The Ongoing Impact of the Housing Sector



John Mauldin is away this week, and so I contributed to his Outside The Box series in a post called "The Ongoing Impact of the Housing Sector."

The fun part of writing that was assigning blame for all of the problems in the credit market. As it turns out, only a few people are actually responsible:

    * Federal Reserve (FOMC)
    * Borrowers
    * Mortgage brokers
    * Appraisers
    * Federal Government
    * Fannie Mae
    * Lending banks
    * Wall Street firms
    * CDO Managers
    * Credit agencies
    * Hedge funds
    * Institutional Investors (pensions, insurance firms, banks, etc.)
    * And back to regulatory role of the Federal Reserve

Other than those few groups, I don’t know who else desrves the blame . . .  ;  )

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  1. GerryL commented on Aug 28

    I saw Barbara Corcoran who used to run a realty company and she was blaming the media. It seems there wouldnt be a real estate problem if the media wasnt reporting it.

  2. Owner Earnings commented on Aug 28

    How about the media that applauded all of these entities?

  3. Graffiti Grammarian commented on Aug 28

    Yes, well said, Barry. But I bet you would agree that there are different degrees of blame.

    If I’m a seamstress and one day you come along and tell me you’ll buy all the dresses I can sew, even if they have holes in the fabric and broken zippers, well who’s more respsonsible for the poor workmanship that results?

    I would argue that YOU should get more of the blame than me.

    I, the seamstress, have two things going for me — 1) an honest incentive to make crappy dresses and 2) NO DISINCENTIVE to make them. If people walk around in crappy clothes, it causes no great harm that I can see.

    YOU on the other hand have a larger role in the economy. You do more than manufacture — you buy and sell with parties across the financial landscape, and you are in a position to see the widespread effects that shoddy goods can create.

    You are, in fact, the first buyer of these goods, and you buy vast amounts of them and then re-package them for sale. No one knows as much about these products as you do.

    I think that means you shoulder more of the responsibility for them having been created in the first place.

    You, in this example, are the Wall Street underwriters, of course.

    In a perfect world, all those other parties you list would have spoken up and done something to prevent all these torn, ugly dresses from having been made.

    But that’s a re-active response. Any one of them could have *stopped* this.

    There was, however, only one party that could have *created* this situation – the bond underwriters.

  4. KP commented on Aug 28

    I don’t see Osama Bin Laden or any of the other evil doers on that list.

  5. sanjosie commented on Aug 28

    Well, the Asset Backed Commercial Paper (ABCP) toxic waste has managed to infect one of my investments. I have free shares (recovered my initial investment plus a couple of bags of profit some time ago). HSBC is on my poop list. The reasons lie at the end of the link below. Sheesh, banker scum!

  6. Richard Hanley commented on Aug 28

    The insurance industry has a hard time pricing liability (‘casualty’) business over the years/cycles. Losses come in over a long period and there is a tendency to let down on discipline and to be overly optimistic on interest income on the cash generated in the liability business. Executives collect their bonuses while it appears that everything is going just peachy. When losses come in high and the company over and over must boost loss reserves, none of the bonuses are pulled back to the insurance company.

    A modern, sort of similar sounding dynamic but on steroids, is all the tools (e.g. options) that allow execs to get rich before the complete reality of a company’s real performance is actually known. We have loosened the tie between company and exec. This is a moral hazard. It promotes short-term thinking/decisions.

  7. David Fiske commented on Aug 28

    Do you really blame the borrowers? Do you really? That’s blaming the victim, IMHO. This crisis was made possible by the investment professionals and (bad) risk managers at the banks that bought the debts from the mortgage originators.


    BR: In the instances where people recklessly borrowed more than they could reasonably pay back — yes, I do.

    I know how much I can afford to pay. So do you.

  8. Whammer commented on Aug 28

    Richard Hanley has it exactly right. Many individuals have gotten fabulously wealthy through this, and undermined the economy as a result. That is no way to run a railroad.

    Wunsacon had a comment the other day talking about “Public Risk, Private Profits”. Again, spot on.

    I blame the regulators in this case. And in many/all of the previous cases (S&L crisis ring any bells?)

    The perverse genius of the shift to the right in this country over the last 25 years is that the idea of regulatory, and other types of failure relating to the functions of an effective government, doesn’t seem to hit people’s radar very hard.

    Mine collapse? Surely couldn’t have anything to do with unsound mining practices. Bridge falls down in MN? Who knew? Katrina? Go figure. Global warming? It is either a hoax or there is nothing we can do about it anyway.

    What is happening right now in subprime is completely consistent with the idea that government can’t do anything effective to stop or intervene in matters that we used to believe were a legitimate function of government.

    We need to start paying attention again. As P.J. O’Rourke said, roughly, “Republicans run on a platform that says government is ineffective, then they get elected and prove it.”

  9. johntron commented on Aug 28

    haha, don’t forget to add HGTV for making everyone think that flipping a house was riskless profit.

    on second thought, maybe HGTV was more a symptom….the manifestation of the human desire for easy money.

    I want those retro Smith Barney commercials back with John houseman. Make money the old-fashioned way, earn it!

  10. LAWMAN commented on Aug 28

    The borrowers are victims? Puh-leeze. People got greedy and tried living well beyond their means. Now its time to pay the price.

  11. Ralph commented on Aug 28

    It takes two parties to make a liar loan work. The one who provides the means to lie and the liar.

  12. Braden commented on Aug 28

    Forgive my ignorance, and thanks in advance to anyone who helps me straighten this out.

    Who is responsible for the AAA ratings that were attributed to this paper? I always thought that by rating a security AAA, the firm ascribing the ‘seal of confidence’ was responsible for backing it.

  13. Eclectic commented on Aug 28

    Let’s be honest… the upcoming Fed minutes (in about 6 minutes) will be perfect discourse on this topic… not much differently than if they actually decided to enter their comments on TBP.

    I can’t remember an event of greater potential volatility regarding these minutes.

    I would not be surprised with a move of 1,500 points, or more, up or down on the Dow between the minutes and the close.

  14. wally commented on Aug 28

    Well, look, don’t blame me. I’m innocent in this whole deal. I didn’t enable anybody or dupe anybody and I didn’t do anything stupid myself. Just a bystander, I am.
    Lavábo inter innocéntes manus meas…

  15. michael schumacher commented on Aug 28

    If we get another V bottom…….I quit-LOL

    well not really but hell……I feel like it


  16. The Financial Philosopher commented on Aug 28

    You could have summed up the entire article in just four words: Greed is to blame…

  17. Graffiti Grammarian commented on Aug 28

    Hear, hear, to Bradon! Who affixes the triple-A rating, indeed.

    Barry, you left out the rating agencies on your list of shame!!!

    But since the agencies are just the paid employees of the financial houses, again, I say, it was the Wall Street underwriters who should get the biggest piece of the blame pie.

  18. Braden commented on Aug 28

    I’m not sure I agree with the wide dispersal of blame, here. It makes it too easy to carry the load. I want BLOOD, goddamnit!
    If someone gets taken to task, other responsible parties will get named in subsequent lawsuits.
    I repeat that nobody should be able to ascribe a AAA rating to anything without being required to support it with money.

  19. rex commented on Aug 28

    No blame for the MSM? Or David Lereah?

  20. zao commented on Aug 28

    OR Mr. Greenspan for encouraging credit scoring, subprime loans in particular and risk taking in general?

  21. michael schumacher commented on Aug 28

    nothing wrong with taking risk…it was the premise that these things were repackaged and the risk was somehow offloaded to the next shill, I mean entity, is what has the most deceptive factor to it.

    It was a chain link and up until the last link there was complicity, only when one of the last links asked for actual collateral was it then exposed. The first link in the chain having already booked the profit but keeping up the appearance of it continuing for time to come (and they still give off that perception even now) that it is really all “contained”.


  22. Strasser commented on Aug 28


    Oops, I think you forgot one: Pres Bush. I mean everything else is his fault… perhaps we won’t have to wait too long before that one hits the headlines. ;)

  23. tt commented on Aug 28

    all Bush’s fault

  24. Camille commented on Aug 28


    Bush didn’t veto any of the budgets produced by the Republican-controlled congress, which added 4 trillion dollars to the national debt. That debt went to wars and tax breaks for the wealthy, neither of which will add to future productivity and our ability to pay off that debt in the future. Past leaders are to blame too…Reagan/Bush ran up our debt/GDP ratio, and Clinton set us up for future bubbles (while the debt/GDP ratio dropped under his presidency). Presidents have the power to veto and so do have impact on budgets and ultimately financial markets.

  25. Old Ari commented on Aug 28

    It’s the bloggers fault obviously, if they would just stop giving out the facts,and play the game, all would have been well in a couple of years or so.

  26. Strasser commented on Aug 28


    You won’t get any rebuttal from this end on “Bush didn’t veto any of the budgets produced by the Republican-controlled congress, which added 4 trillion dollars to the national debt… while Clinton set us up for future bubbles”.

  27. ari5000 commented on Aug 28

    If anyone working for Bush is smart — they’ll resign like Gonzales.

    I’m waiting for Cheney to wiggle out with some kind of medical condition…

    Oh… wow — is this economy f–ked or what?

    It’s just laughable that so many people were taking out 2/28 mortgages…. The thing is – I bet a lot of people were conned into thinking the reset wouldn’t be that bad. I think the borrowers should pay the price but no doubt a lot of salespeople at CFC and other banks lied their asses off and stuck them with bad loans.

    Not that any of this matters.

    Ultimately the question is — how do you profit from it?

    SRS, QIDs, cash.

    Somehow I don’t see gold working. Is there an ultra inverse china ETF? I want a piece of that. China will turn back 50 years when Americans are living off of Alpo.

  28. Eclectic commented on Aug 28

    Here’s your news flash for the Sep meeting:

    Nothing worse… no worse liquidity crisis… no worse employment… no worse macro other than equity markets………

    NO CUT!

    Put that in your pipe and smoke it.


  29. VJ commented on Aug 28


    Clinton set us up for future bubbles

    How dare he recklessly turn federal budget deficits into surpluses and begin to pay down the Reagan/Poppy Bush federal debt. The temerity of actually lifting millions of Americans out of Poverty and raising the Standard of Living of the overwhelming majority of Americans.

    Absolutely shocking behavior.

  30. Lawrence Tureaud commented on Aug 28

    You forgot Bill Clinton’s penis. We always blame Bll Clinton’s penis.

  31. toady commented on Aug 28

    I think, by and large, borrowers are victims. I think the average borrow’s understanding of what they were getting into was worse than poor. These are the same folks that fall for undercoat sprays on their Fords, payday loans, and infomercial impulse purchases. They were sold into the mess, and they’ll pay the most since many will tap all other sources of income to stay in their unafordable houses.

  32. Eclectic commented on Aug 29

    Bernanke is scheduled to speak on housing and monetary policy this Friday (no Q&A I believe):

    He’s already spent a great deal of time speaking at other conferences or giving congressional testimony on the subject of housing.

    Here’s his most forceful discussion to date (to my mind) regarding matters he appears to be quite concerned about. My guess is that this Friday he’s likely to review some of the elements of this speech he gave in March 2007:

    Why would he review these elements?

    1 – The matter of leveraged, derivatives-hedged mortgage investment portfolios is THE primary reason for the recent liquidity crisis, so far limited to non-GSE private mortgage vendors. However, the size of these portfolios held by the GSEs likely dwarfs those of all non-GSEs combined.

    2 – There have been calls for the GSEs to be allowed to write more mortgages than are currently permitted according to their capital structure. To date OFHEO has indicated they would not permit this and according to Bernanke’s own remarks in the linked speech it’s hard to imagine he would argue for them to be permitted to do this now.

    3 – Quoting from his speech linked above, he outlined the Federal Reserve’s 3 recommendations regarding the effective regulation of the GSEs:

    “First, the GSE regulator should have the broad authority necessary to set and adjust GSE capital requirements in line with the risks posed by the GSEs. Second, the GSEs should be subject to a clear and credible receivership process, a process that would establish that both shareholders and debt holders of a failed GSE would suffer financial losses. Third, the GSEs’ portfolios should be anchored firmly to a well-understood public purpose approved by the Congress.” End quote.

    4 – The occurrence of item (1) above likely influences, at minimum, a marginal loss of FOMC capacity to effect monetary policy. Thus, why would he now argue to countermand OFHEO’s ruling?

    I suspect he may feel it necessary to address the Fed’s recent actions regarding the discount rate, since this now represents a change in policy, although I don’t expect he’d show the FOMC’s hand regarding the Sep meeting on the federal funds rate. Because, first, I doubt if even he’s sure of what that action might be… and I doubt he’d attempt at this early date to speak for the other voting members. Second, as long as there is nothing of a continuing crisis until Friday (no decline in stocks of 10% or greater, no precipitous continuation of declining treasury yields, no additional credit crisis that threatens good federal funds liquidity), I doubt we’ll learn much from down in the Hole about the Sep meeting intentions.

    My best guess for Sep?…

    …If no crisis of any significance, then no changes to Fed Funds.

  33. VJ commented on Aug 29

    Looks like that September 18th interest rate cut that was already “baked” into the market turned out to be a soufflé that collapsed on Tuesday.

  34. SPECTRE of Deflation commented on Aug 30

    Barry, let me add congressional oversight at the very top. Where were Chucky and Chrissy when all this was being done?

    `Subprime Chuck’ Schumer Plays Fool in Crisis

    By Jonathan Weil

    Aug. 29 (Bloomberg) — It’s bad enough when a company’s outside auditor is a pushover for management. Equally galling would be for the auditor to try telling management how to run the company. Yet that’s what U.S. Senator Charles Schumer has asked the Big Four accounting firms to do at the subprime lenders they audit, pronto.

    “One of the most promising solutions to the anticipated foreclosure crisis is the voluntary modification by lenders of existing unsustainable subprime loans,” Schumer, a New York Democrat, said in an Aug. 23 letter to the firms’ top executives.

    The chairman of Congress’s Joint Economic Committee then called on the firms to “assist this country’s mortgage crisis” and “urge your clients to do their part to keep our housing markets afloat, by modifying subprime loans that are at risk of default.”

    In so doing, Subprime Chuck made a blithering fool of himself, though he probably doesn’t realize why. So far, none of the four firms — PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, and KPMG — has responded publicly to his plea for lobbying help.

    You see, management’s job is to manage, and the auditor’s job is to audit. There’s also the decades-old requirement under U.S. securities laws that accounting firms must be independent of the companies they audit, both in appearance and in fact.

    Under the Securities and Exchange Commission’s rules, that means the auditors, among other things, “must act in an unbiased and objective manner.” Lobbying audit clients to change their business practices is the mark of a biased auditor, not a disinterested one.

    Apple Pie

    To see why, let’s take the senator’s request to its logical extreme.

    First, we have a subprime lender about to send default notices to thousands of people who can’t afford to pay their mortgages now that the introductory teaser rates have expired. Then, hark! A partner from the company’s “independent” auditing firm swoops in, brandishing an apple pie, and implores: “Give the poor folks a break. Chuck wants it that way.”

    Bowing to the auditor’s pleas for patriotism, the lender softens up. “Of course,” its chief executive says. “We shall extend the teaser rates indefinitely, never mind our investors. That should make you and Chuck happy.” And it does.

    Here’s where it gets tricky. Months later, the company’s top brass comes back: “So, dear auditor, what are you going to do for us? Perhaps we could revisit the issue of those loan losses on our balance sheet that you now call `absurdly low.’ We think they should stay at zero.”

    Time to Resign

    Whoops. The ashen-faced accountant suddenly realizes he crossed the line the moment he flashed that apple pie. Unable to opine objectively on the client’s financial statements, because management has done him and the senator a huge favor, his firm must resign.

    What’s more, his conscience belatedly tells him, the firm must withdraw its latest audit-opinion letter, because it ceased being independent when it began lobbying the client at Schumer’s behest. (A lot of good those campaign checks did for us!)

    Then there’s the problem of the clauses in the client’s debt agreements that require the company to have audited financial statements. Antsy bondholders, already worried about the company’s bleak prospects, rush to declare the company in default on its gazillions of dollars of debt.

    Look Back in Dread

    Looking back, the accounting firm has done more than its share to, as Schumer put it, “assist this country’s mortgage crisis.” That’s because the lender is headed for Chapter 11, and its creditors are pressing to foreclose as soon as possible on all those cash-strapped borrowers who thought they miraculously had caught a break. Nice going, senator.

    There’s a long history of politicians meddling in accounting matters. Only a few years ago, even the SEC’s current chairman, Christopher Cox, resorted occasionally to accounting demagoguery. This was back when he was a Republican congressman from California, fighting what proved to be a losing battle against the Financial Accounting Standards Board’s plans to start treating employee stock-option pay as an accounting expense, rather than a zero cost.

    “What we are about to do at FASB is give corporate managers, the new Jeff Skillings, an opportunity to manipulate earnings,” Cox said on the House floor in July 2004, in a fit of doublespeak that stock-option billionaires surely adored. Cox’s old House Web site once said his efforts were “a key reason” for the FASB’s initial 1994 decision “to abandon a proposed accounting change that would have hindered small and start-up companies’ ability to offer stock options as a way of attracting and retaining talented employees.”

    Chuck’s Way

    In that same tradition of mistaking the accounting profession for the Chamber of Commerce, Schumer finished his letter to the Big Four chiefs by saying: “The auditing firms of this country have played a critical role in keeping our economy strong, and I am confident you will continue to do so.”

    Doing it the Schumer way, though, only would put our economy at further risk. Auditors aren’t supposed to act as cheerleaders for the economy. Their job is to ensure that companies tell the truth about how well or poorly they are performing, so that investors and the broader economy can operate efficiently.

    Butt out, senator.

  35. SPECTRE of Deflation commented on Aug 30

    From Marketwatch Blog:

    August 29, 2007
    Creative Mortgages: Did Bernanke Really Say That?
    In his letter to Sen. Charles Schumer, Fed Chief Ben Bernanke said:

    “It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance. Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms. They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example…”

    Hold on: Isn’t that what we’re trying to get away from? Didn’t we already have a “broad range of mortgage products” that helped create this mortgage mess? Didn’t we just learn that if you can’t afford a standard mortgage you shouldn’t get one? And should the Fed really be encouraging people who can’t afford homes to find a “broad range of mortgage products…designed to avoid or mitigate the risk of payment shock”? (What, with neon signs alerting in investors rates may rise?) Don’t we already have loans with “variable maturities?” (Uh,huh.) And what’s with this “shared appreciation” provision? What — share appreciation with the bank? So the bank now also becomes landholder or part landlord? If that’s the case, why own? (I can only imagine how that will eventually end.)

    I understand the need to help those stuck in mortgages they were sold by predators. But if anything, the mortgage and housing industries should be encouraging a more realistic approach to buying a home, especially with prices as elevateds as they are now: Either you can afford to buy using a standard mortgage — with or without PMI, depending on your circumstances — or you can’t.

    And if you can’t now, just wait: If the Fed cuts the Fed Funds rate enough — and prices continue to fall despite falling rates — standard mortgages may be what the doctor (not as in, Bernanke) ordered for everybody. One for all, all for one.

  36. Eclectic commented on Aug 30

    Now Spectre… You’re making a spectacle of yourself. You’re tryin’ to beat a fly to death with a baseball bat.

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