The crisis was fueled by people showing up and doing their jobs. Think about that.
The hunt for the criminals is a waste of time. People were acting aggressive, not criminal--with notable exceptions that could happen in any era. In fact, finding scapegoats will make the problem worse. It leaves the system intact and fools everybody into believing the problem is fixed.
Credit and risk has always been a problem of information. In this era we have more tools than ever to manage them. However the rules require a major rethink to get the right information circulating.
Now, if you believe it is a systems problem, what's the solution? Here's one: Transparency. Not the SEC's version of quarterly accounting quibbles. Just tell me the the end-of-day positions of every "large" participant. 20 years ago that would be too much information to process. Now it would be no problem. Lots of little agencies could process the information.
The impact would be enormous. The informational advantages of large institutions and so-called speculators would simply disappear. Nobody would be able to grow to be too big to fail, simply because they would have a harder time trading. If you are starting to feel sorry for banks having to supply this type of formerly proprietary information, just remember, they have the corresponding information on you and you don't complain.
When an investment bank packages up securities to sell and doesn't communicate material information to potential buyers (e.g. "the bonds are junk"), that's fraud. People committing fraud as part of doing their jobs are criminals.
When an S&P manager tells one of his professional credit raters not to request information on the loans underlying the instruments he's supposed to rate, what would that be?
I think you have a point even though it is a gray area. However, I think that having the government focus on Real Transparency (TM) as a prevention instead of criminal enforcement would be a far more effective systemic reform. Not that I believe it likely to be implemented anytime soon.
Suppose a hair dresser buys a house for $750k, the interest payments alone consume 50% of family income, clear title has not been established for the house, and the signed mortgage document is filed into a dumpster. Suppose hundreds of similar mortgages are piled together into a mortgage-backed security.
The criminals were rating that festering bond as AAA (highest rank) and stuffing it into pension funds. The rating fee was on the order of $500k, but the raters did not even pick a single private eye out of the phone book to verify that the house even exists, nor a CPA to see that if the paperwork exists.
The whole thing was a fraud from beginning to end. Thousands of people need to go to prison, and pay trillions in restitution.
> Just tell me the the end-of-day positions of every "large" participant.
Bernie Madoff Investments had stellar numbers. The whole point of a financial fraud is that the numbers are cooked.
I wish they had let Wall Street crash and burn when they had the chance. It's obvious that the majority of credible advisors had an inherent conflict of interest in proclaiming that systematic failure would destroy the economy irreparably. I say it would have been better to let the economy crumble and then rebuild it rather than allow this precedent to be set that investment banks can take any disk imaginable and it'll be backed by the taxpayers. If these rich fucks think they have such huge brass balls, let them take some risk, and I don't mean the risk that their bonus might only be $1 million instead of $50 million.
There was no reason to let it crash and burn, the ripples through the economy would have been painful. What should have been done is an orderly government takeover through bankruptcy courts, then fire all the executives and finally break up the giant banks into 100 smaller institutions that would then compete with each other and wouldn't have as much lobbying clout in DC.
The bailouts have indeed occurred on a regular basis since at least, say, the mid 80's (the Continental Illinois Bailout). The rather clear problem is they have been increasing in size at an alarming rate.
This is exactly what one would expect. Each bailout increases the moral hazard involved in the banking system.
that gets bigger each time after a major financial deregulation law package passes..its an uncanny correlation..uncanny as most congress people and senators seem to be okay with overlooking it as long as their political war chests are filled with lobbyists dollars..
The Garn–St. Germain Depository Institutions Act preceded the S&L crisis and both the Gramm–Leach–Bliley Act and the Commodity Futures Modernization Act preceded the subprime mortgage crisis.
Quick economics lesson. The money on Wall St doesn't belong to the guys in red braces - it is the pensions of ordinary Americans and the savings of little old ladies.
Letting Wall St crash and burn means everybody in America's pension disappears - everybody over 65 is out on the street. Everybody who saved money has lost it. Nobody accepts cash anymore, after all if you put it in the bank it might dissapear. You are back to bartering chickens.
Letting Wall St crash and burn means everybody in America's pension disappears - everybody over 65 is out on the street. Everybody who saved money has lost it.
Was that not well understood beforehand? I'm Canadian, but our government will only certify certain investments. Everything else comes with the understanding that all of your money could be gone tomorrow. As such, we plan for such occasions. It is an expectation that an event like this will happen eventually.
Here in America that certification is done by "the market" (S&P and Moody's). They gave the CDOs AAA ratings. Of course the fact that they were paid by the same companies that were submitting the CDOs didn't effect their judgement whatsoever. Except they found the emails where they said "go easy on these guys otherwise we lose their business". Oh you mean they made the ratings up? Yea. But that's legal, since the ratings came with no guarantees. They are the "free speech" like poetry. Welcome to America. Sucker.
I think nobody and spot may have been referring to pension funds as well, seeing that many pension funds did have the AAA rated CDOs in their portfolios.
We already know that this is not the case; vide: Robosigning, the pushing of no-doc loans, the very existence of NINJA loans and the collusion of CDO packagers and the ratings agencies that has been amply documented.
The fact that not only have there not been high-profile prosecutions of the executives who created the conditions under which their employees engaged in systematic fraud; but the USDOJ has been actively coercing state AG's into agreeing to a thoroughgoing amnesty that will absolve most of the major players of any criminal liability. And pray tell, why would these bankers be demanding immunity from prosecution if they were not fearful that a serious investigation into their behaviour would find them guilty of, at the very least, criminal negligence if not outright fraud?
And that, my friend, is the point where you have to accept that the system is in fact broken; and that the checks and balances have been short-circuited; that the system is out of control and that we are fiscal flotsam on the tide of events from here on out.
IANAE, but this always struck me as... odd. How would the failure of the banking system stop people who really only use it for money storage and purchasing convenience from continuing to use hard currency?
Someone correct me if I'm wrong, but bank consumers only perceive it as "money storage". In reality all deposits (after a certain point) are loans to the bank which then get pushed along/through/down/into the financial system. That's why runs on banks are so bad - the money isn't there.
The economy is an interconnected system. If the banking system failed, then no one would be able to make over-night loans. If no one can make over-night loans, then large companies can't get the necessary funds for them to keep their regular operations running. If that doesn't concern you, consider that one of the largest companies in the country is General Electric. In simple terms, a failure of the banking system means the lights won't stay on.
Andrew Ross Sorkin talks about this in "Too Big To Fail" (http://www.amazon.com/Too-Big-Fail-Washington-FinancialSyste...). When things were really bad in 2008, and people were wondering what investment bank was going to go next, there was very real fear that eventually the biggest, most stable banks such as Goldman Sachs would go under. After Goldman, the next institution wouldn't be a bank. It would be GE.
Because most pensions are tied up in the market. So if the banking system deflates and resets, it drops the market value of pensions significantly.
The market essentially is a herd animal. Everything goes up or down together, in aggregate. Since wisdom in the financial market is to diversify, ie, hold in aggregate, a well-chosen portfolio generally does about as well as the market in the long term.
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
Whether it is better to drop such people in the cold while things reset or whether it is better to keep the cushion going, I leave to another media form, as such discussions tend to be too inflammatory online.
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
This is most likely not the case. There are many ways the market can "explode 50%". One way is for each security to take a 50% haircut. Another is for the high risk securities to take a 100% haircut and the low risk to take a 0% haircut. Obviously real life lies somewhere in between.
However, it's not by any means obvious that the low risk, well diversified investors would take a particularly large haircut in a market crash. This is particularly true if they don't cash out immediately after the crash.
Never really said I did. But the fact is a lot of people still use cash, and would continue to do so (regardless of actual value) after a banking system crash. At least, I perceive it would, unless governmental authority also broke down. Then we are back to a barter economy.
Where would this cash come from? Right now, banks get it from the mints, which print it on a demand basis. And even if you use cash for most of your transactions, if you keep your money in the bank...
My best guess to this would be the government would have to temporarily (or permanently) set up a federal bank that would get the cash out, perhaps giving back a larger amount than normal that year in tax returns that have to be picked up in cash from said bank. New problems would need new solutions.
The government already insures most private pension funds.
That insurance fund would indeed have been wiped out, however, the government could have injected more money into it. This would have been the appropriate level for the bailout to take. Save the pension funds and FDIC insured savings, let all the large banks and brokerage houses go bust. The small business administration could also have provide some bridge loans for smaller companies stuck without capital.
Simplistically, lets say that pensions and putting money in the Bank are the same thing. So, you put $100 in the Bank. The Bank then uses the $100 to buy a golden chicken; now the Bank has a golden chicken, the farmer has the $100, and the Bank owes you $100. The Bank expects the golden chicken to lay golden eggs, which it can sell. But instead the golden chicken dies, and no-one wants to buy a dead chicken.
Now the Bank has $0, and owes you $100. You can no longer withdraw your money from the bank, it has "disappeared". The farmer has the $100, it still exists, but the Bank has lost it. Saying that it has "disappeared" is a way to shift the blame away from the Bank.
The joke is when you realise that the farmer isn't a farmer, he is an investment banker. And he got a $100 bonus. And he actually works for the Bank.
A few of my in-laws are working night and day, literally, to meet the legal document production requirements for a DoJ investigation of a Large Financial Institution which must remain nameless for ethical reasons. The DoJ is doing it's best to investigate Wall Street as aggressively as it can, but their electronic discovery team's annual budget is on the order of $20 million, which is peanuts when an investigation can yield tens of millions of responsive documents.
At what point do the claim "they are doing their best" and the claim "clearly they don't have the resources to do anything" collide and explode into burning rubble?
I can believe that there are many noble individuals in the Doj who are doing their best. But how can one not call a resource-less investigation a tooth-less investigation if you are talking about intentions of Doj itself?
DoJ puts in budget requests to Congress, which then grants, modifies, or denies them as it sees fit. Heads of agency have a surprisingly limited amount of budgetary autonomy; they can't just reroute millions of dollars because they think it would be sensible. Check out pages 59-62 of this document to get an idea of amount of begging required for the pissant sum of $2 million bucks: http://www.justice.gov/jmd/2011justification/pdf/fy11-usa-ju...
Congress has the power of the purse, and can keep the executive branch on a very short lease if it chooses. Meantime, subjects of an investigation can often borrow a tactic from civil litigation and bury the other side (in this case, the DoJ) with heaps of irrelevant or incidental material that will be enormously time-consuming to sort through.
Partly because of Congressional funding decisions going back for years and partly because of inefficiency, government legal investigators are badly lacking in the technical department. Sadly, this state of affairs suits some people very well.
It is hard for me to believe that if Eric Holder and/or Barack Obama were loudly saying "Wall Street is getting away because you aren't giving us funding", things would not change.
... I think the "suits some people very well" part is most to the point. It is hard not to imagine that this group includes those at the highest ranks of government.
Oh come on. Every time Obama says the word 'regulate' someone in the Republican party says it's a 'jobs killer.' [EDIT: 8 out of 10 #is wrong; ooops] 6 out of 8 of the GOP presidential candidates claim they'd slash funding for the courts, with Newt Gingrich saying he'd just ignore Supreme Court rulings completely if he disagreed with them. Sure, that's just big talk designed to get cheap news coverage, but surely you've noticed there's a bit of a political stalemate in DC right now.
Again I raise the possibility that laws were not broken. There may have been instances of fraud, but its more than likely that the mess was largely the result of of groupthink and really bad decisions made in good faith.
Oh I could certainly agree with that. I forget who said 'never ascribe to mmalice what can be adequately explained by stupidity,' but I've found it an excellent yardstick to judge politics by. As far as investigations go, I am not expecting a big showdown at the OK corral. I am just sick of this meme that it's all one big cozy and corrupt club. There are plenty of people in both the private and public sector who are dedicated to the idea of conducting financial business with both legal and ethical integrity.
Securities litigation is slow because it is complex; additionally, there are sound economic reasons why it is often better to settle for the certainty of large fines than waste time and money on uncertain litigation. It's not as if scores of corporate officers went to prison following the crash of 1929 either. Bad policy often ends up as its own punishment.
its more than likely that the mess was largely the result of of groupthink and really bad decisions made in good faith.
More like bad (but probably legal, and probably profitable) decisions made in bad faith. Anyone with half a brain could see that housing prices would not continue increasing indefinitely. But all the incentives in the industry were to make loans that were likely to head into default.
I think a big part of the problem is probably talent.
A hot shot kid coming out of a C.S./engineering program wants to work at Google or Facebook or a startup, not the federal government. A kid coming out of an econ/math/finance program wants to work for a "big dog" at an investment bank or a PE fund, not some wimpy bureaucrat.
Reading further, it may have more to do with corruption and/or apathy than inability. I doubt they couldn’t find first base in Fenway park, they simply didn’t want to go looking for trouble.
This ignores the non-financial side of employment decisions. I, for one, would hate to be an investment banker right now, because pretty much everyone I care about would lose nearly all their respect for me. This effect seems to be weaker than money, but it does exist.
I was actually primarily referring to the non-financial side of the employment decision which I would argue is huge. That's why I said "they want to work for big dogs rather than wimpy bureaucrats" instead of pointing out that the SEC could never pay them as well as BMO or GS.
Setting aside whether you think this to be true the perception among undergrads headed into finance is that investment banks offer work environments which are high intensity, committed to excellence, meritocratic and so on. To them the idea of being involved in some sort of paper shuffling bureaucracy is really repulsive.
The truth is there are still lots of people who don't hear that their buddy got a job at GS and immediately think they are some sort of a scumbag.
I haven't responded to the comment below about the CIA but I think that rather than proving the point that its all about the SEC being underfunded it actually shows how culture/ perceived importance of the work/ mission/ impressing your friends etc etc can totally outweigh an organizations ability to pay when it comes to attracting talent (Wimpy bureaucrat certainly isn't the first thing that comes to my mind when someone says the CIA or the NSA). The CIA's entry level economic analyst positions top out at 90k which is where most entry level IB positions start, yet the CIA still manages to attract some of the United States' best and brightest econ/math/finance graduates.
Not to ponder into conspiracy theories, but here is another thought. Markopolos wasn't the only one who figured this out. But investing in a pyramid scheme can still be brilliant fun if you get out early enough and enough new victims keep joining.
What world would you rather live in? One in which a not so smart but rather well paid institutional investor puts money (your pension) in a scheme that apparently is a blatant fraught for anybody who cares to actually look at the numbers for more than a sec. Or one in which the rather smart but morally flexible investor saw through it and took a well educated guess how long it would hold up and be profitable?
There are plenty of "hot shot" CS and engineering kids working at the NSA, CIA and a bunch of other agencies, also at all the defense contractors. It's just a matter of funding. Funding for certain financial cops has been cut on purpose.
No one ever thinks wimpy bureaucrat when they hear CIA or NSA. They think security clearance, report to the president etc. Thats definitely part of the reason why the CIA can pay relatively low starting salaries for economic and financial analysts (I checked) and still compete with the banks for high quality talent.
The short of it is that many of the people that work for the SEC and the Justice Department are themselves financial industry insiders who have no interest in pursuing their friends or ruining their professional futures.
"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."
As I heard it, that was the sarcastic end to a 'conversation' in which Taibbi persisted in ignoring any information that did not fit that narrative. The DoJ has put a string of financial industry people in jail for fraud but Taibbi never, ever tells his readers about those cases. TBW was one of the largest mortgage brokers in the country and the almost entire C-suite went to jail; the chairman got 30 years. Taibbi's sole comment on this was that he was 'the exception that proves the rule.' Complete bullshit. Matt Taibbi's schtick is to endlessly repeat that the system is broken that nobody cares so he can reap pageviews from the ignorant. You absolutely cannot rely on this guy for objective reporting.
The hunt for the criminals is a waste of time. People were acting aggressive, not criminal--with notable exceptions that could happen in any era. In fact, finding scapegoats will make the problem worse. It leaves the system intact and fools everybody into believing the problem is fixed.
Credit and risk has always been a problem of information. In this era we have more tools than ever to manage them. However the rules require a major rethink to get the right information circulating.
Now, if you believe it is a systems problem, what's the solution? Here's one: Transparency. Not the SEC's version of quarterly accounting quibbles. Just tell me the the end-of-day positions of every "large" participant. 20 years ago that would be too much information to process. Now it would be no problem. Lots of little agencies could process the information.
The impact would be enormous. The informational advantages of large institutions and so-called speculators would simply disappear. Nobody would be able to grow to be too big to fail, simply because they would have a harder time trading. If you are starting to feel sorry for banks having to supply this type of formerly proprietary information, just remember, they have the corresponding information on you and you don't complain.