Last week, a bi-partisan commission of U.S. Senators, including both conservative Senators and Tea Party favorites such as Tom Coburn, Rand Paul and Scott Brown, released a 635 page report which details the causes of the financial market crisis of 2008. This report includes bi-partisan recommendations such as “Narrow Proprietary Trading Exceptions,” and “Design Strong Conflict of Interest Prohibitions.” This release, similar to the official release of the Financial Crisis Inquiry Commission report, was met with a decided yawn by national media.Following a quick review, it appears that the Levin-Coburn report lays primary blame for the financial collapse at the feet of reckless Wall Street executives, federal regulators “who cast a blind eye,” and out-of-control incompetent credit rating agencies who downplayed the serious risks of “crap” mortgage backed securities and collateralized debt obligations in order to maintain record breaking fees collected from the very entities requesting the ratings. Megabanks like Washington Mutual and Countrywide also aggressively shifted their sales from lower risk fixed rate loans to subprime adjustable loans, flooding the market seeking greater profit margins. Senator Levin pointed out that “rampant conflicts of interest are the threads that run through every chapter of this sordid story.” Notably, the Community Reinvestment Act came up only one time in the report, signifying again the miniscule role it played in the crisis: buried in footnote 495.
Importantly, this report sends a clear signal to the Justice Department that laws have been broken – not just by low hanging fruit such as brokers and borrowers (see Charlie Engle), but by Wall Street titans, like Goldman Sachs CEO Lloyd Blankfein. “Federal regulators should review the [investment banking] activities described in this Report to identify any violations of law.” Will federal regulators take up the Report's invitation to investigate Wall Street executives that acted recklessly?
So, the Levin-Coburn report lays primary blame for the financial collapse, in part, at the feet of, "... federal regulators “who cast a blind eye". How many of these regulators have been fired and/or prosecuted for their negligence? Any? One? Of course, this was the same problem we had with the Bernie Madoff scandal; federal regulators failed to do their jobs despite repeated warnings from members of the financial community. And it's not just the financial regulators. What about the regulators responsible for overseeing oil drilling operations in the Gulf of Mexico? Or, those responsible for the oversight of farm loans that have left us with the Pigford mess?
ReplyDeleteAnd, yet, we get this recommendation, “Federal regulators should review the [investment banking] activities described in this Report to identify any violations of law". It seems that the solution to every government failure is the greater empowerment of government. Get back to me when you've cleaned out this rats nest of incompetents and held those responsible to account.
It should also be pointed out that the ratings agencies operate under a government charter which serves to exclude any competition in the rating of bonds. This government created cartel set the conditions necessary for these same ratings agencies to reap large profits without having to defend their work. And while it's true that "Wall Street" behaved recklessly, that statement alone does not answer the simple question - who was the largest purchasers of these mortgages? Answer: Fannie and Freddie. After all, Wall Street firms could package all the junk in the world, but without a willing and able buyer they would have simply been stuck with their own swill.
When the government and it's agencies are the prime drivers of a financial crisis, their assessment of responsibility for that crisis should be taken with very large a grain of salt.
From reading the Section that cites Footnote 495, I did not glean that the Community Reinvestment Act (CRA) played a miniscule role in the financial crisis. In the body of the report, it stated “[b]etween 1991 and 2006, WaMu (Washington Mutual) was evaluated 20 times by OTS and the FDIC, achieving the highest possible CRA rating of “Outstanding” in each evaluation.” I found the definition of what qualifies an instutution to be outstanding, “[r]egulations state that an “outstanding” institution is one that not only meets the needs of its surrounding community, but utilizes “innovative or flexible lending practices.”
ReplyDeleteThere’s no definition for what an “innovative” lending practice is. Knowing the consumer mortgage market, it was probably adjustable rate mortgages(ARMs) for people with lower credit scores, higher than average debt to income ratio, and low incomes. I found it interesting to read that, “WaMu also sold Fannie and Freddie billions of dollars in higher risk Option ARMs.” In 2005, WaMu shifted the majority of its conforming loan business to Freddie Mac. This move was partly because Freddie Mac allowed “more advantageous credit parameters.” (Read: lower credit scores). WaMu also indicated that it would press Freddie Mac to buy more subprime and “lower quality loans” to ensure that WaMu remained “market competitive.” As we all know this practice backfired, because WaMu Bank was placed in the receivership of the FDIC in September 2008.
I am not saying that the CRA is a major cause of the financial crisis. I think, generally speaking, that the CRA is a great program. However, the CRA was used, among other things, to manipulate the market. I don’t think we should downplay any one aspect of financial markets at this time--- they were all contributing and aggrevating factors.
Levin Coburn report title should be “What kinds of manipulation caused the financial crisis.”
Courtney R.
Bus Org.
A 635 page report can probably be reduced to one word: Greed. Federal investigators/regulators may follow up on the report, but the control of the financial market is in the hands of corporations not the government. More government involvement or control will only add to the confusion. If the regulations and laws currently in place were strictly enforced then many of these problems could be avoided or at least minimized. The fact that Washington Mutual’s 20 evaluations that received outstanding ratings shows that the government regulators lack the knowledge and tools to effectively regulate the economy. The definition of “outstanding “ for innovative and or flexible lending practices shows that the that new and potentially unknown results will occur because with almost every new idea has new problems.
ReplyDelete“Federal regulators should review the [investment banking] activities described in this Report to identify any violations of law.” Why were the activities not reviewed in the first place. It seems as though the current practice is to wait for economic problems to develop and then start damage control, and the correct method would be identifying the problems and implanting solutions to mitigate damage before the crisis point. Further, the Citizen’s United decision shows that the amount of control corporations have on the economy and government is increasing. Investors will always take opportunities to make money and as a result other investors will lose money. Courtney’s suggestion for a title “What kinds of manipulation caused the financial crisis.” is good and I would add who is going to be liable? It seems like the liability fell on those not at fault.
John S
I think that the TARP funds from the Reinvestment Act played some role, probably a larger role than the report indicted, in the financial crisis. These funds are now available for campaign contributions after the Citizens United decision. Instead of helping to restore the company, hire workers, and keep shareholders happy through corporate profit and dividends, these funds are instead going to campaigns and candidates that want to reduce executive responsibility.
ReplyDeleteI agree with the report’s conclusion that executives have played a major role in the crisis. The executive bonuses reported on television tend to suggest this. In an economic downturn, one would expect executive bonuses to shrink; however, despite the financial crisis, these bonuses have grown. Something has to be done so that bonuses correlate more to corporate profit.
Lastly, one aspect not mentioned is legislator interests and motivations for having the laws the way they are. Legislators in Congress need to take a look at themselves and see if they too are part of the problem.
EB
The comment in the last linked article (in the NYT's "Deal Book" blog) that Goldman was not clearly evil, that it was simply doing what the market expected and that Morgan Stanley could have demanded disclosures from GS is appalling and beside the point -- GS was legally obligated to make those disclosures. Whether Morgan Stanley is a sophisticated investor is irrelevant. If GS hid information from ANY investor for the purpose of marketing something to facilitate its own short bet it violated the law. Period.
ReplyDeleteAll this discussion is good and indicates that there are those who care enough about this mess to educate themselves. But it seems to me that the important question is, "What do we the people do now?" Lots of folks are making lots of comments on many blogs. How do we get these people together to take action, put pressure on Congress and the Senate and the President to actually do something constructive?
ReplyDeleteEveryone needs to get this correct... (REPOST ON TWITTER, FACEBOOK)
ReplyDeleteAmerica is controlled by the 3 privately owned states (district of columbia, the city of london, and the vatican.) Each has it's own flag, pays no taxes and has it's own laws. All 3 are part of an interlocking "ONE" called "City Of The Empire" Or "Black Sun".
When you pay taxes it goes to The Bank Of London and straight to the vatican. These 3 privately owned tiny nation states are owned by 13 families that rule the entire planet militarily, financially, and spiritually. Without a doubt. OPEN YOUR EYES AND YOU WILL SEE IT.
They control the markets, the religions, the media, and they rob you of your wealth. Wake up. Time to wake everyone up. Nothing will change until the people SEE the TRUTH about their miserable extistence that has been dictated to them by these CREEPS