Greg Roach's Berkshires Blog
Monday, September 15, 2008
  "The Fundamentals Are Sound"
I wonder if Mr. Limbaugh and Sarah Palin's running mate will be repeating that line today.

Or will they sound like the guy who predicted this who mess who now says -
"It's clear we're one step away from a financial meltdown,"
Actually, I'm sure they will say whatever they believe will help the Palin ticket get elected.

UPDATE: What do I win?!?!? Mr., whathisname, this morning:
"The fundamentals of our economy are strong,"
Bear, Lehman, Merrill Lynch, and now IAG is close to the edge. The Fed is just about out of options to contain this. 1929, anyone?

This is going to be a really interesting week in the markets. Isn't deregulated, laissez-faire capitalism a great thing?

Cap'n John
Oops. AIG. And they just went over the cliff. Bye bye, 401k.

Cap'n John
FNMA and the mortgage market were pretty much the opposite of laissez-faire capitalism. And Obama has been pretty quiet about that mess, perhaps because he's the country's third-largest recipient of Fannie Mae and Freddie Mac political contributions. (About $400,000, almost 4 times as much as McCain.)
Fannie and Freddie are a disgrace, but they are not responsible for the world wide credit crunch that is collapsing many market players. That has much more to do with a lack of SEC regulation over the creation of highly leveraged derivative securities that were based on wishful thinking.

Just like oil, I would like to get away from "paper" contracts on real world items. If you buy a an oil future or a mortgage security, you own the oil or the house, rather than a piece of paper you can walk away from at a mild loss. (Obviously the losses were borne by somebody - in this case Lehman, Bear, AIG, etc...)
Saying it doesn't make it so, dw.

No equity? No problem! No income? Just write down a number you think will work! Appraisal a little low? We can fix that!

The absurdly irresponsible practices of the banking and mortgage industries are not characteristic of a well-regulated industry. The prospect of actual regulation in 2007 terrified them:

Obama has received a lot of money from these folks, but then, he has received more money than McCain from just about every single industry---except oil. Obama also strongly supports re-regulating this messed up industry in spite of the money:

...which is quite unlike McCain's response to getting his big donations from the oil boys:

Cap'n John
"The absurdly irresponsible practices of the banking and mortgage industries are not characteristic of a well-regulated industry. The prospect of actual regulation in 2007 terrified them."

I agree. As often happens, the regulated came to have more power over the regulators than the other way around.

But the irresponsible practices were not a case of, or characteristic of, laissez-faire economics. Everyone has long known that the mortgage industry's losses, like that of the largest banks, were likely to be covered by the federal government. This encouraged buyers of mortgage securities, and other securities packaged by major firms, to downplay issues of risk and leverage when making their "investments."

Throw in the Community Reinvestment Act, which essentially required lending to people with marginal incomes, and communities with marginal prospects, and you have a collapse which has little to do with laissez-faire, other than to falsely give it a bad name.
The flaw with the community reinvestment act was not over regulation. Rather is was a lack thereof that allowed banks to place ridiculous terms on sub-prime loans.

Because the housing market adjusted to the readily available borrowed capital, prices overheated and the rest is history.

Had the FHA(?) put limits on the types of terms offered, eliminating ballooning repayment structures and teaser interest rates, much of the current mess could have been avoided.
And did they offer those loans because they wanted to lose money? Or because that was the only way to get the low-income business they needed to avoid getting screwed by federal regulators?

Here's an interesting answer, and a defense of sub-prime and similar mortgages by Obama economic advisor Austan Goolsbee:
And did they offer those loans because they wanted to lose money? Or because that was the only way to get the low-income business they needed to avoid getting screwed by federal regulators?

The folks who loaned the money quickly packaged and sold the loans. The buyers of the loan practiced "see no evil" diligence and got screwed. Had the impossible happened and the housing market continued to grow by 20+% a year the equation would have made sense. But instead, the only way to entice low income buyers into houses that were price inflated was to use techniques that in hindsight are completely predatory.

Now that I've responded, I'll see what Goolsbee has to say.....
From the NYTimes article: A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.

I think that this reasoning has been turned on its head by the rapid and artificial inflation of the housing market.

While the article focuses on sub-prime, the fact is that many prime borrowers looked for the quick buck and low early payments and are now walking away or being foreclosed upon.

Let me rephrase what I said earlier - if tighter regulation had checked the amount of easy money available for borrowing, prices would not have inflated the way they did. Tighten the supply of cash and market will follow.

People bought houses based upon monthly payments, but unlike a car lease, they couldn't just turn the house in after 3 years or 36,000 miles.
Regulation does not result in moral hazard unless the regulators are in bed with the industry. The anti-regulation that has taken place for the last 8 years or so can be traced to this guy's brother:

and this guy's brother, too:

The fringe conservative idea that the CRA, and therefore, liberals, are responsible in any way for this madness is just silly:

Cap'n John
I remember an incident back in the 70s when investigators were advised to "follow the money" to get to the bottom of who was responsible. Does not that advice work here? Who stood to profit by these fast and loose rules?

Can anyone say....Bush economic plan? Or does he get a bailout also?
John McCain. 25 May 2005, speaking to the Senate:

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

I urge my colleagues to support swift action on this GSE reform legislation.

The legislation was blocked by Democrats, with the assistance of a few Republicans.

James Johnson and Franklin Raines, former CEOs of Fannie Mae and current Obama advisors, have cost us many tens of billions of dollars.
Proving that the markets are regulated by quoting John McCain's only speech ever that calls for regulation? I'm surprised you want to go there. McCain certainly doesn't.

McCain signed onto S990 as a cosponsor 16 MONTHS after the bill was introduced (this speech was in 2006, not 2005), and 10 MONTHS after the bill died in a GOP-controlled committee after being reported back "favorably" from mark up.

Bills that are favorably reported from mark up meetings need to be scheduled for further action, or they just die. The minority doesn't do this. If McCain really wanted action on this, he would have leaned on Shelby (the GOP chairman) to schedule further meetings or a vote. That didn't happen. Lots of right-wing blogs use the vague "democrats blocked it" phrase though, so I guess that makes it true.

McCain never did anything for this bill except give a short speech, knowing that it was already stone, cold, 10 months, dead, dead, dead. I wonder what that might have been about? It certainly wasn't to get this bill passed.

McCain supported the multiple Phil Gramm bills in 1999 and 2000 that laid the groundwork for this fiasco. Gramm is one of his principal economic advisors and it is his DE-regulation of, and "streamlining" of the supervision of the Banking, Insurance and Securities markets, and his repeal of the Glass-Steagall Act that made it possible for this to happen. Not to mention his creation of a whole new, completely unregulated class of derivatives that were nothing more than a vehicle for gaming the markets. He made Enron very happy. McCain defends him, agrees with him, and supports him:

Casting McCain as a reformer in this turdbowl is just more up-is-down, black-is-white nonsense from the right. Have a nice day,

Cap'n John
Cap'n John,
Thank you for the correction on the date. The rest of your letter is unpersuasive.

"Proving that the markets are regulated..."

Way to move the goalposts. Your initial notion was that the problem was due to "deregulated laissez-faire capitalism" -- a notion which is self-refuting for anyone who knows that GNMA securities have always had "implicit" (actually, frequently touted) guarantees against credit risk by the federal government.

I do not argue that we had a good overall regulatory structure. I do argue that the problem is equally one due to governmental involvement (credit guarantees, which led to the "see no evil diligence" mentioned by Greg, and requirements to lend to people with inadequate income and assets, and in poor neighborhoods) as to non-involvement (allowing such mortgages to go to poor credit risks with minimal down payments, or with income inadequate to cover a traditional 30-year fixed payment loan.)

Indeed, Republican backers of FNMA have used "laissez-faire" notions to defend their whoring for FNMA, just as Democratic backers of FNMA have used "help the poor and working class" notions to defend their whoring for FNMA. The troubles at FNMA do no more to discredit actual laissez-faire notions than these troubles discredit actual concern for the poor and working class. What should be discredited is whoring by our political class. And looking at the Obama-McCain comparison, if we follow the money, it is clear that Obama is the bigger FNMA whore.

"If McCain really wanted action on this, he would have leaned on Shelby... to schedule further meetings or a vote. That didn't happen. Lots of right-wing blogs use the vague "democrats blocked it" phrase [but] McCain never did anything for this bill except give a short speech, knowing that it was already... dead."

How do you know how much effort McCain put into this bill with Shelby or the other 96 Senators? (The bill had only 3 cosponsors.) Should McCain get no credit at all for publicly condemning FNMA's "scandal," "manipulation" and "misconduct" at a time when virtually every other Congressman was happy to take FNMA's money and keep their mouths shut?

"McCain supported the multiple Phil Gramm bills in 1999 and 2000... Casting McCain as a reformer in this turdbowl is just more up-is-down, black-is-white nonsense from the right."

And McCain saw the light by 2006. Unlike Obama. It seems to me that McCain advisor Gramm balances Obama supporter Austan Goolsbee. And the existence of the two advisors is less significant than the actual behavior of McCain and Obama themselves.

McCain publicly attacked the rich and popular FNMA in the Senate in 2006. Do you have any comparable speech or sponsorship by Obama that happened more than a couple months ago, before the turd hit the fan?
I see that you are unable to find any evidence that "democrats blocked" this legislation that McCain cared so passionately about that he didn't bother signing on as a cosponsor until long AFTER it was safely dead.

As far as Mccain "seeing the light" in 2006, this is what he said in March 2008:

"Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital."

If you look fast, you can still find it on his website before they scrub it.

As you requested, I have a quote from Obama, also from March 2008, but I doubt you will find it comparable:

"The Federal Reserve should have basic supervisory authority over any institution to which it may make credit available as a lender of last resort. When the Fed steps in, it is providing lenders an insurance policy underwritten by the American taxpayer. In return, taxpayers have every right to expect that these institutions are not taking excessive risks. Now, the nature of regulation should depend on the degree and extent of the Fed's exposure. But, at the very least, these new regulations should include liquidity and capital requirements. Second, there needs to be general reform of the requirements to which all regulated financial institutions are subjected. Capital requirements should be strengthened, particularly for complex financial instruments like some of the mortgage securities that led to our current crisis. We must develop and rigorously manage liquidity risks. We must investigate ratings agencies and potential conflicts of interest with the people that they are rating. And transparency requirements must demand full disclosure by financial institutions to shareholders and counter parties. As we reform our regulatory system at home, we should work with international arrangements, like the Basel Committee on Banking Supervision, the International Accounting Standards Board, and the Financial Stability Forum, to address the same problems abroad.

The goal should be to ensure that financial institutions around the world are subject to similar rules of the road, both to make the system more stable and to keep our financial institutions competitive. Third, we need to streamline a framework of overlapping and competing regulatory agencies. Reshuffling bureaucracies should not be an end in itself. But the large, complex institutions that dominate the financial landscape don't fit into categories created decades ago. Different institutions compete in multiple markets. Our regulatory system should not pretend otherwise. A streamlined system will provide better oversight and be less costly for regulated institutions. Fourth, we need to regulate institutions for what they do, not what they are. Over the last few years, commercial banks and thrift institutions were subject to guidelines on subprime mortgages that did not apply to mortgage brokers and companies. Now, it makes no sense for the Fed to tighten mortgage guidelines for banks when two-thirds of subprime mortgages don't originate from banks.

This regulatory framework has failed to protect homeowners and it is now clear that it made no sense for our financial system. When it comes to protecting the American people, it should make no difference what kind of institution they are dealing with. Fifth, we must remain vigilant and crack down on trading activity that crosses the line to market manipulation. On recent days, reports have circulated that some traders may have intentionally spread rumors that Bear Stearns (NYSE:BSC) was in financial distress while making market bets against the country. The SEC should investigate and punish this kind of market manipulation and report its conclusions to Congress. Sixth, we need a process that identifies systemic risks to the financial system.

Too often we deal with threats to the financial system that weren't anticipated by regulators. That's why we should create a financial market oversight commission, which would meet regularly and provide advice to the president, Congress and regulators on the state of our financial markets and the risks that face them. These experts' views could help anticipate risks before they erupt into a crisis."

Have a nice day,

Cap'n John

Your March 2008 Obama quote is pretty good, but it doesn't really express the foresight or bravery of calling out FNMA almost 3 years ago, for "scandal," "manipulation" and "misconduct" now, does it?

Regarding your latest McCain quote (with the preceding sentence added here): "In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses. Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital."

You don't understand this quote if you think it is damning. Financial institutions have been failing in significant part because they were undercapitalized (= overleveraged, or relying too much on borrowing, and not enough on equity financing). McCain wanted to encourage them to raise more capital. Such would have prevented the bankruptcies or made them much less expensive.
Actually, the Obama quote does all of the things that you seem to think it doesn't--and the McCain quote does none of them, because his subsequent words and non-actions have spoken much louder.

Obama has laid out a comprehensive, 6 point proposal for regulatory framework for ALL the financial markets and the bogus alphabet soup derivatives that John McCain's principal economic advisor created and that John McCain supports and defends---and he did all that 6 months ago, ---and it applies perfectly to today's situation.

Your "undercapitalization" claim is meaningless. Investment banks and insurance companies are failing because they hold portfolios of exotic, and toxic, MBS's on their books at absurdly inflated valuations and they have borrowed heavily against them in order to book higher profits that didn't actually exist.

The owners of the borrowed money now want it back---and it isn't there--it's been spent on more unregulated, absurdly overvalued, MBS derivative products.

For example, the failed Bear Sterns funds overstated the value of the underlying securities that they borrowed against by a factor of FIFTEEN---but up until the time the lenders wanted their money, everything looked good.

The US taxpayer is now going to be the owner of these things, and we are apparently going to buy them at very generous valuations and then resell them to these same markets for what they are actually worth---which is to say, nothing.

McCain, and apparently you, call this "undercapitalization". The rest of the world calls it stupidity, greed, fraud and theft.

McCain thinks we should have a blue ribbon commission think about the situation....

Be sure you vote for him. Have a nice day,

Cap'n John
"Your "undercapitalization" claim is meaningless. [They] are failing because they hold portfolios of exotic, and toxic, MBS's on their books at absurdly inflated valuations and they have borrowed heavily against them in order to book higher profits that didn't actually exist." (emphasis mine)

Well then we agree. But perhaps you should look up the meaning of the terms "undercapitalized" and/or "overleveraged," since they mean the same things as "borrowed heavily against assets."

I don't think I'm voting for the bellicose dotard or the inexperience pinko.
Ahhh. Spoken like someone who may have attended business school.

So, if an entity is "undercapitalized", it is perfectly OK to pump a trillion dollars of taxpayer money into it to get it over this inconvenient and temporary little hump.

Of course, if the same entity is "hollowed out" or "fraudulent", then said taxpayer dollars might be better spent in another fashion, say, protecting said taxpayers, taking over and liquidating said entities, and prosecuting the people involved.

It appears that our Preznit and his loyal dog, John, are all in favor of helping out the poor, "undercapitalized" entities with our money, so that the Wall Street party can continue.

I wonder if the very prestigious business schools, like the Ivies, have simply forgotten to teach the difference between right and wrong to their students? Words like "undercapitalized" and "overleveraged" can be applied to so very many situations that really aren't the same at all. That's the beauty of an MBA, isn't it?---Nothing matters, except the money.

This bailout could well end up being the death knell for us if it is done wrong, which seems to be what will happen. If so, it won't really matter who you vote for. Have a nice day,

Cap'n John
I don't know on what grounds you believe that I am in favor of "helping out the poor, undercapitalized entities with our money" -- or that Obama isn't.
I thought your name was "dwpittelli"? If it is actually "Preznit" or "John" then I apologize, since I was not referring to you. At least, not intentionally.

Unless you have an MBA from an Ivy. Then I was.

Have a nice day,

Cap'n John
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