Barry destroys those who are selling the storyline that Wall Street wasn’t to blame for the financial collapse. Facts are always inconvenient to those trying to tell a story.
What caused the financial crisis? The Big Lie goes viral.
By Barry Ritholtz, Published: November 5
I have a fairly simple approach to investing: Start with data and objective evidence to determine the dominant elements driving the market action right now. Figure out what objective reality is beneath all of the noise. Use that information to try to make intelligent investing decisions.
But then, I’m an investor focused on preserving capital and managing risk. I’m not out to win the next election or drive the debate. For those who are, facts and data matter much less than a narrative that supports their interests.
One group has been especially vocal about shaping a new narrative of the credit crisis and economic collapse: those whose bad judgment and failed philosophy helped cause the crisis.
Rather than admit the error of their ways — Repent! — these people are engaged in an active campaign to rewrite history. They are not, of course, exonerated in doing so. And beyond that, they damage the process of repairing what was broken. They muddy the waters when it comes to holding guilty parties responsible. They prevent measures from being put into place to prevent another crisis.
Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie.
A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair.
Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.
Indeed, the arguments these folks make fail to withstand even casual scrutiny. But that has not stopped people who should know better from repeating them.
The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”
What made his comments so stunning is that he built Bloomberg Data Services on the notion that data are what matter most to investors. The terminals are found on nearly 400,000 trading desks around the world, at a cost of $1,500 a month. (Do the math — that’s over half a billion dollars a month.) Perhaps the fact that Wall Street was the source of his vast wealth biased him. But the key principle of the business that made the mayor a billionaire is that fund managers, economists, researchers and traders should ignore the squishy narrative and, instead, focus on facts. Yet he ignored his own principles to repeat statements he should have known were false.
Why are people trying to rewrite the history of the crisis? Some are simply trying to save face. Interest groups who advocate for deregulation of the finance sector would prefer that deregulation not receive any blame for the crisis.
Some stand to profit from the status quo: Banks present a systemic risk to the economy, and reducing that risk by lowering their leverage and increasing capital requirements also lowers profitability. Others are hired guns, doing the bidding of bosses on Wall Street.
They all suffer cognitive dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility.
And what about those facts? To be clear, no single issue was the cause. Our economy is a complex and intricate system. What caused the crisis? Look:
●Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).
●Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to high-yield mortgage-backed securities. Nearly all of them failed to do adequate due diligence before buying them, did not understand these instruments or the risk involved. They violated one of the most important rules of investing: Know what you own.
●Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch. They had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.
4 Derivatives had become a uniquely unregulated financial instrument. They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims.
5 The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very little room for error.
6Wall Street’s compensation system was skewed toward short-term performance. It gives traders lots of upside and none of the downside. This creates incentives to take excessive risks.
7 The demand for higher-yielding paper led Wall Street to begin bundling mortgages. The highest yielding were subprime mortgages. This market was dominated by non-bank originators exempt from most regulations. The Fed could have supervised them, but Greenspan did not.
8 These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to get creative with underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.
9 “Innovative” mortgage products were developed to reach more subprime borrowers. These include 2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages.
●To keep up with these newfangled originators, traditional banks developed automated underwriting systems. The software was gamed by employees paid on loan volume, not quality.
●Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998. This allowed FDIC-insured banks, whose deposits were guaranteed by the government, to engage in highly risky business. It also allowed the banks to bulk up, becoming bigger, more complex and unwieldy.
●Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks. Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates skyrocketed.
Bloomberg was partially correct: Congress did radically deregulate the financial sector, doing away with many of the protections that had worked for decades. Congress allowed Wall Street to self-regulate, and the Fed the turned a blind eye to bank abuses.
The previous Big Lie — the discredited belief that free markets require no adult supervision — is the reason people have created a new false narrative.
Now it’s time for the Big Truth.
bluestem says:
It seems that it’s always been the bankers and that insatiable desire for more amd more money. I guess I wiould like to know,”How much money does it take to make a banker happy?” John
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7th November 2011 at 4:40 pm
Stucky says:
What a crock of shit, Jim. Make up your god damn mind. After careful study and analysis of stuff YOU wrote I have concluded it is NOT Wall Street.
It’s these folks. YOU said so yourself.
I have taken considerable time and expense to track down the Boomer who actually broke the camel’s back.
It’s this little fucker right here. Looks like llpoh to me.
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7th November 2011 at 5:17 pm
AWD says:
No Change: ‘Fat Cats’ Still Winning Despite Obama’s Tough Talk
Three years ago this week, Barack Obama won the presidency on a campaign of hope and change. But when it comes to reigning in Wall Street (among other issues) President Obama hasn’t delivered the kind of change many Americans wanted.
From the brink of failure when Obama was sworn in, the securities industry has come roaring back: Wall Street firms earned more during the first 2.5 years of Obama’s administration than during the eight years of George W. Bush’s presidency, The Washington Post reports. “The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008.”
Even as he has often criticized and occasionally vilified Wall Street (See: Cats, Fat), the reality is the Obama administration’s policies have worked to benefit Wall Street, most notably the blank check support for Fannie Mae and Freddie Mac, which supports the value of once-toxic mortgage-backed securities.
If Ron Suskind’s account in Confidence Men is correct, President Obama wanted to get tough on Wall Street — including breaking up Citigroup and enacting a financial transactions tax — but was talked out of it by top advisors Larry Summers and Tim Geithner. (See: Confidence Men Author: Obama’s Problem is He’s ‘Consensus Man’)
Instead, Obama talked tough, alienating erstwhile supporters in the financial community, which is complicating his fundraising efforts for 2012. More importantly, he didn’t back up the rhetoric with action, frustrating Main Street supporters and helping give rise to the Occupy Wall Street movement. Obama is, in fact, getting his largest campaign contributions from Wall Street and financiers/bankers.
Obama: a completely failed 3 years for main street, record profits for Wall Street. Well done, jackass. You are so done in a year.
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7th November 2011 at 5:19 pm
llpoh says:
He lost me at “Claims that Earth is not warming”.
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7th November 2011 at 5:45 pm
dd says:
like anyone, he makes good points from time to time — but in the end, he carries the torch for the liberal elite class. good heavens Admin, not good for your cred.
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7th November 2011 at 6:11 pm
Mary Malone says:
Barry has nailed it – provides a laundry list of reasons for the bubble and crash. Big Biz and Big Gov – pox on both their houses.
But he misses a central point.
There was a pivital moment when the Big Banks went from arbitrage (exploiting loophole in big bad ugly regulation to earn a profit without competition) to control fraud.
Let’s face it. Clinton and AG Reno put enormous pressure on the banking sector to lend money to people of color, single women and those borrowers in poorer neighborhoods. Reno threatened the banking execs with slam time and huge fines.
So the banks that were covered under the CRA – got out of the lending business. They didn’t lend their own money – they earned fees and funded loans using warehouse lenders.
The CRA did not apply to investment banks and fly-by-night originators.
CRA problem solved.
The idea was to get these crappy loans off the banks books. MBS ramped up and the money flowed…
Nobody is addressing the core issue – when was the decision to violate NY Security laws that governed the SPV’s or trusts made? Who decided to break the law as a business practice? How did they benefit? What regulators were on the beat and why didn’t they enforce the law?
Who made the decision not to submit the mortgages and promissory notes into the trusts within the 90-day mandatory window? Who decided to sell the Promissory Notes to multiple buyers? Who cooked up the idea to form bogus trusts and foreclose on properties in their name?
Why did the GSE’s push so hard for electronic mortgage recording system (later called MERS)? Why would quasi government agencies facilitate the violation of 400 years of settled property law?
Why is it that nobody in government or media is telling Americans that 60-100 million mortgages have clouded title as a a result of securitization process (which was faked)?
Why is the government allowing these criminal enterprises to steal over 4 million homes and counting – even though they know the foreclosures are illegal?
Why on earth are government agencies guarnateeing loans to people who are buying stolen property (foreclosure sales)?
Numerous people from many companies have broken the law in a coordinated way. The banking industry (consumer and investment) is now a criminal enterprise.
Big Government ignored all the warning signs and is now facilitating the cover-up.
Big bank apologists can blame Big Gov all they want. But no amount of bad government regulation justifies complete and total disregard for the rule of law.
The truth must be told, and the guilty punished.
The full story coming to TBP soon….
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7th November 2011 at 8:36 pm
Stucky says:
MM
I’ve been preaching here for a long time that the snowball that started the avalance was The Community Reinvestment Act. Great to have a fellow believer on board.
“The full story coming to TBP soon….” —- you gonna post a thread on it? That would be great.
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7th November 2011 at 8:41 pm
efarmer says:
I quit reading this shit when he spewed the crap about the earth warming. Did he say anything after that?
Stupidity on parade.
EF
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7th November 2011 at 8:52 pm
Mary Malone says:
Yes, Stucky, I’m pulling together info for a post on Mortgage Fraud for TBP.
Really want to add value and provide readers with new information. The challenge is to sift thru all the data I’ve saved over past 3 years and focus on several major points at a time.
There’s so much that is counter-intuitive. A mortgage isn’t really a mortgage – it’s really unsecured debt. A debt may be owed, but not to the company you make the check out to each month. And by the way, the debt is unsecured, so they can never legally seize your home.
But, you won’t get market value for it when you go to sell it either…because you are one of 60-100 million property owners with clouded title. That means the largest financial investment of your life is almost worthless. You won’t be able to sell it for market value, because buyers won’t be able to secure a mortgage for it. Title companies will refuse to insure it.
Think you can file a claim with your title company? Well,think again. Title companies have made a decision not to honor any claims. So they won’t. Home-owners will be forced to sue. How can that be?
Didn’t title companies know that MERS would cloud title on 60-100 million homes? Why didn’t they stop it? Especially since MERS charter members include largest title companies in the US. Hmm.
Your mortgage was securitized, well, it was supposed to be securitized, but it wasn’t. So the investors who really loaned you the money now don’t have the money to pay your pension or annuity.
Well, you get the idea. So much mortgage/mbs/foreclosure fraud, so little space and time…
Hot debate. What do you think?
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7th November 2011 at 9:13 pm
llpoh says:
Efarmer – that is where I pulled the pin, too. He can beat that drum somewhere else. Even if he is right on that, there was no point in putting that in there. Whatever he said after that I did not read.
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7th November 2011 at 9:28 pm
Opinionated Blovaitor says:
The even bigger truth is that NO PARTIES are blameless for the 2008 financial disaster and that the financial system WILL keep suffering systemic collapses (because the United States and WALL STREET are ALL insolvent) until our “Argentina 2001″ moment arrives (late 2012?).
The TBTF bailout regime started under “Saint Reagan the Lauded One” and HAS enjoyed total bipartisain support through democrat and republican administrations via the Federal Reserve using interest rates and money printing to bail out Wall Streets bad bets whenever the need arises.
Remember, when your TBTF, SOMEONE else gets violated with horse cocks when your luck goes stale.
And here are today with ZIRP and TARP and QE and Operation Twist and Printing the Currency to Zimbucks and Mark to Unicorn Accounting and …
The current incentive structures on Wall Street and in Congress are so badly screwed up that Failure is rewarded MORE than success.
Meanwhile the United States SPENDS 40% more than it earns and the debt to GDP screeches past the 100% point of know return mark at warp 9.
To infinity and beyond indeed.
The United States, soon to be a nation of multi trillionaires… Change…
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7th November 2011 at 10:37 pm
Novista says:
llpoh and efarmer
Just what you want, a definite deconstruction of the global warming pseudoscience:
http://www.bishop-hill.net/blog/2011/11/1/scientific-heresy.html
No one has eve dissected the issue better.
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7th November 2011 at 1:25 am
Novista says:
Oh, and Ritzholtz has another little Big Lie: he keeps saying Glass-Steagall was REPEALED (and it wasn’t 1998 either, oh no.) 1998 was the year Congress gave a special waiver to Citi to merge into “too bigger to fail”. 1999 was the year of Gramm-Leach=Bliley.
Which did effect some changes to Glass-Steagall, some significant — but fools were yapping repeal of G-S back when the wheels came off Bear Stearns. It wasn’t until after the shit hit the fan that the vampires squids and their ilk became bank holding companies. So, Citi had an early pass, didn’t need GLB to play early. Maybe Barry could flesh out that “FDIC-insured banks” with some examples.
The ‘repeal of Glass-Steagall’ just seems like a progressive meme, same with their ‘deregulation’ and *crickets* about the SEC and other regulator failures.
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7th November 2011 at 1:55 am
flash says:
“There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed.”
Yawn, let just say Barry should stick with what he knows.
Yes, no one forced banks to loans to low income debt slaves, The fact of the matter is that the supply of wage earners who could afford 20% down on a house were shrinking fast as the economy began to unravel.
The banksters needed fresh meat so they lobbied Congress , Clinton and later Bush to let them sink their fangs in the low income market and then after all the blood was sucked from the lifelss corpse, dump their toxic waste not only in MBS , but on the backs of the taxpayers as well via Freddie Mac and Fannie Mae.Win Win for the banksters. lose lose for the easily duped dancing with he stars dunce.
Listen to little Georgie explaining how a down payment shouldn’t be an obstacle to achieving the American dream and he will sign the American Dream Act on Dec.6 , 2003 which forced the American taxpayer to become the guarantor of all the banksters bad loans…and they skated .
Watch the vid of a banker tool in action.
Home Ownership and President Bush
http://www.youtube.com/watch?v=kNqQx7sjoS8
Then take note of who pumped the POS G Dubya’s campaign cofeers flush with cash.
George W. Bush (R)
Top Contributors
Morgan Stanley $603,480
Merrill Lynch $586,254
PricewaterhouseCoopers $514,250
UBS AG $474,325
Goldman Sachs $394,600
Lehman Brothers $361,525
MBNA Corp $350,350
Credit Suisse Group $326,040
Citigroup Inc $320,820
Bear Stearns $313,150
Ernst & Young $305,140
US Government $295,786
Deloitte LLP $292,250
Wachovia Corp $279,310
US Dept of Defense $279,157
Ameriquest Capital $253,130
US Dept of State $225,330
Blank Rome LLP $225,150
Bank of America $218,261
AT&T Inc $214,
http://www.glensold.com/blueprint.html
Blueprint for th American Dream
Today, homeownership in America is at an all time high – but not all Americans have benefited. While three-quarters of white Americans own their own homes, less than half of all African Americans and Hispanic Americans are homeowners. Even with a surge in homeownership during the 1990′s, the homeownership gap between minority and white households declined by just 1.5 percentage points.
President George W. Bush announced an ambitious plan in June 2002 to help close the homeownership gap by increasing minority homeownership by 5.5 million families before the end of the decade. He challenged the public and private sectors to work together to reach or exceed that goal. The result is the creation of an unprecedented public/ private partnership – the Blueprint for the American Dream – that is tearing down barriers to minority homeownership and working to help millions of minority families reap the economic benefits of homeownership. There are two dozen member groups in the Blueprint Partnership, and they bring together the individual strengths of government, the real estate and mortgage finance industry, affordable housing groups and advocacy organizations.
Working together, the Blueprint Partners identified four key areas they should focus on to increase minority homeownership, and made specific commitments to take action in one or more Pathways to Homeownership:
homeownership education and housing counseling;
increasing the supply of affordable homes;
giving families new options for upfront funds like the downpayment; and
improving mortgage lending by increasing funds for affordable loans and redoubling efforts to root out illegal discrimination.
President George W. Bush hosted the White House Conference on Minority Homeownership to discuss public and private sector efforts to address the homeownership gap and increase the number of minority homeowners in America.
In June, President Bush announced the national goal of increasing the number of minority homeowners by at least 5.5 million by the end of this decade. Meeting the President’s goal will not only help more Americans enjoy the benefits of owning their own homes it will also help strengthen America’s economy. According to a study released today by the Department of Housing and Urban Development, meeting the President’s goal will involve $256 billion in economic activity in the form of construction and remodeling jobs, spending on household goods, and other benefits.
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7th November 2011 at 7:00 am
efarmer says:
This is from the first site on a simple google search.
“Joseph D’Aleo, of Icecap.us, said the analysis found NASA “systematically
eliminated 75% of the world’s stations with a clear bias toward removing
higher-latitude, high-altitude and rural locations.”
The number of actual weather stations used to calculate average global
temperatures was reduced from about 6,000 in the 1970s to about 1,500 today.
The number of reporting stations in Canada dropped from 600 to 35.
E. Michael Smith, a computer programming expert who worked with D’Aleo, said
he found “patterns in the input data from NCDC that looked liked dramatic
and selective deletions of thermometers from cold locations.”
This isn’t about climate change. It’s about money and politics.
EF
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7th November 2011 at 8:44 am
No One says:
They had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.
OK That’s just funny as hell.
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7th November 2011 at 12:32 pm
Novista says:
efarmer
Another goodie:
http://online.wsj.com/article/SB10001424052970204394804577012014136900828.html?mod=googlenews_wsj
As to the Big Truth, all these fuckers are looking for ONE bone to point … “look over here!” The reality is there is so much guilt to go around, yet no faction wants to acknowledge their fair share. When I was reading some ~progressive~ blogs, the idea that CRA could possibly have been a problem brought shrieks of denial.
I would kindly point them at links to bankers who asserted the pressure from ~regulators~ but … no one thanked me. Heh.
Why were there ratings agencies? So pension funds didn’t have to do their own due diligence.
Why were their appraisers who played the game? The ones who didn’t found themselves out of work.
Why were there speculators? Because of the Greater Fool principle.
Et bloody cetera and so forth.
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7th November 2011 at 9:15 pm
efarmer says:
I never cease to be amused when Al Gore or some hollywooder goes to a climate change rally or sit in or protest and then flies home in their big friggin jet.
EF
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7th November 2011 at 7:14 am