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Gayle in MD
11-11-2011, 11:56 AM
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.

http://www.washingtonpost.com/business/w...qM_story_1.html (http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story_1.html)

cushioncrawler
11-11-2011, 04:40 PM
I dont agree.
The crises iz due to Bad financial systems, but basically a different set of Bads to the bads detailed abov -- and the crises iz due to krappynomix (which iz a financial system anyhow).

But no matter what the system, crooks shood go to jail -- big crooks shood be hung.
mac.

Gayle in MD
11-11-2011, 05:45 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: cushioncrawler</div><div class="ubbcode-body">I dont agree.
The crises iz due to Bad financial systems, but basically a different set of Bads to the bads detailed abov -- and the crises iz due to krappynomix (which iz a financial system anyhow).

But no matter what the system, crooks shood go to jail -- big crooks shood be hung.
mac. </div></div>


I agree, mac, the crooks should be jailed.

But...I have to ask you...


When you say you don't agree, with which parts of the authors stated causes of the crisis do you disagree?

G.

cushioncrawler
11-11-2011, 06:23 PM
They are probly all korrekt -- and they all deskribe bad financial systems. Systems that never work well -- systems that when they work halfwell it iz by accident.
A good proper systems wouldnt hav any bad stuff. Its hard to explain.

Take mortgages. Mortgagees shood not hav the power to evict and auction (ie there shood be no mortgages).
Take banks. There shood be no banks (ie not the prezent animal).
etc etc.
mac.

Gayle in MD
11-11-2011, 06:36 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: cushioncrawler</div><div class="ubbcode-body">They are probly all korrekt -- and they all deskribe bad financial systems. Systems that never work well -- systems that when they work halfwell it iz by accident.
A good proper systems wouldnt hav any bad stuff. Its hard to explain.

Take mortgages. Mortgagees shood not hav the power to evict and auction (ie there shood be no mortgages).
Take banks. There shood be no banks (ie not the prezent animal).
etc etc.
mac. </div></div>

Well, I have to laugh when they try to blame the Community Re-Investment Act, since that was largely through the small community banks, which actually operated under closer scrutiny, and far more sensibly, than the large banks and financial institutions on Wall St...

I can't believe that there are a line up of Republicans who are actually corrupt enough to be out there trying to float this absurd idea, that we need more deregulation in the banking industry!!!

Are there really enough stupid people in America to fall for Republicans calling the OWS public outrage over the unfair distribution of wealth in this country, class warfare? And right on the heels of what we all just watched going on among the wealthy top one percent...the Wall St. Crooks!!! the unfair tax structure! The massive redistribution of wealth, through the loopholes for the wealthy?

More revenue is lost through those loopholes and tax breaks for the wealthy, than all of the income taxes bring in!

OMG! Are there really enough stupid people in this country to buy their lies?

G.

cushioncrawler
11-11-2011, 08:00 PM
If some kids asked mac to explain how their game of kombined MONOPOLY and SNAKES'N'LADDERS and WAR and WHO'DUNNIT kompares to good ekonomix and good finance, i might hav a chance of explaining.

But with western style krappynomix and krappy finance, i wouldnt know where to start.
Explaining stupid wrong ideas iz too diffikult. Best just explain good true ideas.
mac.

LWW
11-12-2011, 05:55 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Gayle in MD</div><div class="ubbcode-body">I agree, mac, the crooks should be jailed.

G.

</div></div>

I concur.

Here's a short list:

- Dear leader

- Chris Dodd

- Bawnie Fwank

- Phil Graham

- Jimmuh Cahtuh

- Franklin Raines

- Jamie Gorelich

- Jimmy Johnson

cushioncrawler
11-12-2011, 06:16 AM
I like the justice system in the very oldendays. U were given a life threatening wound or burn etc.
Then, God make Hiz judgement.
If u died u were guilty.
If u survived u were innocent.
No jails needed.
mac.

cushioncrawler
11-12-2011, 06:18 AM
If some kids asked mac to explain how their game of kombined MONOPOLY and SNATCH and SNAKES'N'LADDERS and WAR and WHO'DUNNIT kompares to good ekonomix and good finance, i might hav a chance of explaining.

Here i hav inklooded snatch -- somehow i forgot in the original.
mac.