FrontLine on the financial crisis.

[ChiliPepr]

No going after your post specifically, just that it is the last one...

No problem at all...

The crime is the disclosure they are required to give when the offer a security. If they were saying that the loans were properly vetted and the borrowers were good credit risks, then they committed fraud if they put in liar loans and some of the others out there...

They never say something like that... They would say "the average FICO score of all the people who took out the loans is xxx. The Average debt/income is yyy, the average loan to value is zzz. All info is as given by the loan application."

Did people turn a blind eye, yup, but if you go after the banks because they "should have known the loans contained false info", they have to go after people that signed a loan application with false info.

and you would be able to repo the car and sell it again

You should be able to "repo" a house and sell it again, but that is not as easy as a car.

It was when the mortgage companies started to loan $100s of thousands of dollars to someone who made $30K or $40K when the problems started... then they started to not even worry if the person had a job...

I agree, no doc loans were a huge problem.

So, IMO, there were people who committed fraud... and the buyers of the securities had to rely on the underwriter that they were telling the truth... there is no way they can do due dilligence on every security or every loan...

Agree again.

Personally, I think ALL home loans should be non-recourse. Any loan made could be "paid in full" by returning the keys. The biggest issue with that would be a rise in interest rates and a requirement for bigger down payments. Good or bad it would be the return of 20% down and full doc loans.

 

[harley]

+1

I agree that any fundamental crime should be charged, like transferring customer money to cover company debts... But how can you justify prosecuting someone for investing in a security that did not do as well as they thought?

You can say that they "should have known", but no one invests in a security if they think it will decrease in value, unless they are selling it to someone else for more money and that person thinks it will increase...

Don't forget... for all of these mortgage backed securities, if everyone continued to pay their mortgage on time the securities would not have decreased in value. There is a lot of blame to go around, but I do not think a lot of it is criminal.

Well, there's a disorderly conduct charge for general bad behavior, and a reckless driving charge for driving while stupid, so maybe there could be an investing while greedy charge for people who's morality has become unhitched from awareness of what they are doing with Other People's Money. Laws are written to be misused. I think if they wanted to charge someone they could find a charge. RICO, financial terrorism, soemthing like that.

 

[Texas Proud]

They never say something like that... They would say "the average FICO score of all the people who took out the loans is xxx. The Average debt/income is yyy, the average loan to value is zzz. All info is as given by the loan application."

Actually there probably were some very specific language in there on what the minimum could be to pass. IOW, each loan has to have 'blah, blah, blah'... this is so the trustee who has to look at each and every loan (or whoever did it for these) can say yes or no, it can be included in the trust.... so, if they said that all loans had to have a loan to income ratio of X and they did not verify that the person even had income, they did not tell the truth...

Most of the ones I dealt with had a buyback clause (which I have seen is being litigated by some) where if the loan did not meet the minimum language the issuer had to buy the loan back from the trust.... this is kind of hard to do from the ones who went out of business....

The paperwork for a CDO is measured in feet, so there is a lot in there that someone can attack even with all the boilerplates....

 

[clifp]

Consistent with Texas Proud's post above. There's more going on than I realized, that's encouraging. SEC Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis. But it may be more for appearances when all is said and done. And OTOH, in the Frontline episode, some of the fines & penalties before the bubble burst at least sounded substantial (millions & billions) but were in fact trivial compared to the returns they generated. Leads to firms viewing fines & penalties just as a nuisance cost of doing business...

It is is interesting I remember hearing about most of the cases individually, but when you put them on one web page it does appear better. Still most of the fines are at the corporate level and barring somebody from being an officer of a corporation and/or working in the financial service industry isn't nearly the same thing as being in tossed jail.

A recent 60 Minutes piece talked about one of the problems with prosecuting folks is that in many cases during the crisis the SEC and/or Fed were aware of the problems at the time and took no actions. It makes a pretty good defense to call the SEC auditor who was sitting at Bears Stearns and ask him were you aware of such and such transaction.

 

[MBAustin]

Looks fascinating. Thanks for sharing!

 

[Bikerdude]

A recent 60 Minutes piece talked about one of the problems with prosecuting folks is that in many cases during the crisis the SEC and/or Fed were aware of the problems at the time and took no actions. It makes a pretty good defense to call the SEC auditor who was sitting at Bears Stearns and ask him were you aware of such and such transaction.

It was interesting that they let Lehman fail only to find out that AIG had written trillions in swaps on a (long shot) Lehman default which, in the end, cost more than saving Lehman would have.

 

[sengsational]

Sorry about my earlier rant... The point I was trying to make was that as interesting as the downstream events were, it's probably not the place to look for remedies. These guys used shady tricks to paper over the problem they got themselves into, but how they got into that situation is more interesting to me. The disturbance occurred when our federal lawmakers decided to incent lenders to lend money to people who, under the current law, didn't make the cut. The bankers just did, with excessive zeal, what they were incented to do, and the old rules about defaulting went out the window. Wall Street got left with the hot potato, and its easy to deamonize them, but I think our federal lawmakers are the real source of the problem.

 

[pfleming]

Just before the Frontline episode The American Experience Series played a documentary on the Crash of '29. I only saw the last 20 min which featured some of the reforms and how many of the principals lived out thier lives. It was an interesing bookend to the Frontline episode which started with the repeal of many of the reforms from the '30's crisis.

The Savings and Loan crash was precipitated by changing the rules on what an S&L could do.

The breakdown of the financial industry was precipitated by reducing or eliminating the restrictions on banks selling investments and insurance.

The government has a role to play and it is not "get out of the way of business". Can you imagine if congress had rolled back the margin rates back to the 1920s when it was 10 to 1? I'm sure there were a ton of margin calls in 2008 at 50% margin. Where would we be if the forced sales due to margin calls was 5 times the amount? Every time I hear a politician say government has to get out of the way of business through deregulation I think S&L implosion.

 

[Midpack]

Though well intended, it's hard to excuse CRA (Community Reinvestment Act) and the like as a primary cause. And again, CDOs and CDSs themselves served a useful purpose as originally conceived and applied. Ultimately Wall Streets "contribution" was to leverage and therefore greatly magnify the damage when the bubble burst. CRA type policies caused a problem, Wall St increased the damage by orders of magnitude (and got rich doing it).

By making their money on upfront fees and not holding the debt when defaults and devaluation came due, it's not hard to see why they weren't as concerned as we'd like to think. As others have said, if housing prices hadn't collapsed who knows how much longer they could have extended the bubble.

 

[MichaelB]

Thanks to all for a lively discussion.

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