A Q&A About Our Investigation on Banks’ Self-Dealing

Just to clarify - these CDO’s were never sold to “mom & pop” investors - they were typically sold in lots ranigng in millions or billions of dollars to banks and other financial institutions. The disclosures were carefully picked through by lawyers and financial experts, and due diligence was (or should have been) undertaken.

Furthermore, it’s disingenuous to blame the collapse of these bonds on the banks - when you trace it back to the beginning it’s clear that the collapse occured due to the American public failing to pay their mortgages. Blame the bonds all you like, but the reason the bonds were risky and failed was because Americans are bad debtors. It really is that simple.

Chris. 
What do you think of those people who owned there homes for mor then 10+ years? One day they just got up and said I am not going to pay my mortgage?
1- 100 might do this but currently we talking 10 million homeowners.
        I think you are an IDIOT who have no clue.

Gabor - that doesn’t change the fact that these bonds go bad because people stop paying their mortgage. I’m not here to describe WHY they stop paying their mortgage, I’m just describing the reality that precipitates the decline in the value of the bonds.

A lot of people are quick to condemn the banks without looking through to the root cause of the failure of CDOs. Yes, they were risky. Yes the rating agencies were negligent. But that’s not the full picture.

Chris,

It is the lender’s responsibility to make sure a loan will return a profit, so you can’t blame the failing of the loans on those who accept them.  Also, it is the responsibility of the party buying the loan/debt off of whoever originated it to make sure it will return a profit UNLESS that loan/debt is rated by a ratings agency, then they could have reasonably assessed the loan/debt’s profitability from its rating (this is the whole point of getting a rating at all).  To the extent that people lost lots of money from buying loans/debt, they either were defrauded by a ratings agency or were neglegent themselves.  And some smaller investors did invest in CDOs, such as school systems and towns, but they should have been able to reliably do so since they were investing in AAA rated investments.  If ratings cannot be relied on, if you have to exercise full due dilligence in addition to them, then they have no purpose.

Americans are bad debtors to the extent that they don’t understand finance and are given loans by people who also apparently don’t understand finance.  They tend to be good debtors as long as those who give them loans do understand finance, and, as surprising as it might be, it is the job of people who work in finance to understand it, not the job of those who don’t.  We don’t expect people to do chemical analyses of their own food, we expect that food suppliers aren’t poisoning the public.

All of the failure belongs to those working in finance (banks, complicit CDO managers, etc.) and to the ratings agencies.

Piddlesworth - you demonstrate the typical victim attitude that gets up my nose. You maintain that you should have zero responsibility for your actions, and believe it’s always someone else’s fault.

“It is the lender’s responsibility to make sure a loan will return a profit” - and equally it’s your responsibility to not take a loan you can’t afford to pay back, and ensure you fully understand any documents you’re signing. If you’re not sure, have a lawyer read it for you.

“it is the responsibility of the party buying the loan/debt off of whoever originated it to make sure it will return a profit UNLESS that loan/debt is rated by a ratings agency” - see you nearly had this right. It’s your responsibility to do your own due diligence, PERIOD. Anyone who relies on an someone else to do their due diligence, especially someone with such an obvious conflict of interest, deserves to be fleeced of every penny.

“All of the failure belongs to those working in finance (banks, complicit CDO managers, etc.) and to the ratings agencies.” - wrong. Although they must accept SOME of the blame, those who took otu loans they couldn’t pay are equally or substantially more responsible.

Chris,

I can’t fathom why you think people who have the ratings agencies backing up the stability of their investments are the ones who deserve to be fleeced while you simultaneously hold that mortgage lenders don’t deserve to be fleeced without any agency backing them up.

Whoever is the owner of the money is realistically responsible for it earning a return upon being invested, just as anyone is realistically responsible for not eating poison.  Simply owning money should not be seen as a guarantee against ever losing it and simply eating anything at all should not guarantee health.  But, the whole point of society is that we don’t have to behave as untrustable animals and that we realize that there is more to know than can possibly be known by any individual in a lifetime, and so we need to be able to trust those who work outside of our fields, and those outside of our fields need to be able to trust us.  The way we happen to have set up the institutions of trust is through ratings agencies, food graders, etc.  We should be able to expect that those foods which are graded highly will not kill us, and we should also be able to expect that those investments which are graded highly will not make us homeless.  What you are suggesting is that we live such that no one be able to trust another, as though we were wild animals.  We tried that and evolved out of it.  If you truly want to live in a society that doesn’t benefit from trustable institutions, you will have to move because there isn’t such a place on earth with internet access.  Making excuses for some of those institutions failing spectacularly while relying on others is hypocritical.

Since you’ve felt inclined to attribute a financial victim attitude to me (I’ve never taken a loan, accepted welfare, or invested in anything by the way), I’ll go ahead and attribute an attitude to you: you demonstrate the typical sophist’s attitude that gets up my nose.  You maintain that we can’t know better or make the world better than it is, and it’s always folly to try.  If you were to take a step back from your premises, actually trust (or if you prefer, learn and understand) what scientists have figured out already, you might realize that what you’re asking for isn’t actually the best we can do.

“I’ve never taken a loan, accepted welfare, or invested in anything by the way” - in which case you must be about 15 years old and your opinion means nothing anyway. Come back when you have some life experience and have earned your own money, worked your own job and owned your own business.

Chris,

Is your position that an argument’s validity or soundness changes depending on who delivers it?  Otherwise I don’t see how who I am matters at all.  If that is your position, then feel free to pretend that parenthetical comment doesn’t exist, as I only posted it to aid your awareness of yourself, not to support any of my arguments.  I’d describe to you how I’ve already done all of the things you suggest I do before I come back, but again it would only be as a prompt for you to be introspective, which you do not seem inclined to be.  I’m also troubled by your implication that someone should not be heard until after they have owned a business, something that is not at all correlated with education or insight into anything (any study will show you that the most entrepreneurial subgroup of the US population is immigrants who have no post-secondary education).

“Chris

“Gabor - that doesn’t change the fact that these bonds go bad because people stop paying their mortgage. I’m not here to describe WHY they stop paying their mortgage, I’m just describing the reality that precipitates the decline in the value of the bonds.”

Who decided to squelch a housing “bubble” by raising interest rates far more than needed, causing marginal loans to reset to larger unsustainable payments?

An excelent book which gives a great explanation of these processes is “The Big Short”! It took 2 readings and some reference work but now I understand how the big banks basically stuck it to the people and walked away with pockets full of cash,OURS!

This is a welcome series and ongoing discussion of a topic that is still not well-ventilated.  If we don’t understand it, it will all come back again.

I think there are three parts to the meltdown story.  Part One is that the securitization industry fundamentally changed the incentives of the mortgage brokers and bankers who create(d) mortgage credit.  Before securitization, lenders bore the bulk of credit risk, and were incented to lend money prudently; their interests and the borrowers were aligned.  After securitization, bond investors bore the bulk of that risk, and the incentives of the originators changed: now they were in a business where volume (number of loans) was paramount.  Someone else was worrying about credit quality.  And instead of lending money to the “right” borrowers, the new structure encouraged them to push borrowers into more and bigger mortgages—more than they could afford.

Part Two was the failure of the rating agencies to understand that securitization had fundamentally altered the dynamics of the origination process.  Their models were all based on mortgage experience where the originator bore the credit risk; as that became less true, the mortgage portfolios (all of them, but subprime was the first and the worst) deteriorated in quality but the ratings did not recognize this.  This in turn created a kind of arbitrage, where securitization turned these mis-appraised low-quality assets into AAA bonds.

Part Three was just Wall Street’s business-as-usual of magnifying the returns on an asset by borrowing money to buy the asset; that’s where the CDOs came in: they existed to magnify the returns from the arbitrage opportunity.

I would argue the primary fault lay with the rating agencies and their systematic failure to understand how the origination market had changed.  Some say that this was not incompetent but corrupt: that the agencies willfully ignored reality in order to keep their fees coming.  But this seems to me unrealistic; why would the agencies knowingly connive in something that would destroy their reputation, their only asset?  Had they realized what was going on, it was in their interest to blow the whistle and perform their watchdog role.  Their failure to do so is what, ultimately, will harm them the most, either through regulatory action, or the entry of new competitors, or simply if the market abandons them.

Hmmm.  Are all the millions of people in the US who have defaulted and been foreclosed on—or all those who are “underwater” (ie holding mortgages that exceed the values of their homes) responsible for their situation?  And must they accept some consequence(s)? Yes.  Are the financial institutions responsible for developing “instruments” that were inherently unstable and for deceptive practices in promoting and selling those instruments? Yes.  Were ratings agencies complicit in the deception? Yes.  Caveat emptor is good advice—but our society (and legal system) has—long ago—determined that there are applicable standards of honesty and fairness in the marketplace.  Consequences for all.

—-
Blame the bonds all you like, but the reason the bonds were risky and failed was because Americans are bad debtors. It really is that simple.
——-

While not false, this statement has almost no semantic content, and is essentially just pedantic twaddle.

Perhaps you clarified you point from this initial posting, I don’t know. If I wanted to hear a jejune analysis I would read further.

It happens over and over. Whenever you run out of good (legal) product, one starts fudging. It happened with Mortgage Products,with Viaticals and it’s happening with now with Life Settlements.
When your income (bonuses) are on the line, your creativity increases to a point where greed takes over.

Chris said:
“Furthermore, it’s disingenuous to blame the collapse of these bonds on the banks - when you trace it back to the beginning it’s clear that the collapse occured due to the American public failing to pay their mortgages. Blame the bonds all you like, but the reason the bonds were risky and failed was because Americans are bad debtors. It really is that simple.”

Chris, do yourself a favor a read “The Big Short” by Michael Lewis and then Google the origins of the word “disingenuous” and why someone had to invent this great big word.

“Financial engineering” is based on cash flows and basic credit analysis is “X” will pay me back. If a bank gets the credit analysis wrong then their will not be any cash flows to “engineer.”

First, well done, Piddlesworth.
Second, I shall henceforth add “pedantic twaddle” to my repetoire
Third, for all those who are under the undeniably daft notion that “Americans are bad debtors” in sum- ha!
Theoretically, one may assign that label; pragmatically, it simply does not fit as so widely and casually assigned.
I purchased a lovely property in 05—WELL able to afford it, wonderful employment, solid, upper earner.  I still can afford my lovely property BUT real estate value in my entire area has dropped to such an extent that if I were to sell my lovely property today, I would not come near what I paid, by well over hundred thousands of dollars and I am NOT in a speculative area whatsoever; through absolutely no fault of my own.  I put a very hefty downpayment so I still do not owe more than the value but the fact remains the value has dropped beyond reason through positively no fault of my own.  Please do consider all possibilities before blanketing the American public as “bad debtors”.  There are those in my circumstance who are walking away from their homes; not because they can’t afford the payments, but more so because it is a reasonable option.
I happen to love my property so choose to stay and pay despite it being currently worth far, far less than my purchase price.  If I didn’t love this property, I am not so certain it would be a wise business decision to stay.

It is too easy to apply blanket statements.  Far more tedious to be specific.

Actively researching for a book on the housing crash for more than two years, it is obvious to me that there is “enough blame to go around.”  From the major changes in banking that really began in the 1970’s when corporations/banks had a very chummy relationship in order for business to achieve expansion/debt financing…that begat corporations realizing that they could raise their own monies by selling their own bonds…Banks had to find new ways to make money…so from a “chummy” relationship filled with “free” advice and of course financing banking began merging, some getting very big, and most devising a way of banking that involved now a different relationship with business….from “free” advice, they began devising all kinds of fees to bolster their bottom lines; changes in credit financing changed their relationships with the public; changes in regulations allowed banks to become involved in other kinds of businesses…..Many local banks were merged into larger and larger ones and lost their identities with their public; for instance one of the major relationships a local bank had was financing of course, small business, but local housing. Making the story short, local banking “really disappeared” and the major national banks took over the mortgage business along with independent operators, more credit unions, etc…...The real local public/banking relationship was really destroyed and set the public on the doorstep of not very honest operators, pushing mortgage paper on clients that didn’t thoroughly understand the verbiage which has been proven many times over by the fact that so many of the latter defaulting has been done by mortgage borrowers that had very high credit scores…....Come the late 1990’s Glass/Steagal was destroyed which took the “firewall” away that kept banks that held FDIC savings from practicing proprietary trading.  Come the crash of 2000 banks were again actively seeking new ways of making money…..everything was in the “toilet”.  The only thing left was housing…..our manufacturing base was destroyed, we had been losing millions of jobs, our economy was very bad; one that is/was almost 75% consumerism and a gross part already deeply in credit crisis.  Misguided politicians of both parties pressing for more consumption, more housing for those that really couldn’t/can’t afford owning, banks/shareholders/market competition pressing for more quarterly profits, and newcomers to the financial houses promising to use the science of pure mathematics to overcome the behavioral one of economics….WALLA…you had the vision of Nirvana in finance…...
It didn’t work because of ignorance on the part of the consuming public; corrupt political system that sees no farther than its’ next election; financial risk management departments that didn’t understand the risks their proprietary traders were taking, let alone the “bad paper” they were pedaling….; Wall street companies enamored with the “Quanta” they could grapple away from academia; rating agencies that were trying to eat the apple from both ends (remember Arthur Anderson?); outrageously crooked companies like Countrywide, etc….so much more…...but, marry that to “GREED”.......Everybody in the line of fire from security origination to end was cloaked in short term greed…...One commenter above was right on target…..In a market society you MUST be able to TRUST….without TRUST you have no market; you have chaos….to try to say that “....every man for him/herself is ridiculous; In a sports game we have rules and referees….In the recent and now experiencing crisis those referees and rules have been destroyed by the slow and gradual deregulation of our banking system since the 1970’s beginning with the Ford administration…..carried thru Carter…on steroids with Reagan…...During Clinton with the tearing apart of Glass/Steagall and into the Bush administration pushing for more housing for everyone, even those who couldn’t/can’t afford it…(look up some of Bush’s speeches on housing).....
Greed, ignorance of the rules of the game; short term outlook for our financial systems….a maniacal consumer society that has lost most of its manufacturing jobs….15M jobs gone…good paying, middle class jobs since crash of 2000.
And, that’s another story entirely…the crushing of organized labor as an exact policy since the Reagan administration thru globalization which has been enormously successful for large global corporations..  Now there’s nobody to buy what they need to sell to survive in this country.
Well done, America!

Want to know about Chase Bank? What Kind of bank is it really?
Just visit youtube and type in ..Chase Bank collaboration with the Nazis

In his testimony before Congress July 16-17, 2002 FRB Chairman Alan Greenspan said: “Why did corporate governance checks and balances that served us reasonably well in the past break down? At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community. Our historical guardians of financial information were overwhelmed. Too many corporate executives sought ways to “harvest” some of those stock market gains. As a result, the highly desirable spread of shareholding and options among business managers perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising. This outcome suggests that the options were poorly structured, and, consequently, they failed to properly align the long-term interests of shareholders and managers, the paradigm so essential for effective corporate governance. The incentives they created overcame the good judgment of too many corporate managers. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously. ” [ http://www.federalreserve.gov/boarddocs/hh/2002/july/testimony.htm ]

The rating agencies were clearly corrupt.  They blessed high-risk credit without the data necessary to support their decisions, but they got paid well to “assume” things would be fine.

The banks kept a lot of the stuff on their books because they couldn’t sell all of it for two reasons.  “Eat what you kill” is a Wall Street mantra, and “Eat what you cook” is too.  The banks had to keep some of the crap to keep their credibility.  And they couldn’t always sell all the crap because they made so much of it, so they kept some of it and insured against losses via the geniuses at AIG, AMBAC, etc.

The regulators were partly clueless but mostly neutered.  Very few, if any, regulatory leaders had the backbone to lock the liquor cabinet while the party was jumping.  In 2006, questioning the logic of no down payments, negative amortization, or liar loans was met with immediate accusations of discrimination and anti-capitalism.

The borrowers were too often duped, but more often greedy.  They knew they couldn’t afford the homes they were buying, or should have known, but the salesman said they could make interest-only payments for two years and then refinance or flip and get rich.  The buyers spent too much time watching get-rich-quick real estate programs that were beamed into every home in the U.S., 24-7, on four different channels, interrupted every eight minutes for commercials from the scummy mortgage lenders promising the American dream to anyone who could fog a mirror.

Investors are the final piece to the puzzle, and the most puzzling piece.  Why so many people and entities put so much money into such flimsy investments is baffling.  Maybe it was greed and ignorance of epic proportions, but that still seems difficult to believe.  But the investors’ money was mostly placed by “professionals” who received fees for their insightful advice.

There’s plenty of blame to go around.  Lenders, borrowers, regulators, investors, and rating agencies were all blinded by greed and ignorance that overwhelmed common sense.  Blaming any one link in the chain is naïve.

A friend of mine rent a house, the owner stopped paying his mortgage and the house goes in foreclosure. The bank (city group) associate bid on it to keep the house, Now a property management Agency offer a year lease to the occupant,under the name of Fanny May. How do Fanny May came in control of this property in less then 30 days after the foreclosure? why do they refuse to offer a lease with option to buy the house at today price.
The bid stopped below $100,000.00 dollars for a 3 bed rooms 2 baths 2 cars garage.
1 the mortgage payments would have been lower than the rent.
2 the bank would not longer be responsible for the property.
3 the tenants would have an incentive to keep and upgrade their property like they usually do compare to renters
4 Or is it, fanny May became a new branch or field as real estate investors, property management and want all the profit for them self and the hell with the tenants,
The tenant is just good to maintain their property and pay rent until the market pick up and then they can sell it for top dollars when the market turn around.
At the same time the tax payer money bail them out.

Yves Bankers don’t want to see anyone succeed. If your friend could buy the house he should make an offer for the bank. But be careful home prices will fall further in the future.

If you know the money your using is counterfeit, your breaking the law!  If you know the value of your collateral is way out of line, isn’t that the same thing? 

Almost everyone that had a mortgage was involved.

We speculated!  We used our home’s obviously inflated value/phantom equity to increase our standard of living.

Dozens of people in the first thread asked why these money handlers haven’t be prosecuted.  The outrage at the system is valid but, I wonder…..

If we juxtapose ourselves with any of the responsible people, in business or government, wouldn’t the same greed drive the machine?

Wasn’t it our votes or our apathy that allowed deregulation? 

Isn’t the pool we get our leaders from “dirty”?

I’m hard pressed to say I would be any different.  How about the rest of the public?  It’s so easy to turn your head and cough, then you don’t see or hear what’s necessary to make the right choice, the hard choice.

This one of the most civil and intelligent conversations that I’ve seen on a news site for a long time.  Very refreshing!

Chris makes some valid points about personal responsibility but takes it to an extreme.  Most reasonable people could see their way through the hucksters that were out there hawking the no down payment mortages but some were not.  I moved to DC in 2005, bought a house with a 30 yr, fixed 20% down mortgage.  we are currently under water but fortunately, both my wife and I are employed and we do not need to move.  When we were looking for financing, looked online at Lending Tree and other sites for the best possible rates.  I was bombarded by brokers and lenders who were trying to sell me these exotic mortgages that I wouldn’t touch with a 10 ft pole.  Thousands of people tried these mortages for various reasons; they were desparate, greedy, not financially sophisticated, not very bright..etc..Some people made money if they “flipped” their house before the crash and others didn’t.  Their mistake and they bear the consequences.

There were two things very wrong with what the financial institutions did: (1)  They made bad business decisions by making exotic, sub-prime loans and their companies suffered..Countrywide, New Century, WaMu,...are gone as a result.  If you give a $400K mortage to a “Sandwich Artist” at Subway you had better not expect that loan to be paid.  and (2) These people pushed and pushed these loans on people.  I know because they were calling me.  A certain percentage of the population is suseptable to this pressure and they will be influenced into making bad decisions.  This makes the mortgage company culpable in the blame here.

These mortage companies knew that many of the loans were junk, which is why they packaged them up and sold them.  “Hey!  I know it’s crap, but if I crap in the ocean, who’s going to notice?”.

Chris and anyone else who hasn’t read it yet, look at the comments by David under the Pro Publica article
“Banks’ Self-Dealing Super-Charged Financial Crisis”. Yes, I think the banks, who should’ve and did know better, and had a fiduciary responsibility are more to blame than the borrowers. With commissions and bonuses at stake, fiduciary responsibility went out the window. With the lack of regulation, by accident, by design, graft became the operating principle of many of the above mentioned banks and the insurers of the CDOs created from these dishonest loans. So, yes, start with the heads of the Big Five banks and work down from there. Then, if the borrowers aren’t already living on the street, you can go after them.