I never wanted to write Bailout Nation.
That only came about after Bear Stearns collapsed. McGraw Hill approached Bill Fleckenstein to do a follow up to his successful Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, about the end of Bear.
Fleck turned them down. When the publisher asked him who else was covering this subject, he said “That’s easy, Ritholtz has been all over this story.” (so I was told).
I turned McGraw Hill down — repeatedly — but they cajoled and flattered and wheedled and promised, and eventually I relented.
I approached the subject with a blank slate, pragmatically, with no agenda. It was a problem solving exercise, and I began by looking for and at the data that led me where ever it would. Following the money is always a good tactical approach for anyone researching these sorts of events.
The data led me to numerous conclusions: I blamed Republicans, I blamed Democrats, I blamed the Federal Reserve, Congress, the ratings agencies, mortgage originators and lending banks, the biggest Wall Street firms, the SEC. I blamed US borrowers and home buyers, the RE agents, the mortgage brokers, and appraiser. I blamed the other end of the sausage factory, the collateralized debt obligation (CDO) underwriters, managers and the funds that bought them. I blamed Greenspan & Gramm, Bush & Clinton, Paulson & Bernanke & Rubin & Summers. Even mutual funds, compensation consultants and crony corporate board members come in for criticism. (This is only a partial list).
Which leads to today’s exercise in willful ignorance.
The 4 GOP members of the FCIC have a document which purports to have questions and answers on the causes of the financial crisis have abandoned their charge. They released a silly analysis that could have been written by wingnut think tanks like the AEI or Cato or others BEFORE the crisis even occurred (and indeed, there are many examples of this findable via the wayback machines of the intertubes).
The Gang-o-four absolves Wall Street and the banks, blames the government — for everything — and ignores the data that conclusively demonstrate otherwise.
To these Reality Challenged people, I pose the following questions:
1. From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?
2. How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?
3. The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?
4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?
5. For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?
6. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?
7. These firms abdicated traditional lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?
8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders. How did this cause a worldwide boom and bust — even bigger than that in the US ?
9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?
10. Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?
I can go on and on — but the concept is rather simple: If you cannot answer these questions, or adequately explain these facts, then how on earth can you explain the credit crisis?