patrick.net

"The crazy times were caused by expected government bailouts"

More bullshit. The fraud was caused by industry operatives able to make millions of dollars in the crimogenic conditions of 2002-2006.

That's what control fraud and the agency problem are. Nobody making bank 2004-2006 needed a "bailout", they were getting theirs while the getting is good.

Mozilo cleared $500M from his role. Others made out similarly.

But to the typical right-wing ideologue, there's government malefactors hiding in every bush. The free market cannot fail, only government creates fraud opportunities apparently.

The mortgage crisis was caused by too little government, not too much.

The anti-government ideologues behind the loss of regulation, eg. Wallison ex of AEI's "Financial Deregulaton Project" are still shucking & jiving on this to this day.

http://www.ritholtz.com/blog/2011/07/why-wallison-is-wrong-about-the-genesis-of-the-u-s-housing-crisis/

http://www.ritholtz.com/blog/2010/12/aei-scrubbing-wallisons-fin-dereg-project/

Troy says

More bullshit. The fraud was caused by industry operatives able to make millions of dollars in the crimogenic conditions of 2002-2006.

That's what control fraud and the agency problem are. Nobody making bank 2004-2006 needed a "bailout", they were getting theirs while the getting is good.

The 2003-2005 period was just a typical bubble caused by FED's easy money policy. The real criminal fraud started in late 2006 through 2007 and 2008: deliberate selling of toxic paper to the TBTF institutions such as AIG then create notional bets that the TBTF institutions could not possibly pay on their own. In other words, the looting of the taxpayers was through the bailouts, fully expected in advance; otherwise, the counter parties to AIG, like GS, wouldn't be paid for their "winning" bets at all so there wouldn't be any point betting.

Mozilo cleared $500M from his role. Others made out similarly.

But to the typical right-wing ideologue, there's government malefactors hiding in every bush. The free market cannot fail, only government creates fraud opportunities apparently.

The orange-skinned dude can stay out of jail largely because of his political connections. If not for the government bailouts, he would have long been sued by counterparties and would have to disgorge his ill-gotten gains.

You are assuming that government officials, if given more regulatory power, would have reigned in bubble blowers like Mozilo. The reality has proven to be exact the opposite: the regulators and politicians not only did not use the regulatory powers that they already had to slow down men like Mozilo, but actually encouraged and exacerbate the problem. The Politicians actually got in bed with those bubble blowers! Remember the government official encouragement to make loans to bad credit risks? Remember Congressional members' and regulators' praise of the "financial engineering"? Heck, many of them took out those "suicide loans" (except they'd force the taxpayers to supply the body later instead of their own when the "suicide" takes place; i.e. turning it into "homicide loans"), some on special terms designated especially for "Angelo's friends." Then FNM and FRE were directed into buying the toxic waste so as to extend the bubble for a couple more years, and get the bubble blowers off the hook, eventually succeeding in selling CFC to Bank of America, which has deposit relationships with more than half of all American households!

The Control-fraud was very much the result of and exacerbated by existing regulatory powers: from the very beginning of FED monetary monopoly going into easing in 2001-2003, to the final (for now) bailouts in 2007-2008, with government officials encouraging bubbles in the middle near the peak in 2005. The worst affected area, like Nevada and Florida, saw the most egregious goosing in the tail end: some places doubling in price in 2007, thanks to the extension provided by the regulators. The government officials even got the private trade group FASB to rescind the more strict accounting standard proposals, to this day.

Do you really want to give those bought and paid for government bureaucrats more power? Remember, all regulations are applied with regulatory discretion. Just because something is in the books doesn't mean it gets enforced. Enforcement is almost always selective. The more regulatory power there is the more concentrated the power nexus created by that discretion becomes. All regulators exercising their discretion have to have food, clothing, house, cars, healthcare for their family members and education for their kids . . . i.e. good paying jobs both before and after they are in that regulatory position. In other words, they are easily captured by the industry that they regulate. Control Fraud is just a monetization of that regulatory power. Only open and free competition can reduce the potential gains from frauds, thereby reduce the magnitude/damage of frauds. Attempts to eliminate all frauds by increasing regulatory power would only lead to bigger fraud as that regulatory power is captured and monetized.

Reality says

The 2003-2005 period was just a typical bubble caused by FED's easy money policy. The real criminal fraud started in late 2006 through 2007 and 2008: deliberate selling of toxic paper to the TBTF institutions such as AIG then create notional bets that the TBTF institutions could not possibly pay on their own. In other words, the looting of the taxpayers was through the bailouts, fully expected in advance; otherwise, the counter parties to AIG, like GS, wouldn't be paid for their "winning" bets at all so there wouldn't be any point betting.

How'd it work for Bear Sterns? Or IndyMac? I've heard that conspiracy theory before and it's bullshit. The "insiders" got caught up in the money train and didn't understand the risk involved in a housing crash.

tatupu70 says

How'd it work for Bear Sterns? Or IndyMac? I've heard that conspiracy theory before and it's bullshit. The "insiders" got caught up in the money train and didn't understand the risk involved in a housing crash.

Bear Sterns and Lehman thought they'd be bailed out too so they carried on business with the degree of high jinx that they did. Remember, human behavior is based on expectations, not post-facto knowledge ahead of time. For example, you go to work today with expectation to be paid for your work, even if later turns out you get killed on your commute. If you had known you'd get killed, obviously you wouldn't have headed out at all, but you don't know that ahead of time.

The guys at IndyMac came under the protection of the political network weaved at Countrywide. IndyMac was a spin-off of Countrywide, taking full advantage of regulatory protection provided by the corporate veil. The taxpayers paid for the losses on IndyMac long time ago when FDIC bailed out the depositors. What's happening now is that the FDIC-assigned take-over bank is trying to squeeze as many cents out of the existing borrowers as possible instead of liquidating the bad loans quickly (say, through an auction), so new home owners can build equity quickly, and both new and previous owners can participate in the economy fully without the existing debt burden.

BTW, none of it is conspiracy, just simple human nature unrecognized by the religious zealots who believe men turn into gods after putting on official robes.

Reality says

The guys at IndyMac came under the protection of the political network weaved at Countrywide. IndyMac was a spin-off of Countrywide, taking full advantage of regulatory protection provided by the corporate veil. The taxpayers paid for the losses on IndyMac long time ago when FDIC bailed out the depositors.

There is a difference between a depositor and a stockholder/owner of IndyMac. You don't work for depositors, you work for owners. The owners lost everything.

It's really simple. The guys were making a lot of money on CDS and mortgages and they didn't really understand the risks involved if housing were to tank. Probably they told themselves it couldn't happen--rationalized it so they could keep making $$$ without worrying.

The government is not perfect, but it is not the cause of all problems.

tatupu70 says

There is a difference between a depositor and a stockholder/owner of IndyMac. You don't work for depositors, you work for owners. The owners lost everything.

No they did not. Being a spin-off from CountryWide run by Angela Mozillo's son-in-law, IndyMac's biggest owner was CountryWide, and by extension Mozillo. He certainly did not lose everything. He kept most of his ill-gotten gains. If there had been no depositor insurance, the depositors would have been much more careful lending money to IndyMac, which was founded as a high-risk spin-off from CFC to specializing in "financial engineering."

It's really simple. The guys were making a lot of money on CDS and mortgages and they didn't really understand the risks involved if housing were to tank. Probably they told themselves it couldn't happen--rationalized it so they could keep making $$$ without worrying.

They were not as naive as you think. There wouldn't be a need to spin off IndyMac from CountryWide at all if not for the recognized higher risk portfolio that IndyMac was set up to churn. They just took the gamble to get as much money as possible for themselves while the getting was good; other financial institutions also stood up to dance while the music played.

The government is not perfect, but it is not the cause of all problems.

Government was very much the problem, on several different levels:

1. the FED played the music for way too long after 2001-2003

2. FDIC deposit insuranced lulled the depositors into keeping their funds at IndyMac for high interest CD's that could only be serviced by lending to risky mortgages (especially Alt-A)

3. When the collapse finally came in 2008, the receivership is slow in liquidating the loans because once again they believe they have the government on their back, and indeed do as proposed more transparent accounting standard is suppressed. So the milking of old bubble debts carry on.

Considering how many times the government officials praised Countrywide and IndyMac during the bubble years, it's silly to pretend that even more regulatory powers would have reigned them in.

Reality says

Nowhere did I say it was a manufacturing job. There was no benefits either at my place or at the mortgage financing firm. Both businesses offer(ed) significant commission-based pay. The mortgage financing firm simply offered higher pay, and that was very important for a B-school student working for only 3 months out of a year.

There is a world of difference between "paying" 30-50 an hour and commission-based pay 3 months a year job for b-school students no matter what industry we are talking about. Since part of your statement was "how could any domestic manufacturer compete with that" any logical person would have assumed you were including yourself. Still, manufacturing jobs, even on a management level, certainly aren't competing for b-school students taking commission-based jobs 3 months a year. That's just BS.

Reality says

No they did not. Being a spin-off from CountryWide run by Angela Mozillo's son-in-law, IndyMac's biggest owner was CountryWide, and by extension Mozillo. He certainly did not lose everything. He kept most of his ill-gotten gains.

Being a spin off has nothing to do with it. All the capital that he/they had invested in IndyMac was lost. Of course he kept money that he made before it went under.

Reality says

They were not as naive as you think. There wouldn't be a need to spin off IndyMac from CountryWide at all if not for the recognized higher risk portfolio that IndyMac was set up to churn. They just took the gamble to get as much money as possible for themselves while the getting was good; other financial institutions also stood up to dance while the music played.

Really? IndyMac was split off in 1985. So, they were planning and executing their high risk portfolio in the mid 80s?

Reality says

Government was very much the problem, on several different levels:

The major government problem was letting the free market run amok. It didn't regulate enough...

bob2356 says

There is a world of difference between "paying" 30-50 an hour and commission-based pay 3 months a year job for b-school students no matter what industry we are talking about.

I guaranteed $30/hr. Commission bonus was on top of that. For the specific workers, that worked out to be more than $50/hr quite often. So I described the job succinctly and conservatively as paying $30-50/hr. You have yourself to blame for flying off the handle and launching into personal attacks for no good reason.

Since part of your statement was "how could any domestic manufacturer compete with that" any logical person would have assumed you were including yourself. Still, manufacturing jobs, even on a management level, certainly aren't competing for b-school students taking commission-based jobs 3 months a year. That's just BS.

"That" meaning the job offerings available in the mortgage financing industry during the bubble. If even a $30-50/hr couldn't compete against "that," how could just about any manufacturing job. Those job openings were not 3-month only. They were year-round. The particular workers/staffers were still in college getting their BBA degrees; in other words, 19-20yr old kids without even a college degree! I had started them two summers previously at $15/hr+bonus/commission before the mortgage finance industry was in full bloom; they got to crack above $50/hr at my business only because of the specific skills and experiences that they had gained. The mortgage finance industry on the other hand could start just about anyone at levels pay levels substantially higher. How could any manufacturing job compete against that kind of lucrative job offerings? BTW, the specific workers do enjoy the industry that I'm in. After the housing market collapse, they have chosen to work for me or for similar business in another city.

tatupu70 says

Being a spin off has nothing to do with it. All the capital that he/they had invested in IndyMac was lost. Of course he kept money that he made before it went under.

He got a slap on the wrist by the government for his mismanagement/looting. If the firms had gone under without taxpayer paying depositors, he'd probably have to disgorge his ill-gotten gains fending off lawsuits, and be put behind bars just for his own protection, like Madoff is now.

Really? IndyMac was split off in 1985. So, they were planning and executing their high risk portfolio in the mid 80s?

It was only a division of Countrywide in 1985. It became a separate deposit -taking corporation in 2000. Incidentally, 1985 was the time for another real estate bubble.

The major government problem was letting the free market run amok. It didn't regulate enough...

"Let" was the wrong word choice. They Encouraged the government-privileged players in the market to run amok. They used the regulatory powers that they had to help inflate the bubble for both personal and political gains:

1. by artificially lowering interest on the fiat money that they force people to take

2. by encouraging people to buy into the bubble

3. by facilitating the securitization of toxic debts, both at the agency level for mortgages and at the deposit insurance level for deposits

4. by restraining private industry standards boards from introducing higher accounting standards.

What other powers would you like to give them? They already legalize book cooking and fraud (e.g. restraining FASB).

What makes anyone think the government officials have more clue about the state of the industry than the captains in the industry? or for that matter they are not bought and paid for by the latter? All regulators accomplish is restraining competition, so the fraudsters can be more profitable as consumers have less alternatives on their own.

Here's the simple question: which of your favorite politician spoke out against the housing bubble before 2005? Ron Paul was perhaps an exception, and he would be the first to renounce regulatory power. All the power mongers sitting in Congress and the various regulatory bodies insisted that there was no housing bubble as late as 2007 if not 2008! So how could they possibly have reined in the bubble if they had more regulatory power? They'd just use additional regulatory to make the bubble even bigger, like they did when ordering FNM and FRE to buy toxic mortgage papers at the tail end of the bubble.

"The 2003-2005 period was just a typical bubble caused by FED's easy money policy. The real criminal fraud started in late 2006 through 2007 and 2008: "

This is an entirely wrong assertion. The Bush economy featured three phases: the boom, bubble, and bust.

Bush inherited the boom from the go-go Clinton days of "full-employment".

The boom got started in the SF Bay (dotcommers) and slowly spread outwards, eg. prices in LA were still depressed in the 1999-2000 timeframe even as SF was on fire.

Then the dot com fraud economy fell apart with 9/11 following. To prevent Bush Jr from following in his father's footsteps as a 1-term failure, it is true that Greenspan dropped rates to the floor and held them, 2002-2004.

This lowered borrowing cost did get the housing boom started, along with the Bush tax cuts, which also increased "affordability" and thus home prices, at least in areas where demand outstripped supply.

Booms are sustainable, bubbles are not. Rates are lower now than during the boom times of 2002-2003:

http://research.stlouisfed.org/fred2/series/MORTG/

so rates alone did not make houses unaffordable. What made houses unaffordable was the suicide lending that *temporarily* increased buying power. This was teaser-rate mortgages with pre-pay penalties, negative-amortization pay-option loans, and the availability of liar loans that allowed prime borrowers to self-underwrite their loans.

These suicide lending elements were the drivers of the bubble, along with the ratings agencies giving AAA ratings to CDOs of subprime tranches of loans that were destined to blow up once appreciation went away in 2006.

"The real criminal fraud started in late 2006 through 2007 and 2008"

LOL. Way to be a realist there, Reality. You apparently don't have the vaguest idea of what actually happened 2001-2007.

Government now has removed from the market the suicide lending innovations that were the prime causes of the bubble, yet your analysis is missing this element completely since you are an ideologue with an agenda who desires to whitewash the colossal industry malfeasance (with government collusion) that was operating 2002-2005 when the boom turned into a bubble.

Reality says

They used the regulatory powers that they had to help inflate the bubble:
1. by artificially lowering interest on the fiat money that they force people to take

Fed doesn't set mortgage rates.

Reality says

by encouraging people to buy into the bubble

That's somewhat debatable, but I will grant that the government was encouraging home ownership.

Reality says

3. by facilitating the securitization of toxic debts, both at the agency level for mortgages and at the deposit insurance level for deposits

What do you mean by facilitating? They let the free market do what it wanted.

Reality says

4. by restraining private industry standards boards from introducing higher accounting standards.

You've GOT to be kidding. You think private industry wanted higher accounting standards??? Please provide evidence if you have it.

Reality says

What other powers would you like to give them? They already legalize book cooking and fraud (e.g. restraining FASB).

Well, it would have been nice if they had actually used the powers they had during the early 2000s. And getting Glass Steagall back on the books would certainly have helped, don't you think?

Reality says

What makes anyone think the government officials have more clue about the state of the industry than the captains in the industry?

Captains in the industry?? Stop it. Please.

tatupu70 says

Probably they told themselves it couldn't happen--rationalized it so they could keep making $$$ without worrying.

you underestimate the venality of people making money.

Troy says

tatupu70 says

Probably they told themselves it couldn't happen--rationalized it so they could keep making $$$ without worrying.

you underestimate the venality of people making money.

“Nessuna soluzione . . . nessun problema!„

True enough--but didn't they realize they will be out of work at some point in the near future?

ten million in the bank at 5% pulls in $500,000/yr in interest.

who needs a job if you've got winnings off the table.

How many banks are paying 5% interest?

I was buying 5% t-bills in 2006 . . .

Troy says

What made houses unaffordable was the suicide lending that *temporarily* increased buying power. This was teaser-rate mortgages with pre-pay penalties, negative-amortization pay-option loans, and the availability of liar loans that allowed prime borrowers to self-underwrite their loans.

There is nothing particularly wrong with any of these practices if the lender is taking his own risk. Most of these options are still available in "Hard Money Lending" and at "Bank of Parents." It's all a matter of interest rate high enough to compensating for the risk (loan sharking) and having enough reserve provisions (lending from parents). What caused the bubble and bust was regulations making taxpayers into the patsy on the hook for losses.

Who do you think ordained the 3 Oligopolistic rating agencies? The government.

The 2006-07 window was significant, because that was the time when toxic loans were systematically transferred onto the backs of the TBTF institutions . . . even more importantly, the CDO's were multiplied multiple times through notional bets that the counter parties could not possibly pay up. The entire under water amount on all real estate in this country in 2008 did not amount to $16 trillion. The overwhelming majority of underwater homeowners were still paying back on schedule then, some even making extra principle payments. It was the leveraged short bets, a set of houses worth only $10million in total could have $100 million bets on them defaulting . . . that's what caused the financial crisis. If not for the government bailouts, the "winning" bets would not have received anything as the counterparty wouldn't have the money to pay up. Essentially here is analogus to what happened:

You and I each have $1mil, and we decide to bet $100 million on the next coin flip. Regardless how the coin lands, one of us will be bankrupt and bailed out by government and the other will be worth $101million as consequence. Remember, we only had $2mil between us to begin with! That was the criminal looting designed to take advantage of the regulatory power structure.

tatupu70 says

Fed doesn't set mortgage rates.

It sets caps interest rate on savings through setting overnight rate. The artificially low interest rate on savings was the reason why money flooded into the mortgage securitization.

What do you mean by facilitating? They let the free market do what it wanted.

Not in the field of money. The interest rate on savings is capped, and the deposits are insured, and the mortgages were securitized by government sponsored agencies. In other words, the government was giving out free money to companies that would shuffle savings to mortgage (i.e. banks) without much reduced risk than a free market would have.

You've GOT to be kidding. You think private industry wanted higher accounting standards??? Please provide evidence if you have it.

FASB proposed rules that were suppressed by the government.

Well, it would have been nice if they had actually used the powers they had during the early 2000s. And getting Glass Steagall back on the books would certainly have helped, don't you think?

It would have been nice if Stalin and Hitler had used their dictatorial powers for good. LOL

Bringing Glass-Steagall back is essentially shutting the door after the horse has already left the barn.

Captains in the industry?? Stop it. Please.

Why would the captains of the monopoly on violence be any better?

At least with private vendors, if you don't like them, you can shop elsewhere.

Reality says

It sets caps interest rate on savings through setting overnight rate. The artificially low interest rate on savings was the reason why money flooded into the mortgage securitization.

Wrong. You could have had savings rates 10X what they were and it wouldn't have mattered. Mortgage securitization paid exponentially higher returns while they lasted. The risk adjusted rates were not that high, of course, but nobody understood or, perhaps, cared.

Reality says

Not in the field of money. The interest rate on savings is capped, and the deposits are insured, and the mortgages were securitized by government sponsored agencies

Who caps savings rates? And I'm assuming you are referring to Freddie and Fannie with your last line there. It's been proven that they were very late to the game and were followers. The securitization was well under way before they decided to play.

Reality says

Bringing Glass-Steagall back is essentially shutting the door after the horse has already left the barn.

That why I said it would have been good to have had it on the books then. But, we need it now too. Who's to say this couldn't happen again? The Free Market got a taste of money--it will try again.

" What caused the bubble and bust was regulations making taxpayers into the patsy on the hook for losses."

More bullshit. There were no losses during the bubble. Again, you're totally and intentionally ignoring the obvious agency problem that exists in private enterprise -- the industry people making milions 2002-2006 didn't need to care what happened 2007-now.

Granted, the casino-like business environment was heightened by existing regulations like non-recourse loans that shifted risk from borrower to the system.

"The entire under water amount on all real estate in this country in 2008 did not amount to $16 trillion. The overwhelming majority of underwater homeowners were still paying back on schedule then"

2008 was just the culmination of unsustainable lending cycle. I was looking at the graphs of the IO and reset/recast schedules and could see the train coming, and was telling everyone to GTFO the market.

http://www.calculatedriskblog.com/2007/10/imf-mortgage-reset-chart.html

"At least with private vendors, if you don't like them, you can shop elsewhere."

aha aha ahah aha aha.

Oh man, there's nothing more entertaining that a right-wing ideologue in the morning.

"and the mortgages were securitized by government sponsored agencies"

No, the feature of the bubble times was the GSEs *losing* market share to private label issuers.

http://www.ritholtz.com/blog/2011/02/fannie-freddie-market-share/

Reality says

"That" meaning the job offerings available in the mortgage financing industry during the bubble. If even a $30-50/hr couldn't compete against "that," how could just about any manufacturing job. Those job openings were not 3-month only. They were year-round. The particular workers/staffers were still in college getting their BBA degrees; in other words, 19-20yr old kids without even a college degree! I

A straight story would be nice. It's 3 months a year, then full time not 3 months. It's B school students (B school is business school aka mba which is graduate level work), then it's 19-20 year olds without without a college degree. So you are saying these 19-20 year olds were abandoning your 100k a year job that may have been year round or may have been 3 months, whatever that mysterious job might have been, and walking in cold, with no back round or experience to the "mortgage financing industry" what ever that means and doing better than 100k out of the box. I stand by my first statement. BS. This doesn't wash. I would be willing to bet there were NO 19-20 year olds making 50+ per hour in the mortgage industry even at the peak. What were some of the job titles for these entry level jobs paying 50+ per hour?

Thanks again for the comments Troy/Bob.