Showing posts with label credit crisis warnings. Show all posts
Showing posts with label credit crisis warnings. Show all posts

Wednesday, January 13, 2010

Bankers to Commission: Screw You

The First Public Hearing of the Financial Crisis Inquiry Commission was held on January 13, 2010 at the Longworth House Office Building in Washington, DC. "The Commission..has been given a mission to examine the causes of the financial crisis and to report findings to the Congress, the President, and the American people."

According to the New York Times, "The heads of Wall Street’s largest banks faced skeptical questions on Wednesday about executive pay and the failures of regulation from the bipartisan commission established to examine the causes of the biggest downturn since the Depression. Tensions flared as commission members retraced the events leading to the near-collapse of the financial system in 2008 and pressed bankers on whether they or their employees had acted unethically."

This is inaccurate. There were no skeptical questions. There was no tension. No one pressed the bankers on anything. They lied at will, without fear of being contradicted. It was as if the bankers were being questioned by their employees.

I know. I was there.

Nothing to see here, people. Move on.

Saturday, March 14, 2009

Why the market failed

For those of you wanting more of an explanation, read this.

"There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used (financial bets) to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when (hedge funds) bought a credit-default swap, (they) enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets (hedge funds) and others made with firms like Goldman Sachs and AIG. (Hedge Funds), in effect, were paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all."

“They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” (Eisman) says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans."

From The End by Michael Lewis, Portfolio Magazine. December, 2008 issue.

One part of the puzzle. This is, actually, a positive sign, meaning we may start to work our way out of this mess. Here is, also, what this means: blaming the crisis on CRA or subprime lending is flat out wrong. Others are (finally) beginning to see the problem in full light: there simply were not enough subprime borrowers to cause a catastrophe of this magnitude. For that, you needed greed-induced leverage, a complete lack of ethics, and a set of parasitic financial institutions.

As we noted in April, 2008:

"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."

You also need a compliant (non functioning) regulatory apparatus, something we warned about in 1998:

"“The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.” WILLIAM MICHAEL CUNNINGHAM, UNITED STATES COURT OF APPEALS (CASE NUMBER 98-1459). OCTOBER, 1998.

Welcome to the solution, fellas...about time you got here.

Monday, November 10, 2008

What we said...

Someone recently asked about our track record with respect to the market crisis. Here, from 2003 and 2006, are a few of our comments:

SEC Comments. Page 6: "Envy, hatred, and greed have flourished in certain capital market institutions, propelling ethical standards of behavior downward. Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning."

http://www.sec.gov/rules/proposed/s71903/wmccir122203.pdf December 22, 2003.

and:

SEC Comments. Page 2: "Together these practices threaten the integrity of securities markets. Individuals and market institutions with the power to safeguard the system, including investment analysts and rating agencies, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased over the past eight years.

Investors and the public are at risk."

http://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf February 6, 2006.