Notes from a Collapsing Empire (2)

By Mike Marsh


During the run-up to the election, there was a lot of noise from the Right about how the financial crisis was caused by misguided loans to the minority community. The names ACORN, Freddie and Fannie, Barney Frank, and the Community Reinvestment Act were thrown around as the culprits behind the collapse in the mortgage market, which in turn was held responsible for the failure in the investment banks and other financial institutions. The central problem, according to this odd view of history, was that Democrats forced responsible lenders to make irresponsible loans to undeserving people with dark skin.


Hogwash. This was always a cartoonish explanation, pushed by the Rush Limbaugh’s and Sean Hannity's on their more innumerate followers. I thought it was particularly pathetic when McCain advanced the ACORN-is-the-cause-of-the-meltdown argument, but as the saying goes, desperate times call for desperate measures, and he was desperate.


Anyone who spent 20 minutes looking at the data on where the mortgage defaults were coming from- i.e. what types of loans were going bad- realized that it wasn’t loans from federally regulated banks that were behind the collapse. The root cause was the massive failure in loans made by mortgage lenders totally outside regulatory channels that were bundled into CDOs and sold by investment banks. Unscrupulous rating agencies like Moody’s played their part too, as they gave AAA ratings to crappy loans in return for outsized payments from the loan salesmen.


In 2005, I spent a fair amount of time studying the business models of the companies making these loans, focusing on several like Countrywide, Washington Mutual, and New Century Financial that seemed particularly shaky. I couldn’t believe the lack of standards they employed in determining who was qualified to get a loan, and was pretty sure they were ripe for a fall. I also couldn’t understand why the regulators were not taking action when it was obvious this was going to end badly. Which is why I found an article in Forbes particularly interesting. The article, US diluted loan rules before crash, explains how various financial institutions lobbied the White House not to impose more stringent regulation on them in late 2005, and how the White House went along with their wishes. By the time new regulations were announced, a year later, most of the tougher rules were removed from the regulation. A great example of too little, too late.


A few paragraphs from the article give the basic idea: “In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs. .....The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown.”


Some of the quotes from the companies involved are interesting, in a HooCoodaKnowed? kind of way. From collapsed Countrywide: “[the regulation] appears excessive and will inhibit future innovation in the marketplace." Bankrupt IndyMac said: “It is not our role to be the regulator for the third-party lenders.” Regulations weren’t needed because “An open market will mean that different institutions will develop different methodologies for achieving this goal,” according to bankrupt Lehman Brothers. Bankrupt Washington Mutual opined that we needn’t worry because “these mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages." And this gem: “To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products,” according to bankrupt Downey Savings.


Does this sound like a bunch of prudent and wise business types who are being pushed to give loans to people who they know don’t deserve them? Hardly. They knew the dance was going to have to end at some point, but figured they might as well enjoy themselves while they could. They, and hundreds like them, are responsible for the financial disaster we have experienced, not the poor shmoos who took out loans from these guys because their boiler room salespeople convinced them that house prices never fall and if you don’t buy now, you may never get another chance. It is infuriating that many of these guys are still employed at lavish salaries, and now have their hand out asking you and me to bail them out.