Still trying to blame the homeowners?

(Matt Taibbi Author)

In the ongoing effort to rewrite history and deflect blame from Wall Street for the financial crisis, former U.S. Treasury official and current American Enterprise Institute swine Peter Wallison has issued a lengthy analysis of the mortgage bubble that, surprise, surprise, lays the blame for the crash at the feet of government efforts to expand home ownership to "those who normally would not qualify."

The Washington Times piece about the Wallison study includes the following coda near the top. The emphasis here is mine: "Without waiting for the evidence, many in the political class, particularly those on the left, bought into the argument that the financial crisis was caused by greed."

I'm going to come back to that remarkable line written by senior Cato Institute fellow Richard Rahn, who's just jumped to the very top of my shit list, in a second. But just quickly, the argument goes on to summarize the conclusions in Wallison's study, which is described as a "stronger and more empirically-based" argument, having been done by one of what Rahn calls the "somewhat more sophisticated observers" who didn't just rush to blame the whole thing on greed without waiting for the evidence.

The essence of Wallison's argument is that the crisis was caused by the fact that the government in the late 1990s started forcing Fannie Mae and Freddie Mac to acquire increasing numbers of "affordable" housing loans.

Which is true. The Clinton administration did issue a mandate instructing Fannie and Freddie to purchase a larger portfolio of low-income housing loans. But this had nothing, or very little, to do with the mortgage bubble. What's fascinating about this AEI stance is the evolution of the right-wing argument: the first effort to explain the mortgage crisis involved, of all things, the Community Reinvestment Act of 1977, the anti-redlining law that required banks to issue a certain percentage of home loans to the people who made up the bulk of their depositors. That propaganda effort was only mildly successful for the screamingly obvious reason that the law in question was passed in the seventies, across thirty years of crisis-free American history. That, plus the fact that the CRA had absolutely no real impact on the sudden explosion of subprime home loans in the early part of the last decade, made this a propaganda non-starter.

So now they're coming back with this, pegging the whole mess not to greed but to Clintonian policies involving Fannie and Freddie. Note that although they could have done so, the AEI is not criticizing Clinton for the things he was actually guilty of, like repealing the Glass-Steagall Act and signing off on the Commodity Futures Modernization Act (which deregulated the types of derivatives that made the mortgage-backed securities boom possible) in 2000.

No, the criticism here is not really partisan; it's designed more to put class and race at the middle of the crash discussion, pitching the financial crisis as the result of a botched socialistic scheme to put "those who normally would not qualify," i.e. poor white trash and poor black and Hispanic people, in fancy homes.

Here is why this argument is bullshit, and I'm not the only one saying so.

The reason there was a sudden rush to lend out homes to subprime borrowers was not because of Fannie and Freddie, but because the banks had discovered fancy new derivative tools like CDOs and CMOs that allowed them to chop up bundles of home loans and turn them into AAA-rated securities. Countrywide was not trolling the streets looking for jobless indigents to lend mansions to (this literally happened, by the way) because the government was forcing them to. It was because big banks like Goldman and JP Morgan Chase and Bank of America were letting them know that they had a virtually limitless market for mortgage-backed securities, thanks to the new derivative tools that allowed them to sell billions of subprime MBS as AAA-rated investments to suckers like German land-banks and Icelandic trade unions and the like.

Every time the AEI or some other stooge comes out with one of these "But the government made us lend this shit!" arguments, we need to stand up and repeat: no, sirs, it did not. This was not a government program to put people in homes. This was an international fraud scheme to disguise crappy American home loans as AAA-rated safe investments so that they could then be hawked to foreigners and insurance companies and pension funds. The fact that a whole bunch of people who probably didn't deserve credit ended up owning mortgages and buying homes was actually an incidental side-effect, a kind of collateral damage, to the underlying fraud scheme. Not about greed, Richard Hahn? This crisis was about banks bundling subprime mortgages and selling it off as AAA-rated gold to pension funds.

That means a bunch of jackasses on Wall Street with $1000 suits and slicked-back hair were passing the word to Countrywide lenders that they needed masses of crap loans that they could then turn into investment-grade paper and sell it all off to, say, the state pension fund of Indiana.

That way, thousands of Indianan toll booth operators and teachers and prison guards and janitors who'd been working their whole lives and saving up nest eggs were made into customers of this toxic crap these bankers knew would blow up eventually. Indiana's pension fund lost $5 billion during the crisis. Virtually every state in the union suffered similar fates. Why? Because a bunch of used-car salesmen on Wall Street sold them fleets of lemons with no engines under the hoods.

I don't know what Richard Rahn would call making your yearly bonus goal by robbing some janitor in Indiana out of his pension. As a flack for the Cato Institute, I'm sure he would call it good business. But in my mind, if that's not greed, I don't know what the hell is.

This has to be repeated: Fannie and Freddie did not invent this scheme to turn subprime crap into AAA-rated gold. They were not the ones who were mismarking dicey home loans; that was the fault of the ratings agencies, who did so because they wanted to retain relationships with the big banks. Here's what Fannie and Freddie did do; they followed the market and bought lots of these loans after the banks had already collected them and chopped them up and mismarked them. As Barry Ritholz points out, they were essentially just another in a long line of dumb banks that jumped ass-first into the MBS market once it started to bubble up.

There's certainly a legitimate debate about government housing policy and whether or not it makes sense to have the Government-Sponsored Entities like Fannie and Freddie putting so much of our capital at risk to help low-income borrowers get houses. It may very well be that the Clintonian dictums went too far and were ultimately unsustainable. But that is an entirely separate issue, very different from the question of what caused the mortgage bubble and, by extension, the crash.

Plain and simple, the mortgage bubble was caused by the unregulated mass-marketing of mismarked, or fraudulently marked, subprime mortgages to customers who had no idea or only a very dim idea of what they were buying. This was high-tech fraud and stealing, and not just greed but unconscionable, criminal greed on a grand scale.

As for Richard Rahn talking about observers in the "political class" who blamed the crash on greed "without waiting for the evidence," let me just ask this: on the literary totem pole, what could possibly be lower than a flack for an industry-fattened think tank taking a paycheck to defend greed? I guess there are all sorts of creatures in God's kingdom, but man, are some of them ugly.

I wanted to include the most recent story on the housing bubble and it's inherent flaws and manipulations by market insiders.

What many individuals don't recognize is the seriousness of the fraud that existed inside of the banking institutions that securitized home mortgages. Often we get caught thinking of fraud being on the front end of the process, what many people haven't recognized is the level of deception, manipulation, and outright fraud that went on once the mortgage was signed and prepared for sale to investors. Manipulation, like in this article, is just a portion of what the banks have their hands in as if this wasn't enough on its own. This is a simple manipulation that went on for at least 3 yrs. Bribing friends and other institutional investors to purchase securities that the market no longer had an appetite for in order to put sales on paper to generate bonuses for themselves. By creating a false market and defying their own previously demanded mark to market pricing standard they continued to drive home prices higher for individuals for at least 3yrs after the market should have been indicating a stabilization if not a retraction from previous highs. Similar to Goldman's process of shorting their own collateralized obligations while simultaneously pushing them to their investors this type of market manipulation is not only unethical but illegal but I promise you that the individuals involved will not face consequences.

Imagine the numbers of homeowners that overpaid for their homes over the course of those years all because of the fraud taking place in the back rooms of some of our most trusted institutions.

It's things like this that make my job of finding legal recourse for homeowners so easy. I suppose between robo signing and creating new loan documents, manipulation of prices by securitization, and wrongful foreclosure and due process I should be thanking them.


http://www.msnbc.msn.com/id/40795080/ns/business/

Seriously? Reaganomics?

Today I once again heard the battle cry of many that claim Ronald Reagan was a genius economist, or more reasonably his ad visors and handlers. That their financial capacity and plans saved our country and brought us the greatest success in modern history, economically at least. While I won't contend that Reagan had an influence on our country's economic policy I would like to suggest that the blank check that seems to be afforded him in hindsight should be looked at a little more critically especially given the current state of economic affairs in our country. As most I believe would agree the warning signs looking back should have been much easier to see by not only professional financiers but by everyday Americans as well.

Let's just consider two major tenants of Reagan era economic policy. First tax cuts primarily for the most wealthy (generally expressed as the top 1% based on income) and deregulation of financial markets.

Consider the Reagan era tax cuts. The effect was primarily a change in the composition of tax revenue, towards payroll and new investment away from higher earners and capital gains on existing investments, with comparatively small effect on overall tax revenue: the changes "reduced the federal revenue share of GDP from 20.2 percent in fiscal 1981 to 19.2 percent in fiscal 1989," a 1% reduction. What this means is that a 1% drop in the overall tax received was generated entirely by changes made to existing savings and investment from the well heeled and a shift from tax burdens on the top 1% of earners to the middle and working classes. Considering the impact of the movement as a whole one may not recognize the sweeping nature of the reform or the impact it would have on its benefactors but when we consider the very small number of individuals who benefited from the swing of revenue it's quite sobering.

The theory at the time was labeled as "trickle down economics" and that by saving the greatest earners and investors even more they would generously pour those savings and more into better working conditions, wages, and bless the lives of all those they oversaw. Clearly at the time it was a tough pill to swallow realistically but even more so now that we've witnessed the slow disintegration of America's middle class.

Outsourcing middle class jobs to save companies bottom lines did not improve the lives of those whose responsibility it was to cover the shortfall and despite many claims to be anti big gov't Reagan and his policy makers did not decrease spending over his terms.

While I do agree that as in virtually all situations a case can be made that the era had some benefits I think critically thinking we must examine and accept the failures of our economic decisions during this time as they had a great impact on where we stand now and what we might consider moving forward.

More specifically reaching into current events in our country the Reagan era deregulation of the financial markets needs to be addressed as it has led to significant turmoil in our country. The housing mess.

Seeing the housing mess from the inside has been quite an amazing process. Working for the subprime lenders on a wholesale side and structuring capital on the secondary markets has given me a little perspective while I will still not claim that I am not constantly surprised by new information that seems to trickle out month after month I can say what I've seen is criminal, deceitful, and just plain wrong in many instances.

I won't venture into the deregulation time frame at this point while I would like to point out that no matter how you choose to affiliate yourself politically there is ample blame to go around on every side. For every Phil Gramm there is a Barney Frank that can bear equal but separate burdens.

The dismantling of the financial regulations began shortly before we began seeing the boom and bust cycles of specialized markets. Oddly the overseer of many of these was Alan Greenspan yet his record seems oddly unblemished. Even if we only address his two biggest unseen collapses, the tech bubble and the derivatives bubble (mortgage backed) we would have enough to seriously question the planning and pace at which our economy was handling its new freedoms. Add in the savings and loan scandal and the commodities fiasco's and we really should have been more aware but it appears gov't, business, and the treasury were all oblivious and completely unaware of the underlying issues associated with the new boom and bust cycles.

This is my opinion, but I'm fairly certain based on the risk vs. reward system in place for those same individuals who benefited from the original Reagan tax cuts were also the ones who benefited from the bubbles and their eventual collapse. The bankers and finance professionals reaped massive rewards for the selling and marketing of these securities both ".com", commodities, and housing. The manipulation of these markets has been shown in both previous cases and is coming out now in our latest bust. The latest collapse is a little more personal for many because it didn't stop at their wallet and their savings account balance it followed them home and took a toll on their families and personal lives.

The point needs to be made that for the past 30yrs we've had a particular approach to business and regulation including taxation and that has brought us to where we are good or bad. I'd contend that a much greater portion of us see it as bad while only a select few have reaped the reward of lack of constraint and pedal to the floor risk taking with no consequence or recourse. Shouldn't we think critically for a minute instead of throwing out our favorite pundits quip of the week? It seems we are all too tired to think for ourselves anymore but if we don't we are doomed to keep getting run over by the machine that has run us down several times already. Isn't it obvious that trickle down theory is flawed at best and a tool for the most advantaged to benefit off the rest of us at worst? Isn't it obvious that an unregulated market allows those in power to steal from those without?

Everyone is mad at the bonuses being paid to the executives that ran the their trains into a ditch. Being rewarded in tremendous excess for being completely inept or more likely just being intentionally self serving and unconditionally greedy at the expense of everyone else is not what we as a country should be rewarding. Pandering to those with great wealth and selling out position and influence in order to rub shoulders with the financial elite should not be what we desire from our representation.

The American people have been bamboozled and it's about time to put an end to it and restore the American dream to everyone and not just to those with influence, connections, and power.