Bubble Logic 6 comments
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Question: Were bankers and risk managers and investors who got us into this credit crisis plain stupid? Or were they just responding to incentives up and down the line?
Answer: Both. For many people, it was rational to participate in the mortgage bubble even if they thought it might (would) end in tears. On the other hand, even smart people can be taken in by bubble logic if everyone around them is convinced. For example, here is a 2006 discussion from Brad DeLong's blog of a column by Paul Krugman, making the case that most of the country was not experiencing a bubble, and that zoning was the main culprit for coastal price increases (hence prices were sustainable). If you were a CDO modeler in 2006 and believed that argument, you might not have even considered that your model assumptions were way too optimistic -- even with people like Robert Shiller (and me) shouting that we were in the midst of a gigantic bubble.
Some of the best journalistic coverage I have found of the mortgage bubble is from Ira Glass and This American Life (audio, pdf transcript). They get the "local color" right from top to bottom: self-interested individual borrowers, local mortgage brokers rushing to assemble as many loans as possible, to be sold to Wall Street banks and repackaged as CDOs, rated by agencies like Moody's (MCO) and S&P that were making record profits from fees, and sold to investors chasing yield in the midst of a liquidity glut caused by low interest rates. From their coverage you can see the incentives were messed up from top to bottom, and that many individuals anticipated trouble ahead, but couldn't put up a fight without risking their careers or bonuses. Some excerpts below.
borrower: ...I wouldn't have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that and they break your knee-caps. I don’t know why the bank did it. ...Nobody came and told me a lie: just close your eyes and the problem will go away. That's wasn’t the situation. I needed the money. I'm not trying to absolve myself of anything. I thought I could do this and get out of it within 6 to 9 months. The 6 to 9 month plan didn’t work so I’m stuck.
mortgage broker ...it was unbelievable. We almost couldn’t produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce. That was our difficult task, was trying to produce enough. They would call and ask “Do you have any more fixed rate? What have you got? What’s coming?” From our standpoint it's like, there's a guy out there with a lot of money. We gotta find a way to be his sole provider of bonds to fill his appetite. And his appetite’s massive.
...my boss was in the business for 25 years. He hated those loans. He hated them and used to rant and say, “It makes me sick to my stomach the kind of loans that we do.” He fought the owners and sales force tooth and neck about these guidelines. He got same answer. Nope, other people are offering it. We're going to offer them too. We’re going to get more market share this way. House prices are booming, everything’s gonna be good. And ... the company was just rolling in the cash. The owners and the production staff were just raking it in.
Wall St. banker ...No income no asset loans. That's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? We’re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened ... we did it because everyone else was doing it.
...All the data that we had to review, to look at, on loans in production that were years old, was positive. They performed very well. All those factors, when you look at the pieces and parts. A 90% NINA loan from 3 years ago is performing amazingly well. Has a little bit of risk. Instead of defaulting 1.5% of the time it defaults at 3.5% of the time. That’s not so bad. If I’m an investor buying that, if I get a little bit of return, I’m fine.
CDO packager: ... In 2005, we had an internal debate here because there were two banks coming to us, why don’t you do a deal with us, BBB securities, you get paid a million bucks in management fees per year. Very clear, just like that, in 2005. And we declined those deals. We just don't believe those BBB RMBS assets are money-good. And we thought if we do a CDO of those, that's gonna blow up completely. We were early in '05 by not wanting to do those deals. People were laughing at us. Saying you're crazy. You’re hurting your business. Why don’t you want to make ... Per deal, you could make a million dollars a year
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This article has 6 comments:
If these individuals had found work in a factory, for example, or built a productive business, they would have been taxed at twice that rate. By changing the incentive structure for borrowers and investors, those tax cuts assured a bubble. The net effect is that our efforts are going into trading assets instead of producing them.
How about taxing capital gains at the same rates as productive work? We want to encourage productive work, right? Has any economy ever functioned on just selling stuff to each other, while producing nothing?
His piece is arguing, correctly, that median home value is an irrelevant and misleading measure.
Most middle class peoples' productive work is hardly touched by income tax after the various exemptions and deductions are applied. Those people pay mostly payroll taxes. And those payroll taxes are necessary to preserve the fig leaf that social security and medicare are "retirement" systems rather than welfare programs.
A Jedi's strength flows from the Force. But beware the Dark Side. Anger, fear, and aggression; the Dark Side of the Force are they. Easily they flow, quick to join you in a fight.
Mr Bernanke said today: “With the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal package by Congress at this juncture seems appropriate.” He added: "If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation...”
"Access to Credit!!!" Unba-fucking-real. These guys have absolutely no shame, not a moral or ethical cell in their malignant souls.
Give the stupid, ignorant mass of poor slobs money so that they'll feel OK about getting into MORE debt; give 'em that false sense of wealth---like the one "W" gave 'em with the $600 'stimulus' checks---so that they feel OK about getting 3 new credit cards and running up $7500 in debt and paying the minimum payment each month of $50 while NEVER, EVER getting close to getting out of debt. Debt servitude, for all of your days. Pay the man and make him rich.
Look folks, this has gotta stop. We cannot exist forever as the meat for the financial industries sausage grinder. There are many ways to get out from under this pile of shit, but one very straightforward method comes to mind first: stop playing.
Stop borrowing money from corrupt banks and stop paying money to a corrupt government. Don't pay your taxes, don't take out new mortgages, don't patronize the institutions that prop up this system. Live smaller---live in and for your community. Grow vegetables, trade with neighbors, share resources. Don't buy cool things anymore---you don't need them. One small TV is just fine...in fact, my wife and kids and I have chosen not to have TV in our home. We listen to the radio and occasionally watch M*A*S*H on an old DVD player. Don't buy into the need to buy into happiness. Ride a bike to work.
The Empire cannot make us go to THE DARK SIDE. We have a choice. The Dark Side exists on greed and excess and hubris. If we can learn how to live small, the forces of Evil will fall. They can only exist if we subsidize their existence. I say, no more!
Here is a great video about THIS VERY TOPIC:
video.google.com/video...
Lets also remember that it was during the mid01990's that Congress and Fannie/Freddie began the process to expand underwriting guidelines to pervert the mortgage credit process...
You needed a willing, consumer driven economy, and perverse quality controls (aka: BAD REGULATION) to make the whole nightmare a reality....
The worst of it is, though, that,during this time...while the credit markets were getting screwed up..a lot of people...many who rant in blogs with no real understanding...took great financial benefit from the growth in the economy.....Just like housing and stock market are giving some back...when this is done, we will all have to give back...we all rode it up....and we all will ride it down in some manner....