Thursday, December 16, 2010

The Truth Is Out There

For Most, This Is The Signpost At The Border Of Consciousness

Yet, Strangely, No One Gives A Damn

I'm not in the habit of reposting other people's work in full.

That said, Barry Ritholtz, financial investment analyst and a person of consistently-demonstrated intelligence, operates his own very successful site, The Big Picture, and is the author of a get-to-the-meat-of-it book about the 2007-2008 Crash, "Bailout Nation".

I have issues with what Barry does for a living, and have written about that before; however, that doesn't stop me from frankly admiring his intelligence and insight.

And that being said, I want to repost in full something which he noted on his blog this morning. It isn't laziness on my part; when I see a distillation of information that can help clarify a situation most politicians and the Mainstream Media have only helped to obscure...

Well, read it; learn something -- even better, do your own research.

10 Questions for GOP Members of Financial Crisis Inquiry
By Barry Ritholtz - December 16th, 2010, 7:45AM

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, but the publisher asked him who else was covering this subject. I was told he said “That’s easy, Ritholtz has been all over this story.”

I turned McGraw Hill down — repeatedly. But they cajoled and flattered and eventually I relented. I approached the subject from a blank slate, pragmatically, with no agenda. It was a problem solving exercise, I began by looking for data that led me where it would. Following the money was good advice for anyone researching this.

That 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, borrowers and home buyers, the RE agents, the mortgage brokers, appraisers, and Collateralized debt obligation (CDO) managers. 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. It is a silly analysis that could have been written by wingnut think tanks like the AEI or Cato BEFORE the crisis even occurred. It absolves Wall Street and the banks, blames the government — for everything — and ignores reality and the data that conclusively demonstrate otherwise.

To these people, I ask 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?

-- Barry Ritholtz

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