, going-places people, who were not told that. Who, being the smart, going-places type of people that they were, actually asked the bank what was going on.
Do you agree that the lending institutions should have made this fact known to their prospective clients?
Or do you step back yet another pace and claim that it’s up to the customer to find that out, not on the bank to supply requisite information . . . even if asked (albeit in an indirect way)?
Further, your sentiments above seem to be at variance with an earlier post of yours:
So how do you square the two statements? They seem contradictory to me.
“They seem contradictory to me.”
I must confess that I’m at a loss as to the contradiction you see. Banks under pressure to expand home ownership made a lot of loans to people they’d never have loaned to in the past. People they had good reasons for not loaning to in the past. This doesn’t mean that anybody who was paying attention during the process wouldn’t have been aware that the banks were going to re-sell the loans. It IS disclosed in the paperwork, if you read it. In fact, the local small town bank advertised that they didn’t.
But then, the people who probably shouldn’t have been loaned money were not the sort to sit down and read an inch high stack of documents before signing it, or even after during the grace period.
Banks under pressure to expand home ownership made a lot of loans to people they’d never have loaned to in the past
(spits all over the monitor)
yes, those banks were just trying to help along Bush’s Ownership Society. it had nothing to do with the voracious appetite Wall St had for MBS.
What cleek said. Brett, it’s a shame you’re wedded to these dubious narratives because they consistently get in the way of what could otherwise be sensible points.
Alas…
“There is no equivalency in a dubious mortgage agreement. Even if the bank thinks the client is overextending themselves, ultimately that’s the client’s problem.’
Why, my bookie explained my debt problem to him in those very terms just the other day!
I’m not sure exactly who’s saying what here, but I certainly didn’t mean to imply that these were contradictory. When I said ‘no’, I meant that no, it’s wrong that this is not an asymmetrical information. Not that it was one but not the other. That’s my math PhD habits speaking 🙂
Cleek,
Re: our prior discussion on Summers/Geithner v. Krugman, Roubini, this story doesn’t shine light on Summers:
http://blogs.wsj.com/economics/2009/01/01/ignoring-the-oracles/
Short story: Rajan was warning about the exact crisis we’re facing – bubble collapse with securitization nukes – and Summers called his fears “misguided.”
Scent of Violets: “Do you agree that the lending institutions should have made this fact known to their prospective clients?
Or do you step back yet another pace and claim that it’s up to the customer to find that out, not on the bank to supply requisite information . . . even if asked (albeit in an indirect way)?”
I’m not Brett, but it seems to me that the most important fact to disclose in terms of asymmetric information possibilities was the montly payments at different times of the loan. Those aren’t easily calculated by people not good in math, but they were also disclosed. I can’t get on board with an abdication of responsibility so large as to say that people aren’t able to understand that $xxxx per month is or is not likely to be affordable to them.
People can understand that. Though I suppose if you truly believe they can’t it explains the whole liberal paternalism thing.
Cleek “yes, those banks were just trying to help along Bush’s Ownership Society. it had nothing to do with the voracious appetite Wall St had for MBS.”
and
Eric “What cleek said. Brett, it’s a shame you’re wedded to these dubious narratives because they consistently get in the way of what could otherwise be sensible points.”
Nothing to do with? Of course it had *something* to do with the voracious appetite for mortgage backed securities. This whole thing had a lot to do with a lot of things.
But the government push to increased home ownership had a lot to do with it too.
Enforced mark-to-market accounting for assets for leverage ratio purposes (as opposed to disclosure purposes, which is the distinction Buffet makes in the proper use of the mark-to-market accounting tool) caused a lot of problems too.
The problem is that the private market and the public government worked together hand in hand to create an enormous set of incentive-warping situations which have now exploded.
If you focus on the private part alone, you won’t be fixing the government’s very large part in the problem.
(And the reason I always seem to be defending the private part and attacking the government part is purely because people around here don’t seem to have much problem identifying the private portion, and seem deeply in denial about the government portion.)
Summers called his fears “misguided.”
in my reading of Summers’ comments, he is most troubled by Rajan’s calls for more regulation. Summers isn’t saying Rajan is wrong about the dangers the market faces:
(and here’s where i would paste Summer’s penultimate paragraph, if i could copy from that PDF)
i think Summers was clearly wrong, back in 2005, about not needing more regulation. i hope he’s changed his mind at least a little bit.
This is exactly right. In fact, it’s exactly why I chose the driving example, it being well-known that most people will rate themselves as ‘above average’. Even, notoriously, if they’ve been involved in a greater than average number of accidents. Understand, these people aren’t being deceptive when they gloss over these inconsistencies when discovered and questioned. They honestly think they really are better than average drivers, and that they just happened to be unlucky. Significantly – in the light of some rather unpleasant financial events – they’ll often claim that these accidents would have been much worse for all concerned if they hadn’t been the ones who driving at the time the accidents occurred.
This is the flip side of the banks having superior models derived by some extremely sophisticated people(mathematically speaking) who are backed with a lot of money, data, and computing resources. Unfortunately(irony alert), I teach math to these benighted masses. In fact, in one course, we have an entire chapter devoted to ‘financial mathematics’: interest payments, annuities, mortgages, balloon payments, stuff like that. Iow, extremely pertinent math that every American should know. And we teach this not only traditionally, but with TVI solvers to boot.
Here’s the thing. This class, ‘Finite Mathematics’, is not a required math class. That tops out quite a bit lower, at ‘algebra facts you would have learned in high school, had you been paying attention’. Iow, even college graduates cannot be assumed to have what is really a rather basic grasp on the mechanics of compound interest.
So why do people like von, Sebastian and Brett keep on insisting that it’s obvious that these people are perfectly competent to make these sorts of decisions, more so even, than bank officers who presumably have had a number of relevant financial and business math courses, and backed by the hired eggheads out back?
This seems to touch more on meta-competence than mere competence alone.
and on the other hand, let me point out, FWIW, that not everyone worships Krugman the way the left-o-sphere has suddenly started to.
Sebastian:
I’ve seen plenty of people (me included) talking about the problems with the public/government parts.
But the difference is, the public/government parts didn’t make the bets that let them make obscene profits off the bubble, and then start whining about their precious bonuses. The private part did. The government part mostly started whining about socialism, Bill Clinton, Jimmy Carter, Fannie Mae, all those bad, bad, bad people who took out mortgages, how NOBODY COULD HAVE PREDICTED, and communism.
“So why do people like von, Sebastian and Brett keep on insisting that it’s obvious that these people are perfectly competent to make these sorts of decisions, more so even, than bank officers who presumably have had a number of relevant financial and business math courses, and backed by the hired eggheads out back?”
Because the disclosures don’t make you figure it out longhand. They put actual numbers in the blanks. They say things generally like “at the current rates on month 60 of your loan, your per-month payment will be $XXXX, WARNING, rates can change based on the X month T-Bill rate +X%”
And since the T-Bill rate hasn’t gone up, people haven’t gotten caught by that last phrase. So if they couldn’t afford $XXXX it should have been noticeable to them, because $XXXX is a scalar number which requires elementary school math to understand.
“But the difference is, the public/government parts didn’t make the bets that let them make obscene profits off the bubble, and then start whining about their precious bonuses.”
Well that is fine. And as I’ve said it is mere whining. If there were really lots of private hedge fund money to run to so they could keep their bonuses, they would already be doing it. And so far as there is such money, we should be thrilled that they find it–because that will save the taxpaymer MUCH more money than the bonuses in question.
Krugman’s influence in Left Blogistan has more to do with his being one of the first public people with a soap box to stand up and say “Dude, the emperor’s totally naked!” during the Bush years.
Being a Nobel prize winning economist certainly makes him credible on the financial front, as well.
That’s just the whole point right there. By your own choice of words, you acknowledge an adversarial relationship. Great numbers of people did not know really know this, and never needed to. They just figured that while the bank did not have their best interests in mind, the banks interest was aligned with theirs in that neither party was anxious for the loan to go into default. Why would the bank be so crazy as to issue a loan that it thought stood a good chance of being defaulted on? This is sound thinking, and served at least four continuous generations very well. A good thing, because previous generations weren’t all that sharp with the math thing either. They never needed to look at that table of payments to see whether or not they could afford to make them later on.
You seem to be of the ‘buyer beware’ school thought. Could I get a straight answer from you for the question I have asked others? Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?
You shouldn’t be reluctant to answer the question forthrightly.
You’re still not answering the question. And no, recalculating interest payments should the rate reset is not ‘grade school math.’
One more time – what makes them more competent than the bank in these sorts of financial matters? Especially since(contradiction time again), you seem to grant this is not the case with something like auto insurance?
Damn you cleek!!!
For the record, though, it’s not Krugman alone – or even mostly. I look to Roubini, but also Stiglitz, equally if not moreso.
I find Yves Smith to be quite informative as well.
Regardless, bottom line: No matter how you slice it, the Geithner plan gives almost risk free money to hedge funds/other investors, and recaps the banks on the backs of the taxpayers – all the while the Obama admin is cowering about scaling back compensation on Wall St.
It’s better than no plan, and if for some reason the underlying securities are secretly worth close to what the banks are asking, then it will work out to some extent for all involved. But if not (which is likely the case), we all take a bath while the screwed up banking structure remains in place (still too big), and Wall St continues its conspicuous consumption.
Them’s the facts, regardless of Paul Krugman or any other DFH economist.
“Why would the bank be so crazy as to issue a loan that it thought stood a good chance of being defaulted on? This is sound thinking, and served at least four continuous generations very well. A good thing, because previous generations weren’t all that sharp with the math thing either. They never needed to look at that table of payments to see whether or not they could afford to make them later on.”
Says you. I’m quite confident that four generations of Americans who purchased houses were able to competently decide for themselves whether or not they could make payments if offered a table of payments.
Seriously do you know people who lived through or were born just after the Great Depression? None of the ones I know were brilliant at math, but every single one knew what to do with monthly payments.
“Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?”
No, not to buyers, though they should have been clearer to bank investors perhaps. Payment tables are quite sufficient for the needs of the home buyer. Can I pay $3000 per month is not complicated math. If we were caught in huge *unexpected* payments becuase of say an enormous increase in T-bill rates, you might have a point. But that isn’t the situation we are in at all.
“One more time – what makes them more competent than the bank in these sorts of financial matters? Especially since(contradiction time again), you seem to grant this is not the case with something like auto insurance?”
Because a table of payments is the kind of thing that people can handle. There have been no interest rate surprises so the payments are in line with OR LOWER THAN the disclosed payment tables.
Auto insurance is an extremely poor analogy. The question there is how good people are at predicting an unexpected and enormous payment obligation for medical bills or physical compensation based on how well they drive. That has just above nothing to do with how well people can handle a chart of payments.
This is the flip side of the banks having superior models derived by some extremely sophisticated people(mathematically speaking) who are backed with a lot of money, data, and computing resources.
This is a minor aside, but I don’t think the banks really needed, or in many cases even had, very sophisticated models or people for assessing whether to approve standard home owner loans. Based on my experience in other domains, I’d bet that the simple weighted sum threshold test will outperform much more sophisticated classification algorithms and will be more robust to boot.
Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?
I am neither Brett nor Seb, but my guess is that this sort of disclosure would not have made a difference. People get really irrational when it comes to home ownership and the power of wishful thinking is strong. I don’t think most people would have been able to game out the consequences of securitization. After all, even if you sell a loan, the buyer is still very interested in the borrower’s ability to pay, and I don’t think most people would have understood that loan buyers would have no clue about the borrower’s ability to repay. I mean, that aspect of the system is pretty darn irrational, right? In this day and age, you’d think it would be trivial to attach a tiny bit of data to each security specifying credit score, income, assets, and whether those numbers were independently verified.
Even if people could figure out that securitization in practice meant that there was no incentive for good underwriting, I’m not sure that most people really understand that getting a loan means that someone thinks you can repay it (as opposed to just relying on the notion that people who get loans can repay because that’s how it has always been). People often rely on historical correlations without understanding why those correlations work. And that’s a reasonable thing to do.
FWIW, I think there was a lot of borderline fraud on the part of a lot of borrowers. I’m thinking of cases where the mortgage vendor runs your numbers through the computer and it says denied, so he asks you suggestively, surely you must have some other assets hidden somewhere right? Maybe you had some extra income sources last year that you forgot about? I have trouble blaming people for this because I honestly don’t know whether this phenomena affected 1% of borrowers or 80%, and even if it was very common, I’m don’t know how to separate self-deception from willful deception.
In that sense, banks are a much easier target: they are supposed to take simple easy precautions to prevent fraud. How on earth could I entrust my deposits or IRA to any bank so stupid as to issue a mortgage without verifying income and assets? I mean, if the bank is that stupid, how do I know they won’t give all my money to the first person who claims to be me but doesn’t have any ID and doesn’t know my account number?
Well… Not completely. After all, many of the first loans that caused the problems were subprime loans, including the “ballon” ones, and NINJA loans, and other “financial innovations” that started out low then had the payment jump after a year or two or whatever. Combine that with people talking about how “housing prices always go up” and you’ve got problems.
And then when the bottom fell out of the housing market, people who HAD been able to afford the mortgages started losing their jobs, watching their houses’ value drop below what they owed, and so on. Which disinclined them to keep the houses. So then more people lost jobs, or houses, and house prices dropped, and… So what HAD been a payable mortgage before wasn’t any more. The assumptions that had underlaid the whole system BROKE when housing prices stopped going up.
Also, another reason people are madder at the bankers? Bankers’ real product is trust. Do you trust this person to take care of your money? To be honest with you, and advise you on retirement, and all the rest. And now it turns out that many of them had been taking people’s money and simply betting it. They actively violated the expectations for them.
Says you. I’m quite confident that four generations of Americans who purchased houses were able to competently decide for themselves whether or not they could make payments if offered a table of payments.
Four generations of Americans were not presented with the variety of skeezy loan products on offer today. They could not apply for stated income stated asset loans or negative amortization loans, etc.
Them’s the facts, regardless of Paul Krugman or any other DFH economist.
and i won’t argue. i’ll just say that i hope that this really is the best plan possible at the moment, and i’m content to let them implement it.
what else can i do, really ? it’s not like we get to vote on this…
“They could not apply for stated income stated asset loans or negative amortization loans, etc.”
Again, I’m certainly not defending the banks in their really stupid practices surrounding loans in the past 10 years. But the idea that people are just too stupid to read a chart of payments is a bit too much. Responsibility isn’t found in just one party of this multiple party transaction. Should banks have decided not to make loans where it should have been obvious that the person wouldn’t be able to pay? Of course.
Should the prospective homeowner have decided not to take a loan with clearly stated charts of payments that he well knew were out of reach? Of course.
I’m all for the idea that banks shouldn’t have made these loans. But I’m not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won’t be able to pay. A chart of payments isn’t specialized math. It just isn’t.
Actually, before we go around asserting things about charts, how clear WERE these charts, especially for balloon and NINJA loans and all the other strange “subprime” ones?
Well, I agree with Sebastian.
However, let’s not underestimate the immense stupidity of the American people at large regarding financial matters.
After all, look at the ten of millions of folks who believed the predicted compounding rates of the stock market into the forever future, which would allow them to retire and pay for their kids’ college education ..
… why, we lemmings even thought the market would bail out Social Security. Considering the market is worth less than half (minus dividends) of what is was when Bill Clinton left office, what we have here is a negative compounding rate over a ten year period …..
….. despite Wall Street and Larry Kudlow talking head assurances that the DOW would keep inflating.
There is too much small print in American society these days and not enough bifocals and magnifying glasses. That is, if you can remember all of your PIN numbers, passwords,and account numbers to get into your accounts and check out the damage.
Yeah cleek. I’ll probably keep muttering to myself for a bit, and then just hope to hell those securities are worth more than the current market value. By a good clip. And that this was the best possible route – I don’t think so, but I’m pretty sure I was wrong at least once before in my 34 years.
Brett Bellmore: Banks under pressure to expand home ownership made a lot of loans to people they’d never have loaned to in the past. People they had good reasons for not loaning to in the past.
You skipped about ten steps between the first sentence and the second, incidentally. Redlining, for example, was not typically done for “good reasons,” unless you consider “that neighborhood is full of black people” to be a “good reason.”
Eric: I also embrace the responses Bernard gave to Von. But, while I’ve noticed Hilzoy and Publius have tackled the economic mess and you have mostly kept a posting focus on foreign affairs, I wanted to say thanks for participating and keeping a sharp point in the comment sections of these lively Econ posts.
Meanwhile, I believe Bernard Madoff would agree with Von’s thesis that it is important that we regular folk share in the blame of the economic meltdown.
P.S. Speaking of Bernard — Yomtov, that is — I would like to lift a virtual cold one, Sam Adams will do, to him, Russell, Janie, Tony P and the other New Englanders who will be gathering tonight for good food, drink and discussion. Wished I lived as close to Boston as I do Philadelphia, and I’d be there.
“But I’m not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won’t be able to pay.”
In full agreement with you here, Seb.
However, I think it’s clear where the sleazy mortgage companies helped get us into this mess was when they did not show those figures, did not make it a point to bring them to the attention of the consumer and just kept painting a rosy picture instead.
At the start of the decade, I was seduced by one of those interest-only loans on the townhouse I had at the time that I had managed to refinance a 30-year down to a 15-year mortgage.
Single, I was OK making an $800 payment but, hell, when it was explained to me that I could pay $250 or $350 — essentially whatever I wanted as long as it met the minimum — I was in, hook, line and sinker. I kept asking questions, obviously not the right ones, because the mortgage rep kept making her product sound so good. After all, she said, all of us in this building are doing these.
Now, of course, I know these interest-only instruments are insane and warned a co-worker recently not to do it.
Luckily, I wound up selling the townhome just a year later for more than $50,000 I had paid 10 years earlier — and had to pay “only” a $1,000 penalty to First State Mortgage — and used the proceeds of the sale for the rancher that we’re trying our best to stay in now.
So, yes, I was a fool and should have known better about this woman’s sales pitch. But she was good, and while I can’t say she committed fraud, there definitely was deception involved.
P.S. I was between jobs. No problem, the lady said. We’ll do a “no-doc” (no proof of income necessary, no proof of a job; just what was then my excellent credit score — boy, I thought at the time, these people are accomodating.)
Thanks btfb. And yeah, I’m jealous. I could use a cold one right now. I imagine a bunch of us could.
Cleek: what else can i do, really ? it’s not like we get to vote on this…
Eh, you did dude, you and me both. We *voted* for this.
As Glenn would say: Heh!
*We* voted for this.
You and me both…
That has to suck at some point, Heh?
That has to suck at some point, Heh?
It stings, but you know what salves the pain: President McCain and Vice President Palin.
Eh, you did dude, you and me both. We *voted* for this.
sure. and i don’t regret it. McCain would have been an utter disaster. a complete sh!tstorm of failure.
did you see the press conference tonight? about 1/2way through i started trying to imagine grumpy-ol McCain up there with his fake laugh and his mindless sloganeering… then i realized that we chose correctly. i felt a warm wave of relief flow over me, i shuddered. and when i opened my eyes, the sun was out, the sky was blue; i’d been laid-off with five years severance, and i had the fitness level of an 18 year old; and beer was the same price as it was in 1991.
O! Ba! Ma!
McCain? Let us not forget his senior economics advisor, Phil Gramm. We had a long chat about him around a year ago.
Cheers to Bernie Yomtov and the others meeting tonight. Wish I could be there.
Says you indeed. Running out of room to manuveur there? You keep changing the rules; now we are down to what would be a traditional mortgage, like the one I got, or my parents got, or my grandparents got. Yes, if you put 20% down, paid a fixed rate, etc, you just get your little payment book and you mail each installment off like a coupon once a month. And yes, you could read off the amount due from a handy little table, no problem.
But those weren’t the loans that got people in trouble, were they? The problematic loans were the weird paper like the Alt-A’s and the option-ARMS (I never knew any of this stuff until I started reading Calculated Risk about three years ago. If I sound knowledgeable, it’s because I’m cribbing from the late great Tana.) The sort of loans our forefathers didn’t have any experience with. Trust me, the people in 1962 couldn’t have calculated a rate reset unless they hired a professional to do it for them. You might try it yourself sometime to see how ‘easy’ it really is.
But this doesn’t make sense. Why should they have been clearer to the investors, but not the buyers? It sounds like after all, you treally do think that warning prospective buyers of the new situation would have cost the lenders money.
Iow, you’re not being consistent again.
You keep saying things like this without offering up the slighest scintilla of evidence. Would it be to hard to dig oup some other reason than ‘because I say so’? Cites, quotes, links? Since you are, you know, making the argument about how competent home buyers are.
Again, this is simply not in touch with reality. Unexpected and unforseen circumstances are also priced into the loan you get on your house. Combining the two, how does the home owner know they’re not going to have a catastrophic illness? Or lose their job? Or get into an auto accident, incurr huge lifelong medical costs, and lose their livelihood as well 😉 You sound as if you are unaware that in fact, good drivers get better rates on their auto insurance, just like people with a long history of good credit with a stable job get offered better terms on a mortgage. Can you say no-doc loan? Sure. I knew you could.
At this point, Sebastian, you have given little if any reason to believe that individuals are better at this stuff than the professionals at the bank. You’ve made me move in the other direction, actually – no doubt, you would like to think of yourself as being competent to make these sorts of decisions, but you were unaware that banks price the risk of the unforseen into their home loans. So why should I trust you any further?
A few points:
(a) Introspection: meh. I have gone over and over my mortgage history — the first house with a 6% 30 year fixed rate loan, the second with an 8.something 30 year fixed rate loan, which I refinanced down to a 6% or so year fixed rate loan; the third with a 6 3/8% 30 year fixed rate loan which I just refinanced down to a 5% year fixed rate loan (nb, in none of the refis did I take equity out, other than to cover closing costs); never less than 30% equity — and I have yet to see what I should have done to prevent the housing collapse.
Specificity: it is a good thing.
(b) I don’t know about the tables, Seb. There were some pretty hairy loans out there, including some that could reset completely unpredictably, based on (iirc) whether, in exercising the option to pay less than the interest on your loan, which option was part of the deal, you passed some percentage of equity in the home, at which point the whole thing reset.
I would not have taken out such a loan, myself. (You might have noticed a pattern in my mortgage history …) But then again, I have a good job and fairly modest tastes, so I was never in a position where I needed to make tough choices.
(c) A lot of people also lost jobs, or in some other unexpected way came to grief. This was not imprudence.
(d) That said, I’m not particularly invested in the idea that homeowners have no responsibility at all. I think that probably a decent number do. On the other hand, I also recall (and will try to find, if anyone wants) a particularly interesting post by Tanta on CR, about a horrible hairy complicated kind of mortgage that was becoming popular, whose terms she tried to explain at nearly unendurable length (and recall that Tanta was a very clear writer and a very clear thinker; if she had to write half a dissertation to get it across, imagine your average mortgage broker), and which she had found agents who didn’t understand. I don’t think it had tables.
Which is just to say: I think there’s a lot of blame to go around.
But not everyone is holding a gun to the country’s collective heads, after having made out like bandits on the grounds that they were so wise that they deserved to make six or seven figures a year, during which time they helped to blow apart the economy. I mean, for chutzpah, that leaves most deluded or deceptive homeowners in the dust.
Oh — I really wish I could be at the meeting in Boston (my fair city!) 😉 Have a wonderful time.
No doubt such a simple model would easily capture most of the behaviour; I’d say over 90% After that the bites get smaller and come at a higher price. And while the smaller concerns might be perfectly happy with a simple model – it is by it’s simplicity robust as you note – I’d guess that the larger outfits would find it monetarily worth while to chase after those increments.
All very true. I am in general very leery of ascribing any weight to intentions; I prefer tangible outcomes. However, in this case, that’s all we’ve got. I know of several people who have said something to the effect “Well, if Ida known that . . .” and I’m guessing that this is just blow. But I also know people who really did reason that way(ironically, people who considered themselves to be hip, smart, going-places economic conservatives), to the effect that they themselves were cynical enough (all of 28!) to be well aware that the lender wasn’t doing them any favors out of the kindness of their institutional hearts.
I agree that this is the weakest part of what I take as my argument. Once again, a case of intentions versus reality, of talk versus action. If I had a better way to discriminate, I would. However, this is certainly better than what other people have been offering up to point the finger at that nefarious figure, the buyer. And – trust me, as math teacher, this is something of a sore point – there are a lot of people out there who think of themselves as smart and clever, well-educated, many of them who actually work with figures from time to time who are quite simply functionally inummerate.
On this point, I think Sebastian and I might even be in agreement – compound interest, amortization, annuities – these are certainly exactly the sort of things that should be taught in high school. There’s no reason why it shouldn’t be, especially in an age of calculators, many of which come preloaded with some sort of TVI. That this isn’t taught until the college level, and in a nonrequired course at that(I live in Missouri, btw), is simply disgraceful.
Here’s the thing. This class, ‘Finite Mathematics’, is not a required math class.
Do you by any chance teach at a major Midwestern university? Because I taught a class with that exact name and syllabus…
Boy – this is depressing –
I was going to say something, elaborate on what I had said earlier, but exactly so, Nate. Further:
I’ll say it again – if you’re in a ‘conventional’ mortgage, sure, it really is that easy. Yes, all you have to do is read off the schedule on the rate table. But that’s not even math, really. The problem is that when things become even slightly more complicated, Americans at least become extremely stupid. If there was one reason why people should be learning math up to the high school level, I’d say that this would be the prime candidate. But you know what? I personally teach people every year – at the college level, mind you – who if they multiply two two-digit numbers together are unsurprised to see a two- or five-digit number. Who upon subtracting 126 from 710 on their calculators will not have warning bells flash if the result is, say, 614.
Honestly, I don’t think the situation was ever that much different in the times of those sturdy pioneers, our fathers and grandfathers. Oh, they say otherwise, of course. But talk is cheap. As near as I can tell, what’s changed is not the the people; it’s the loan ‘products’. I really attach small credence to the notion that people somehow became greedier when the 21st century rolled around, or that the banks went soft in the head and the heart simultaneously. I attach a much higher probability to the emergence of a new scam that succeeds for a while until enough people are caught out. That’s the sort of human behaviour I can believe in, the sort of motivations that haven’t changed through the millenia.
As a matter of fact, Anarch, I teach at the University of Missouri at Columbia. Or whatever they’re calling it these days. There’s been a lot of bureaucratic squabbling, literally thousands of people-hours wasted on what to call the thing and whether outlying institutions like Southwest Missouri State (or whatever they’re calling it these days) can call themselves ‘the University of Missouri at _’. If this is where you were, then you may have had a class or two by Professor Cutkosky; he’s my advisor.
Exactly so. And I don’t mean to imply that the homeowner side of the equation bears no portion of the blame. Just that in matching culpability their portion is by far the smaller for two reasons: a)at the end of the day, it is only the lender that can offer a loan, and b)it is the lender who is more financially sophisticated and who has the most information and experience. As always, there will be fools and frauds on both sides for which no excuse is possible. And the people making six figures who bought a second or third property to flip and who thought of themselves as smart and sharp and smooth operators and knew the risks going in? Yeah, they lost a lot. And I could care less – it’s all on them.
The people who between them had a household income of less than $50K? Who only had a pair of high school educations between them, but were steady workers, and aside from a bit of bad credit from their teens which disqualified them for a straight 20% down thirty-year mortgage at a reasonable rate, were otherwise excellent risks? If they sign the papers with all the wierd resets and manifold clauses and sub-sub-subclauses and get hosed later, my sympathies are entirely with them.
Perhaps what is at issue here is just in what proportion are these two types of buyers?
While I understand that individual homeowners are not blameless, I think putting the spotlight on them only serves to minimize the focus that should be placed where it ultimately belongs: Wall Street excess, Wall Street schemes, Wall Street making sure it can partake in the American Dream, even if it comes at the expense of others.
Wall Street has gotten billions upon billions in bailouts. Its probably safe to surmise that its CEOs and employees aren’t suffering like so many of us have in this Great Recession. If they haven’t had Hank Paulson and, then, Timothy Geithner’s ear at Treasury, then it certainly seems that way.
What have regular working stiffs have received?
Many of them even lost the characterization of “working stiff” upon losing their jobs. Many of them have lost their homes. Many of them, like yours truly, have filed bankruptcy; clearly, we are not Too Big To Fail.
What have we gotten?
I called my mortgage holder, Wells Fargo, today to gain answers, and more, regarding the Homeowner Affordability and Stability Plan, having been told three weeks ago to give them time to set up. Three weeks later — after listening to the wait-for-a-rep music for 25 minutes, I got the same answer: Call back in a few weeks when the plan is up and running.
I believe the Fed and Treasury got money flowing to Wall Street — to AIG, Citi, Bank of America, to friggin’ Wells Fargo — much faster than six weeks once a plan was first implemented.
So despite the Obama Administration’s best intentions to help the little guy — despite their pronouncements that they are indeed doing that — I think it’s just the usual political hot air.
This is still a trickle-down economy.
And so it is that folks like me are waiting for the damn trickle-down.
I voted for President Obama. I’m glad a Democrat, not a Republican, is in office. But in so many ways — tangible these-guys-are-on-my-side ways — you can’t tell the difference, and that is sad.
Look maybe 10% of the country understands the risks of ninja neg am option arm. They were set up to blow up a few years down the road. They only way they make sense is if there were an unlimited flow of buyers and property never went down
a long ways from executive bank personnel who are not going to take “no” for an answer about the delivery of those bonuses…as if the exceptional clause(s) enabling that delivery were not enough to condemn these professionals.
What could be more subprime than this, people?
Good on you for pursuing your education Scento, and mighty fine performance here, too.
Who upon subtracting 126 from 710 on their calculators will not have warning bells flash if the result is, say, 614.
Heh. I’ll raise you: the first time I taught our Finite Mathematics, I had a girl declare on a midterm that there were 899 3-digit numbers — we weren’t counting leading zeros — and 724,149,894 3-digit numbers that did not repeat a digit.
Let me repeat:
1) Her work consisted of two lines.
2) On the first, she declared that there were 899 3-digit numbers.
3) On the second, she declared that there were 724,149,894 3-digit numbers that did not repeat a digit.
4) The kicker: after the exam, she came to my office and complained that she didn’t receive enough credit. When I asked her what she thought was fair, she said 6/10… and she wasn’t joking.
And this at, as I said, a major university. [IIRC, we were in the top 5 public universities on US News & World that year.] Trust me when I say, you have no idea just how bad math is in this country.
Oh, and let me add: later in the book, when we covered the normal distribution, I received conclusive evidence that, in fact, a non-trivial number of people can’t read a table. I’ve never really recovered from the cynicism that blossomed that semester.
I am marveling at the disconnect between some saying that going after bonuses instead of the real problems is myopic and the idea that the individual home owners who took out loans deserve a non-trivial portion of the blame. If you accept the first premise, how do you accept the second?
Hilzoy: Oh — I really wish I could be at the meeting in Boston (my fair city!) 😉 Have a wonderful time.
Janie M, Bernard Yomtov, Warren Terra, Russell, Turbulence, and yours truly had a wonderful time indeed. We need an excuse to do it again, so let us know if you ever get to Boston, Hilzoy.
–TP
Our strategic oil reserves aren’t nearly enough to seriously tinker with the price of oil.
This is VERY wrong. The SPR is 6 months of US consumption, which makes it about 12% of one year of world consumption. Oil has unbelievably inelastic demand; the elasticity of oil is about 1/15th, meaning, after a change in supply, the ratio of the price before to the price after is the fifteenth power of the ratio of supplies. (1/1.12)^15 = 0.18, so releasing the entire US petroleum reserve would have reduced prices 84 percent.
With such a huge move, the elasticity equation would no longer hold, and the price move would probably have been somewhat less. But it would still have been HUGE.
Should the prospective homeowner have decided not to take a loan with clearly stated charts of payments that he well knew were out of reach? Of course.
As far as I know, default rates for mortgage products similar to what had been traditionally offered have not changed much over the last few years. That is, default rates for fixed rate mortgages with 20%+ down payment and income/asset verification are no higher than they were for earlier generations. Therefore, I really don’t understand your complaint.
I’m all for the idea that banks shouldn’t have made these loans. But I’m not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won’t be able to pay. A chart of payments isn’t specialized math. It just isn’t.
Many loan products did not have a chart of payments as I understand it. They had a clearly explained first month payment and then a lot of verbiage that a suitably trained person could use to generate a chart but which the average person could do nothing with.
I’ll be happy to stipulate that people who took out simple loan products that clearly stated tables of monthly costs over the lifetime of the loan that differed significantly from their earning capacity suck. They should be punished horribly. I just don’t think most people buying negative amortization ARMs fall into that bucket because I don’t see how you can make a payment schedule when the payments depend on future interest rate changes.
Oh, certainly you need a Ph.D in math to even come close to claiming credibility in the arena of math. hilzoy has pretty much ranking credentials in the areas of ethics and philosophy, I think.
None of which gives anyone a priveleged argument. Just, if we’re arguing from authority, Anarch and hilzoy are tough acts to follow. Possibly others; I have a hard time keeping track.
If you want a decently informed discussion of missile defense or targeting systems, I just might be your huckleberry. We’d have to wait and see, though. You just never know who’s lurking.
Dunno why I keep insisting on misspelling ‘privileged’. Nervous tic, or something.
Pulling rank has always struck me as unseemly, especially in such a democratic forum such as this.
Which isn’t the same as saying I do not appreciate the value and weight of one’s credentials, even if they may only come from a person’s life experiences.
Lucky for me, my degree in Journalism and Communications makes me priveleged of a sort in everything. And nothing.
But I am proud of my knowledge of dogs, squirrels, mafia and cowboy movies, “All in the Family,” Russia, Russian women, homemade vodka, apple pie, baseball, football, birds, Buddy Ryan, Pete Rose, Larry Bowa, Charles Barkley, Randall Cunningham, Reggie White, Italian mothers, John Wayne, Humphrey Bogart, Frank Sinatra, Ava Gardner, Rita Hayworth, David Halberstam, Russian architecture, Wendell Berry, Norman Rockwell, cats, horses, bi-polar manic depression, “Gunsmoke,” pickup trucks, family, divorce, wolves, Andrew Wyeth, cancer, hospice, charity, and the value of a good newspaper.
Pulling rank has always struck me as unseemly, especially in such a democratic forum such as this.
Which isn’t the same as saying I do not appreciate the value and weight of one’s credentials, even if they may only come from a person’s life experiences.
Lucky for me, my degree in Journalism and Communications makes me privileged of a sort in everything. And nothing.
But I am proud of my knowledge of dogs, squirrels, mafia and cowboy movies, “All in the Family,” Russia, Russian women, homemade vodka, apple pie, baseball, football, birds, Buddy Ryan, Pete Rose, Larry Bowa, Charles Barkley, Randall Cunningham, Reggie White, Italian mothers, John Wayne, Humphrey Bogart, Frank Sinatra, Ava Gardner, Rita Hayworth, David Halberstam, Russian architecture, Wendell Berry, Norman Rockwell, cats, horses, bi-polar manic depression, “Gunsmoke,” pickup trucks, family, divorce, wolves, Andrew Wyeth, cancer, hospice, charity, and the value of a good newspaper.
Privileged, indeed, Slarti.
“Redlining, for example, was not typically done for “good reasons,” unless you consider “that neighborhood is full of black people” to be a “good reason.””
Um, is “High crime neighborhood with very low property values, lots of carjackings, and a history of riots in which houses get burned to the ground.” a good reason, in your opinion? Or does the fact that a good reason happens to correlate with a particular bad reason magically transform it into a bad reason?
Businesses do not, typically, “redline” on the basis of race. They do so on the basis of perfectly rational criteria such as crime rates, which happen, through no fault of the business, to correlate with race.
I don’t see why an insurance company is obligated to lose money on it’s policies in high crime areas just because a lot of black people live there.
Although in the United States informal discrimination and segregation have always existed, the practice called “redlining” began with the National Housing Act of 1934, which established the Federal Housing Administration (FHA).[7] The federal government contributed to the early decay of inner city neighborhoods by withholding mortgage capital and making it difficult for these neighborhoods to attract and retain families able to purchase homes.[8] In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners’ Loan Corporation (HOLC) to look at 239 cities and create “residential security maps” to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual’s or household’s ability to satisfy standard lending criteria. Since blacks were unwelcome in white neighborhoods, which frequently instituted racial restrictive covenants to keep them out, the policy effectively meant that blacks could not secure mortgage loans at all. link
I look forward to Brett relating the history of riots in the late 30’s where houses were burnt to the ground.
I can only speak to what redlining was all about in Michigan, while I lived there. For all I know it could have meant something different decades before I was born.
Note, I used the present tense.
So, I got back my property assessment the yesterday upon getting home from my MBA class.
We’re down 61% from last year. Not down TO 61%, but down 61%. I’d have to pump 40K into the mortgage just to hit 0 equity. (Or to put it another way, assuming no appreciation we’ll hit 0 equity in 2020.)
The problem being of course is that I’m going through a divorce and I’m getting the “asset” of the house. It is affordable, but it isn’t where I want to live. And the only way for me to leave is to get foreclosed on. Which isn’t an option thanks to job related concerns. Nor can I take my soon to be ex-wife off the deep. You can refinance up to 105% value; I’m at 145%. So no refi for me.
How did I get here? Back in 2003, my wife and I had been married a year with good jobs, and saw what rent was doing, versus what house prices were doing, and decided to buy. It being 2003, we were on the front edge of the financial innovations, in our case a 95/5 mortgage – where we had two mortgages for a total of 100% of the mortgage. No PMI. A sweet deal, and it worked for us.
And over the next 5 years, the values doubled, I can remember seeing in 2006 seeing someone willing to buy the house sight unseen for about 80K more than me bought the house for. 20/20 hindsight makes me kick myself.
But now we’re standing in the midst of the rubble of our neighborhood. We were hit hard with the sub-prime and Alt-A bubbles thanks to being a starter home community, and I can only imagine what the latest round of assessments are going to do to people’s motivations to pay.
It is going to be an interesting ride.
“But those weren’t the loans that got people in trouble, were they? The problematic loans were the weird paper like the Alt-A’s and the option-ARMS (I never knew any of this stuff until I started reading Calculated Risk about three years ago. If I sound knowledgeable, it’s because I’m cribbing from the late great Tana.) The sort of loans our forefathers didn’t have any experience with. Trust me, the people in 1962 couldn’t have calculated a rate reset unless they hired a professional to do it for them. You might try it yourself sometime to see how ‘easy’ it really is.”
You don’t have to CALCULATE anything. The amount you have to pay is right there in the table. You READ it. That is all.
I know because I looked over disclosures with ARMs with friends buying houses over the past 3 years. I also suggested that they not use ARMs. And I bought a place of my own, without an ARM, which I lost when the person I bought it with became unemployed for 9 months.
Your entire argument is based on the idea that the homeowner has to calculate anything.
And you’re 100% wrong about that.
Which makes responding to the rest of what follows from your completely wrong premise kinda of pointless.
“This is VERY wrong. The SPR is 6 months of US consumption, which makes it about 12% of one year of world consumption. Oil has unbelievably inelastic demand; the elasticity of oil is about 1/15th, meaning, after a change in supply, the ratio of the price before to the price after is the fifteenth power of the ratio of supplies. (1/1.12)^15 = 0.18, so releasing the entire US petroleum reserve would have reduced prices 84 percent.”
First of all, the claim was that merely not putting into the reserve would have been enough to dramatically impact the prices.
Second, you are talking about drawing THE ENTIRE RESERVE which is a) ridiculous, and b) would be foolish.
Third, where does that leave us 6 months in? With no reserve, and back in the same supply/demand problem as before.
Which is why we don’t use the reserve in such a silly way.
Actually, barely more than one month. The SPR holds about 700 million barrels, and US consumption is right around 20 million barrels a day.
To be clearer, I think perhaps the discussion is bogged down because of the materialized risk in ARMs (that you couldn’t pay the later legs no matter what) and a potential risk in variable ARMs (that you couldn’t pay the later legs because interest rates had gone up).
I’m not sure that the latter risk was adequately disclosed. The disclosure tables I’ve seen had the prices at very possible interest rates, but no easy way of figuring out the likelyhood of having to pay at that rate. If you are talking about disclosures on THAT, you may be right.
But if you are talking about what actually happened, that part of the disclosure is irrelevant. The part of the disclosure that is relevant to what actually happened is the monthly payment at pretty much the lowest disclosed rate. The Fed rate is extremely low right now. The risk of it being high did not in fact materialize. So if people can’t pay, they can’t pay even at one of the very lowest disclosed monthly payments for where they are in the loan.
I would think you had an important point if people had relied on the Fed rate not rising and had been caught by unexpected inflation. I’m not sure that risk was disclosed enough to my liking.
But when they can’t pay even the very lowest monthly payment possible under the loan, I can’t say that complicated math confused them.
And your evidence for this is? I’m going to post a few things here, but let’s get one thing clear first: I am under no obligation to post this. The obligation to post supporting data, cites, whatever is entirely on you. Accordingly, I’ll take a very dim view of you if you try to wiggle out from under this burden and start attacking these cites as if their not ‘proof’:
Trom msnbc:
How about delinquencies on those traditional 30-year mortgages? The ones that you just have to look up on a table? From the same story:
It appears that even with rising unemployment, delinquencies rose less than a third of one percent. So it seems that my understanding of the big picture is generally correct.
Now, how about offering up some evidence of your own? And one more question: why do you think so many people here have the wrong perceptions and you the right one? Especially since your impressions seem to be faith-based at this point?
Something besides your mere statement would be nice. Something more statisticky with juicy cites and crunchy numbers.
“The obligation to post supporting data, cites, whatever is entirely on you.”
Who pray tell introduced the entirely anecdotal idea that people were relying on the banks to not loan them too much?
I believe that was YOU.
And your alleged evidence about disclosures is not on point. You are offering evidence that unemployment makes it difficult to make mortgage payments.
I don’t believe I’ve disputed that point. I haven’t even made a point that is even within driving distance of that point.
“And one more question: why do you think so many people here have the wrong perceptions and you the right one? Especially since your impressions seem to be faith-based at this point?”
Ah, the ScentofViolets from JaneGalt and CrookedTimber begins the descent.
Your points on this thread have been largely anecdotal (I have friends who said they relied on the bank to not loan me to much) and appeals to authority (I’m a PhD, a MATH PhD, well almost a PhD, no seriously MATH!!!!)
But I responded to the arguments contained in them as much as I could.
But you have to be a bit brazen to start on the “your impressions seem to be faith-based at this point”.
I’ve seen actual disclosures in actual mortgage applications. The ones I saw seemed sufficient to me. The
My 11:10 contains the crux of my argument with you. You seem to be arguing that the disclosures for what didn’t actually happen caused a problem. That seems odd.
Sigh. I’ve admitted up front that relying on what people say is probably the weakest part of forms my beliefs. But I honestly don’t know how to go about testing for something like this. Not only that, but you appear to be rather heavily overstating my original observation:
You have offered nothing to support the claim that they do know better. The best you can say is that the only thing homeowners need do is ‘look at a table’. And even that is unsupported. In fact, you misread my cite; the point was that homeowners who only have to ‘look at a table’ don’t seem to be the ones having problems. The problems, everyone seems to think, were with the more complicated ‘products’, the Alt-A’s, the ARM’s, etc. The mortgages which weren’t just a matter of ‘looking it up in a table’. And I’ve just produced a cite that seems to agree with me – not that I am under any obligation to do so. Now, getting back to what you said:
What evidence do you have for this?
Finally:
Since you seem to have missed it, I’ve been poking fun at myself, and anyone who thinks that saying “I have a PhD” is any sort of way to make a point. The only time my math experience has been relevant is to note that people really aren’t any kind of math savvy. I hope you don’t dispute this.
“The problems, everyone seems to think, were with the more complicated ‘products’, the Alt-A’s, the ARM’s, etc. The mortgages which weren’t just a matter of ‘looking it up in a table’.”
But for even most of those mortgages, it is a matter of looking it up on a table. The variable rate disclosures that I saw for ARMs had the date of the rate reset and the payment at various possible rates. In the situation as it played out because of current interest rates, they will be paying the lowest disclosed rate. Between the Truth in Lending Act, and the Federal Reserves Regulation Z, these monthly payments were disclosed, as well as the date when the payment changes would take place.
See for example the Federal Reserve testimony on the subject here
If it had turned out that the Fed rate was high right now, you might have been correct that the disclosures were largely a problem because people might not have been able to accurately understand the risk of a big inflationary spike. That is what the Fed testimony is worried about. (In actual fact the disclosures I saw had a maximum amount, but I take it that those were not required).
But that isn’t what actually hit us.
What actually happened is that people, even with jobs, are defaulting as the ARMs go to their lowest full rate. This is the lowest they could have expected to pay, and they can’t pay it. That payment was fully disclosed and has been for decades.
They know better, because they know their actual earnings better than the bank does and they know their actual prospective earnings better than the bank does. They can use that knowledge to look at the box which says “monthly payment”.
In any case I think you are hanging way too much on ‘better’. Whether the amount of knowledge distribution is 49-51, 50-50, or 51-49 isn’t important to me. The homeowner has more than enough actual knowledge of his job, his job prospects and his personal budget to be able to use the information of a single dollar amount monthly payment and understand whether or not he can pay that.
Was the bank at fault for making the loan? Almost certainly yes. Was the purchaser at fault for seeking/taking a loan that clearly disclosed he couldn’t pay it? Definitely yes.
The government mandated dislclosures were already in place. No matter how greedy the bankers are, we don’t get here without tens of millions of Americans looking at that number they know they can’t pay and buying the house anyway.
Note that this is only what the law says, not what is actually practiced. Further, the testimony goes on to say:
We also have gems like this in a cite chosen by you:
Back to your quote here:
Note that it says nothing about any other rate, only the worst case. So people who pay more than just the interest can still be quite shocked at how much they have to pay when the rates reset. Are there any tables for those other rates?
A simple yes or no will suffice 🙂
Also, in the same quote:
It looks like your cite doesn’t back you up the way you think it does. In fact, I’ll claim it for my own 🙂 Do you have anything else? Oh, and there’s this as well:
You keep saying these sorts of things without any proof. And when I point out that insurance works the same way, you dismiss it. I would also point out that in my case, the bank was right and I was wrong about my future income. This isn’t due to any intellectual insufficiency on my part btw, but people do fall behind or default on their payments for reasons outside of their control. The bank has a good deal of data to make an informed judgment about the set-points, just as an insurance agency has accumulated data for various classes of people in classes of health. I do not. This goes back to those cognitive biases – other people might lose their jobs, but not them; they’re ‘above average’.
People who take out mortgages are teachers, plumbers, administrative assistants, etc. Their job is to be good at teaching, plumbing, assisting administrators, etc.
People who originate mortgages are not just one guy who can read a few tables–the originator is actually a loan officer, plus the loan officer’s secretarial staff, plus the software the officer uses, plus the people who wrote and maintain the software. And that’s if you’re working with only one loan officer. Many individuals get their mortgage through a broker, who works with dozens of loan officers, each of which works with secretarial staff and software written by teams of analysts and programmers. All of these people are trained to understand mortgage financing and everything relevant to it–it is their job, it is what they have trained for, it is what they having been doing for 40-60 hours every week for the duration of their careers.
So on the one hand, you have an individual with no expertise in mortgages, and on the other hand, you have the combined brainpower and experience of dozens of people or artifacts capturing the expertise of people (that is, software), whose very job is to determine whether the individual applying for the mortgage is an acceptable credit risk. The mortgage originator, in addition to more people with more experience, also has more information, including a detailed credit history of the borrower that the borrower probably doesn’t have access to and wouldn’t know how to assess him/herself as precisely as do the originators even if s/he did.
Over the years, people have learned that creditworthy borrowers will receive loans, and non-creditworthy borrowers will not receive loans. In the past ten or so, however, lenders changed their practices and gave just about anyone a lone. Borrowers did not change their practices–as before, they took the loans that were offered them. The system collapsed after one variable was changed, while the other stayed the same. Which variable, then, bears the responsibility for the collapse?
“Note that it says nothing about any other rate, only the worst case. So people who pay more than just the interest can still be quite shocked at how much they have to pay when the rates reset. Are there any tables for those other rates?”
Yes there are. You’re misreading. They are talking about the reset rate in that quote.
I also note that yet again you are focusing on disclosure issues which did not in fact come into play–the problem of the rate being reset much higher than initially disclosed because of the federal interest rate being high.
If those disclosures were deficient, they still do absolutely nothing for your case, because they have nothing to do with why people are defaulting now.
“It looks like your cite doesn’t back you up the way you think it does. In fact, I’ll claim it for my own”
Go for it. Unfortunately it doesn’t help your argument because high federal interest rates resetting ARMs to above the disclosure amount didn’t happen in this world, only in some alternate one which is irrelevant to the discussion.
I say that people know their own finances better without proof becuase it is almost always true. The bank knows what the borrower discloses. The borrower knows what they didn’t disclose in addition to what they disclose. You harp on ‘proof’, but you offer none that the bank had more knowledge about an individuals finances than the individual.
It isn’t particularly analogous to insurance (the metaphor isn’t ridiculous, it just isn’t very close) because the average personal knowledge about personal finances is much more in depth than the personal knowledge of catastrophic health issues or disasterous car accident. In that kind of insurance case *nearly the entire issue* is that of catastrophic health problems or disasterous car accident. Which is to say outside the personal knowledge of the person buying insurance.
In the loan case *nearly the entire issue* of personal finances is within the personal knowledge of the person obtaining the loan. He knows how much he makes now. He knows is likely earnings in the future.
Furthermore, you again are reaching for cases beyond what actually happened. The loss of the houses at ARM reset was not largely because of loss of jobs. It was because the payments couldn’t be made even with the job. Which cascaded into this recession, causing loss of jobs which will compound the problem.
But to analyze it as if joblessness was the main cause of the housing crisis, is to miss the point entirely.
The bank knows what the borrower discloses.
No, the bank knows what it chooses to verify. The bank knows what the borrower’s credit report says without the borrower disclosing it. The bank knows that the borrower is being honest when disclosing assets because the bank checked out the supporting evidence that they demanded the borrower provide.
The bank is not at the mercy of the borrower because there is no reason for the bank to unquestionably accept whatever the borrower tells it. Banks do not unquestionably accept whatever people tell them in other areas of finance. Try walking into your bank, claim to be some other depositor and demand the bank give you a cashier’s check for their deposits without supplying any evidence that you’re telling the truth.
The borrower knows what they didn’t disclose in addition to what they disclose. You harp on ‘proof’, but you offer none that the bank had more knowledge about an individuals finances than the individual.
The banks are not subject to the same biases that borrowers are. The banks have a great deal more statistical data available to them than the borrower does. The banks have a great deal more competence at basic mathematics than borrowers do.
Have you ever had to explain to a college graduate why making only the monthly minimum payments on a credit card is bad? There is a lot of financial illiteracy, as SoV and Anarch can attest. That means that banks tend to be better than many borrowers at making predictions about those borrowers’ ability to repay. This isn’t complex: functionally innumerate people are not going to make good decisions about complex loan products just like they’re not going to make good decisions about relatively simple credit card loan products.
Um, is “High crime neighborhood with very low property values, lots of carjackings, and a history of riots in which houses get burned to the ground.” a good reason, in your opinion?
Um, are we talking about mortgage lending or insurance?
Low property value lowers risk- even if the chance of damage is greater, the value insured is lower. Carjackings are completely irrelevant to homes.
History or riots is pretty damned sparse compared to history of wildfires, earthquakes, landslides, floods, tornados, and hurricanes and yet no wealthy community is denied mortgages en masse despite heavy exposure to these far more common causes of total destruction. Has the mortgage industry redlined Florida beachfront or Southern California hillsides?
How is risk to property of any sort related to mortgages anyway? These are insurance issues. If you can get coverage, you should be able to get a mortgage. Insurance redlining is another issue- and again, greater risk ought to result in a higher premium relative to the property’s value, not the inability to purchase a policy at all because of zip code.
“This isn’t complex: functionally innumerate people are not going to make good decisions about complex loan products just like they’re not going to make good decisions about relatively simple credit card loan products.”
Sure, but that doesn’t excuse them from looking at a blank that cleary says $3,000 per month beginning 5 years from now and noticing that they make $3,500 per month.
I’m arguably kind of crappy with money. I’ve had late payments, and in my college years I had a minor brush with credit card silliness. But still, it says X per month, and that isn’t all that confusing.
Seb, does this mean that you’re backing off your earlier statements that banks only know what borrowers disclose?
My statement is that borrowers know plenty about their own position to make an informed decision. See for example my statement earlier:
This statement was made in the context of SoV’s analogy to insurance. I said that unlike personal knowledge of the likelyhood of car accidents or semi-random catastrophic illness, the borrower knows more than enough about his own situation to be able to look at a monthly payment disclosure and have a pretty good idea if he can pay it.
Further I would say that whatever you think about the distribution of knowledge, unlike the insurance situation, the bank’s knowledge is not so much more than the borrowers as to cause the borrower to ‘rely’ on the offer of money as some sort of guarantee that he is able to pay it. And it never has been.
And I’m not at all convinced that the bank knows ‘more’ about the borrower’s money situation on average than the borrower. The “stick $10,000 of your parent’s money in the bank for a few months” thing has been employed by the middle class for generations.” The informally borrow money for the downpayment thing has been going on for generations as a method to game apparent credit risk.