FrontLine on the financial crisis.

[clifp]

Last night Frontline had very good documentary on the financial crisis.
The first two hours are here. The final two hours are coming to PBS May 1.

I thought the first hour on the history of credit default swaps was particularly good. The JP Morgan bankers who started the CDS back in 1994 were interviewed and very articulate. The also have in depth interviews on the web site.

I have read many books and watch most documentaries on the crisis and I'd say this is one of the best ones, even if at this point it is not real news.

 

[DoingHomework]

Last night Frontline had very good documentary on the financial crisis.
The first two hours are here. The final two hours are coming to PBS May 1.

Yes! I have it recorded and will be watching it when I get a chance. Don't tell me how it ends please!

 

[Bikerdude]

And Congress has Roger Clemens on trial.

 

[M Paquette]

And Congress has Roger Clemens on trial.

It's an election year. Investigating the nice folks funding all those SuperPACs would be a career limiting move.

 

[travelover]

It's an election year. Investigating the nice folks funding all those SuperPACs would be a career limiting move.

And every other year is an election year for congress.

 

[Koogie]

I really enjoyed it as well. I am by no means a feral, "anarcho" Occupy Wall Streeter but it certainly is disgusting that no one has ever been prosecuted for this mess. Wall Street skated and Main Street got screwed isn't even a truism. Its just plain true.

And it was very telling that certain banks knew what they were getting into and certain didn't. The one thing I think I have learned is that when people start talking in absolutes about a financial topic, you know you are in bubble territory (ie: "American house prices can only rise forever" "This Internet economy is completely replacing bricks and mortar")

 

[Midpack]

I DVRd and watched it too, also thought it was one of the best summaries I've seen. Really looking forward to the 2 hour parts 3&4 next week.

It's interesting to see how this played out, the sequence of events is important, and part 1 layed that out beautifully. CDOs aren't new at all, mortgage backed securities have been around for decades, and until subprime they were considered a bulletproof investment. CDSs have also been around forever, basis of commodities, and they were also a good idea as first conceived an applied by JPMC to corporate debt, though it's interesting they seem to have invented them but stayed away from CDSs on CDOs made up of residential loans with increasing toxic loan components. It's only when CDOs containing large percentages of subprime and CDSs were applied to them, and then leveraged, that the (disaster) die was cast. And while the ratings agencies probably should have known better, it's somewhat understandable they could give high ratings to inferior assets because they had the CDS insurance to protect against losses. Most everyone, including the public, seemed to think real estate appreciation could only go up, otherwise how could so many people get so far over their heads? I finally understand traunches now I think. I still can't grasp synthetic CDOs, and that's key I gather. Ultimately too much credit, too much leverage, inadequate capital requirements.

I am not excusing anyone, but for those who want people prosecuted, what exactly would be the fundamental charges? Most of the clear criminal acts were not fundamental. Some awfully smart, but greedy, people got fooled. It's not "fair" that Wall St got bailed out and Main St didn't, but it's possible life as we know it would have ended for generations if the financial system was left to creative destruction - we will probably never know for sure.

I am more worried that nothing has really changed. We won't get fooled in exactly the same way, but who knows what awful bubble will develop that very few people will see or understand before the bust.

Critiques are welcome, I am sure I'll never fully grasp what happened, still learning.

 

[clifp]

One of the nice things about the documentary is the very extensive website the team developed working with Duke University.

I have watched several hour long interveiws on the site. Wells Fargo's outspoken CEO Richard Kovacevich makes several important points which haven't really been made by any of the histories of read of the crisis. First it isn't all of Wall St or all banks, that brought done, it is about 20 large financial service institutions out of 6,000 banks that did the lion share of the harm through stupidity, incompetence and unhealthy amount of greed.
My list (and I suspect Richard's wouldn't be that differerent) is

Almost of the investment banks: Goldman Sach, Merrill Lynch, Lehman Brothers, Bear Sterns, and Morgans Stanley (only GS, and Morgan Stanley survive)
The three rating agency Moody's, S&P, and Fitch
Fannie and Freddie
The subprime lenders: Country Wide, Washington Mutual, Wachovia, CitiGroup and a couple others
The investors: Namely German industrial banks
The regulators: The SEC, the Office of Thrift Supervision, Office of Federal Housing Enterprise Oversight(regulator for Fannie and Freddie) and the regulators of the Federal Reserve.

The other point (touched on in the documentary) Richard makes and is that Paulson (with the cooperation of Geitner and Bernake ) made a huge policy mistake by forcing all of the banks to TARP funds. Paulson wanted all banks to take TARP funds so that market wouldn't see that BofA or CitiGroup was taking a TARP funds and JP Morgan and Wells weren't and conclude that Citi and BofA were in trouble. What happened is that when the market saw that AAA rated Wells Fargo is getting a bailout the conclusion was that situation was truly awful. Everybody knew that BofA and Citigroup were in deep trouble.

I think the data supports Richard's view the Dow drop 40% from the time of the TARP announcement but financial shares went down 80%. Wells Fargo dropped from $33 down to $7.80. As Wells shareholder at the time I remember thinking both Wells is crazy cheap, and also "Clif you are out of you mind, you really don't have f*ing clue as to what is Well's balance sheet if the Government is bailing them out maybe they are another Country Wide".

As far as punishment, it is very frustrating that none of the folks involved with potential criminal activities, (like Lehman Brothers cooking the books by transferring $50 billion between the UK and US, recently reported on 60 Minutes) have been prosecuted. On the other hand if you look at the list of guilty institutions the shareholders got killed for almost all of the firms (and most employes and all senior manager had large chunk of their wealth). Even the Office of Federal Housing Enterprise Oversight was shut down. So while its true that many Wall St folks still ended up as multi millionaire it is mostly because many of them started of as deca millionaires before the crisis.

 

[Payin-the-Toll]

Watched it, I like seeing history like this. Of course, anything that has Bethany McClean (sp) in it, I'm a sucker for. Gosh, I love that woman's voice, and she's a good-looker too. Thank God my wife doesn't follow ER forums-

 

[Midpack]

One of the nice things about the documentary is the very extensive website the team developed working with Duke University.

I have watched several hour long interveiws on the site. Wells Fargo's outspoken CEO Richard Kovacevich makes several important points which haven't really been made by any of the histories of read of the crisis. First it isn't all of Wall St or all banks, that brought done, it is about 20 large financial service institutions out of 6,000 banks that did the lion share of the harm through stupidity, incompetence and unhealthy amount of greed.
My list (and I suspect Richard's wouldn't be that differerent) is

Almost of the investment banks: Goldman Sach, Merrill Lynch, Lehman Brothers, Bear Sterns, and Morgans Stanley (only GS, and Morgan Stanley survive)
The three rating agency Moody's, S&P, and Fitch
Fannie and Freddie
The subprime lenders: Country Wide, Washington Mutual, Wachovia, CitiGroup and a couple others
The investors: Namely German industrial banks
The regulators: The SEC, the Office of Thrift Supervision, Office of Federal Housing Enterprise Oversight(regulator for Fannie and Freddie) and the regulators of the Federal Reserve.

The other point (touched on in the documentary) Richard makes and is that Paulson (with the cooperation of Geitner and Bernake ) made a huge policy mistake by forcing all of the banks to TARP funds. Paulson wanted all banks to take TARP funds so that market wouldn't see that BofA or CitiGroup was taking a TARP funds and JP Morgan and Wells weren't and conclude that Citi and BofA were in trouble. What happened is that when the market saw that AAA rated Wells Fargo is getting a bailout the conclusion was that situation was truly awful. Everybody knew that BofA and Citigroup were in deep trouble.

I think the data supports Richard's view the Dow drop 40% from the time of the TARP announcement but financial shares went down 80%. Wells Fargo dropped from $33 down to $7.80. As Wells shareholder at the time I remember thinking both Wells is crazy cheap, and also "Clif you are out of you mind, you really don't have f*ing clue as to what is Well's balance sheet if the Government is bailing them out maybe they are another Country Wide".

As far as punishment, it is very frustrating that none of the folks involved with potential criminal activities, (like Lehman Brothers cooking the books by transferring $50 billion between the UK and US, recently reported on 60 Minutes) have been prosecuted. On the other hand if you look at the list of guilty institutions the shareholders got killed for almost all of the firms (and most employes and all senior manager had large chunk of their wealth). Even the Office of Federal Housing Enterprise Oversight was shut down. So while its true that many Wall St folks still ended up as multi millionaire it is mostly because many of them started of as deca millionaires before the crisis.

Helpful insights, thanks!

 

[TromboneAl]

I've Tivo'd it and am looking forward to it, but I'm worried it's just going to make me more cynical about corporations and government.

 

[Bikerdude]

I've Tivo'd it and am looking forward to it, but I'm worried it's just going to make me more cynical about corporations and government.

You can take it to the Bank!

 

[jazz4cash]

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.

 

[scrabbler1]

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.

I caught only the last few minutes of the AE show and hope that airs again soon, as my cable TV carrier has 3 area PBS stations (WNET, WLIW, and NJTV) here in New York.

 

[obgyn65]

I agree 100%. IMO, very significant currency devaluations are looming. Where we least expect.

We won't get fooled in exactly the same way, but who knows what awful bubble will develop that very few people will see or understand before the bust.

 

[LRDave]

I've Tivo'd it and am looking forward to it, but I'm worried it's just going to make me more cynical about corporations and government.

It will. But it is gripping stuff and well worth the watch anyway.......

 

[Redbugdave]

All the Frontlines are good. One of my favorite no-miss shows. I remember William Black being interviewed about 3 years ago on Moyer's with the related savings and loan scandals. He was one of the first to shine the light on this mess of crookery. It was stuff you don't get on the news.

Bill Moyers Journal . Watch & Listen | PBS

 

[okapi]

Wall St. is a Kabuki Theater.Many of the main actors are sociopaths.Due diligence,buyer beware.

 

[Gatordoc50]

I remember when this was unfolding that both Jim Kramer and Larry Kudlow admitted they didn't know what a CDO was.

 

[Gatordoc50]

I remember when this was unfolding that both Jim Kramer and Larry Kudlow admitted they didn't know what a CDO was.

Correction. They didn't know what a CDS was. And after watching I'm just as confused. laugh.

 

[ChiliPepr]

I really enjoyed it as well. I am by no means a feral, "anarcho" Occupy Wall Streeter but it certainly is disgusting that no one has ever been prosecuted for this mess. Wall Street skated and Main Street got screwed isn't even a truism. Its just plain true.

I am not excusing anyone, but for those who want people prosecuted, what exactly would be the fundamental charges? Most of the clear criminal acts were not fundamental. Some awfully smart, but greedy, people got fooled. It's not "fair" that Wall St got bailed out and Main St didn't, but it's possible life as we know it would have ended for generations if the financial system was left to creative destruction - we will probably never know for sure.

+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.

 

[ChiliPepr]

Correction. They didn't know what a CDS was. And after watching I'm just as confused. laugh.

Think of a CDS this way....
Gatordoc is taking out a mortgage for $100k with Party A
Party A then goes to Party B and says "for the life of the Gatordoc mortgage, I will pay you $20 a month if you promise to pay off his note if he defaults"

That is a CDS.

The one other hitch is I could also go to Party A and say the same thing even though I do not hold the mortgage. Party A could write 10 of the CDS deals to different people, and collect $200 a month in fees..... BUT if Gatordoc defaults on his mortgage they would have to pay out $1 million (10 x $100k).


There are other minor details, like the monthly payment is usually a rate * remaining principle, and the payout is just the remaining principle...

 

[Texas Proud]

+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.

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

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...

There is nothing fundamentally wrong with a subprime loan... most subprime loans, when the borrower has a job etc. etc., are good loans. When I was a trustee on some CBOs, I had a few subprime auto securities... sure, there were a lot more people who defaulted then prime, but the rate charged to all the others was enough to make up for it.... and you would be able to repo the car and sell it again (as an aside, I actually saw one car sold 4 times within a year)....

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...

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...

 

[BellBarbara]

I agree, love Frontline and this show. If you haven't read Michael Lewis's book about this - pick it up. He focuses on how people made money in the crisis (by betting basically that the mortgage market would fail). The Big Short.

Also love Bethany - she co-wrote the Enron book "Smartest Guys in the Room" and was in the movie. That is another book to read. A bit of an accounting slog, but totally worth reading.

Lastly, funny side issue, my husband leads large technology projects. Two projects he lead were a system to manage CDOs (we have about 5 books in our bookshelves on what they are - he needed that many to "get it") and he also put in a huge system to help Freddie sell distressed properties quickly. He was right on the edge! He put in the Freddie system before the market collapsed and we laughed about how they were really using his system now.

 

[Midpack]

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...

I was a little surprised to see JPMorgan Chase on the SEC list. They (and the Wells Fargo CEO) seemed like the (relatively) good guys in the Frontline piece - again relatively! I know Jamie Dimon has been held in high esteem among Wall Streeters, whatever that's worth...