I Am Not a Whiner

November 17, 2008 9:37 AM

Phil Gramm is unrepentent."Mr. Gramm said the problem of predatory loans was not of the banks’ making. Instead, he faulted “predatory borrowers". "Mr. Gramm, ever the economics professor, disputes his critics’ analysis of the causes of the upheaval. He asserts that swaps, by enabling companies to insure themselves against defaults, have diminished, not increased, the effects of the declining housing markets." “This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”
posted by Xurando (69 comments total)

Thank God McCain didn't win, with this turnip-head in his camp.
posted by never used baby shoes at 9:46 AM on November 17, 2008 [2 favorites]

So wait...he admits there is a non-imaginary problem now? Well, that's the first step.
posted by DU at 9:52 AM on November 17, 2008 [2 favorites]

Christ, what an asshole!

But, really, did you expect anything else from this guy?
posted by tommasz at 9:53 AM on November 17, 2008

Phil Gramm is other things as well.
posted by kuujjuarapik at 9:54 AM on November 17, 2008 [1 favorite]

I wonder what it's like to go through the day saying things that anybody who is paying attention knows to be false, but you have to say it because your ideology is dependent on it being true. Do you think he's bothered by the fact that intelligent people know he's an intellectual fraud? Or does fact that that he's wealthy and powerful insulate him? I really hope it bothers him.
posted by diogenes at 9:55 AM on November 17, 2008 [1 favorite]

It never ceased to amaze me that McCain was able to push the idea that he was for "responsible regulation", given his history and the fact that Gramm, the architect of CDS deregulation, was his chief economic advisor.

I kept waiting to see the TV ad from the Obama camp that strung together the umpteen times that McCain had said our economic problems were mostly psychological, that we needed more deregulation, and Gramm's record and comments, but it never happened.

I guess they figured that would be too complex. The much simpler, more concise repetition of the "McCain said our economy was fundamentally sound" soundbite was enough to send the message, I suppose.
posted by darkstar at 9:57 AM on November 17, 2008

I think his assessments of CDS would be more accurate if they were allowed only to principals of the deal. By allowing third parties to bet, the process has not only distributed the risk, but has increased it many times over. But that's just me, I guess.
posted by boo_radley at 9:58 AM on November 17, 2008

Krugman sums it up better than I could (obviously):

"Yet it’s now clear that the phony account of the crisis — that it’s all due to Fannie, Freddie, and nasty liberals forcing poor Angelo Mozilo to make loans to Those People — is setting in as Republican orthodoxy, part of what you have to believe to be a respectable member of the party."
posted by diogenes at 9:59 AM on November 17, 2008 [5 favorites]

Bullshit. If you can transfer risk to others, you will take more risks, and the whole system is rotten with the stuff. Why the hell do you think they're having to inject hundreds of billions of dollars of new "capital" into the banking system? The system has so much risk in it that it's failing outright.

Credit default swaps are the process of transferring risk from those who CAN bear it (those who make the loans) to those who CAN'T (those who want to make money but don't have the capital to make the loans themselves.) Those who have, want to keep; those who lack, want more. So risk flows from entities that can bear it, but are risk-averse, to entities that can't, but are risk-hungry.

Net effect: the system takes on too much risk, and when failures start, they cascade into huge problems very quickly. As Buffett has said, when the tide goes out, you find out who has trunks on and who's been swimming naked.

So how do we respond? Instead of letting the bad players fail, we start bailing the whole system out. Those who took too much risk are rewarded, because their losses are socialized. Finance people are smart; if they see that taking risk is not actually a risk, they will take more risk! If you can make more short-term money being foolish, and Uncle Sam will save you when your positions blow up, there's no room for prudence in the financial system. The foolish are propped up and rewarded, while the prudent are outcompeted and destroyed.

The economy will become dependent on bailouts, because the risk-takers will gradually squeeze the sane out of the system. Sensible business models can't survive and prosper against unlimited fiat-currency backing of their competitors from the government. We get into a cycle of stupidity that's bailed out, resulting in more stupidity and more bailouts, and more stupidity and more bailouts. We can't get off the bailout train, because at no time will the immediate consequences of failure EVER be deemed acceptable, so in each bailout, we will sow the seeds of the next set of collapses. We reward the stupid so we get more stupidity.

Gradually, the economy will become completely dependent on the central authority's ability to issure currency on demand to prop up the system. The ultimate endgame: Zimbabwe.

Ultimately, historians will determine that the Great Depression was the best possible outcome to monetary disorder. It was terrible, but what's going to happen to us will be much worse. I suspect that things will start to get better for awhile after the reflation starts to 'take'; we may even feel prosperous again for awhile. But then the next cycle of collapses will start.

Remember that old saying, "The purpose of my life may simply be to serve as a warning to others?" That's the boat we're in now. The Titanic is sinking, but hopefully future economies will learn from our mistakes.

Credit default swaps absolutely create risk. Absolutely. Bailing them out creates even more.
posted by Malor at 10:03 AM on November 17, 2008 [35 favorites]

McCain was able to push the idea that he was for "responsible regulation"...

"Responsible regulation" means "not enough" or maybe "not any at all". This is the same trick that the GOP uses with environmentalism. "Our guy knows the importance of maintaining a balance between protecting the environment and economic realities..." Where "a balance" means "screw polar bears, I'm gonna drive an SUV!"
posted by DU at 10:06 AM on November 17, 2008 [4 favorites]

In a way, I think he's right about it softening the housing crisis, but his conclusion is way off the mark. CDS (as I understand them), did diminish the effects of the declining housing markets. However, what seemed to happen is that risk was spread as wide as possible, ostensibly to reduce it (hindsight proving this assumption utterly false), and then, due to the perceived lack of risk and easy money, the market got very large and saturated. So "spreading the risk" became synonymous with everybody being tied to each other, and if one were to sink, all would sink.
So yeah, I think he's right that the housing markets were cushioned by these instruments, cushioned by Lehman, AIG, GM, etc, etc, etc ... so what was a housing crisis became a "fucking everything" crisis.
But to paint it in the narrow view, when its part of broader picture is disingenuous at best.
posted by forforf at 10:12 AM on November 17, 2008 [1 favorite]

Countdown until someone calls out Malor for repeating his Zimbabwe analogy...

3-2-1....

Note that I agree 100% with Malor's analysis, fwiw.
posted by ornate insect at 10:16 AM on November 17, 2008

True Story: I'm around 12 years old at the '92 Republican National Convention with my sister, when she sees Phil Gramm talking to a circle of reporters. The running joke in Washington in those days (attributed to many people, but by far most often to Gramm) was "The most dangerous place to be in Washington is between Phil Gramm and a camera." Knowing this, my sister told me to run over there and shake Gramm's hand during the middle of his impromptu press-conference.

I did, which obviously took Gramm by surprise. He's an unpleasant person in general, of course, but not so dumb as to pass up a photo-op with an eager child, so as he's extending his hand, trying to make the most of the disruption, I crane my neck back to my sister, calling out, "Who is this guy again?"

One of my sister's favorite stories to tell.
posted by Navelgazer at 10:24 AM on November 17, 2008 [18 favorites]

Okay, that's it. I've had enough. Putting the guillotine on Wall St. would be symbolic, but I think Union Square could hold the crowds better.
posted by The Whelk at 10:41 AM on November 17, 2008 [3 favorites]

Rightly or wrongly -- as I suspect rightly -- Gramm is going to be forever linked to this free market apocalypse. That is a small comeuppance.
posted by chunking express at 10:49 AM on November 17, 2008 [1 favorite]

The problem wasn't Credit Default Swaps per se, it was the opaque nature of the market in CDS, with no central clearing house combined with the massive leverage that was built up using them. People were dealing in CDS who had no direct interest whatsoever in the performance of the underlying securities: A vast tower of synthetic CDS were created were simply side bets on their performance.

This is why a relatively small drop in the underlying value of the asset underpinning all these bonds resulted in such huge losses: the total leverage involved was huge.

CDS by themselves are a great idea, just as MBS were. The implementation sucked rocks.
posted by pharm at 10:55 AM on November 17, 2008 [1 favorite]

Well, this is rather premature.

Nobody has a clear picture of what caused The Credit Crunch at present; lots of theories whizzing about, the entire continuum from rational and credible to crackpot and timecubesque. I've seen several academic papers working through various hypothesis and scenarios but nothing definitive at present. So his statements seem far, far out of line with what we know about the topic. Which, as strange as this might sound, is simultaneously a lot and not much.


I've mentioned this before, but the events of 2007/2008 remind me a great deal of the 1987 Crash in that right afterwards nobody had a clear idea, we didn't see a single definitive outline of events that helped to illuminate and drive consensus towards an explanation.

Unlike 1987 the problem is much more complex, cutting a wide swatch across markets and assets classes and regulatory domains. Like 1987 we've got an awful of data, some of it very, very good (e.g., LIBOR, T-Bill rates, etc), but unlike 1987 we're also missing much data, that will be difficult to ever precisely nail down (e.g., CDS' outstanding by name / tenor / etc), and, again unlike 1987m there is a third class of data we can back into given enough time and resources (the web of interdependencies across couterparties for starters).

So until folks start to pile through data we've got in hand, reconstruct what's missing and fill in the blanks, any explanations advanced about the causes are just speculation, some more informed than other (see "timecubesque" above).

Many six months after the 1987 crash we started to move towards a general agreement of the cause, but arguments continued until perhaps two years later. Now the 1987 Crash is textbook material, we teach it in business schools in various econometric courses (not to mention most models of Market Risk will include it as a scenario when we're stress testing) and we all agree on what happened when and why.

Make no mistake about it: The Credit Crunch is at least one, maybe two or three orders of magnitude more complicated than 1987.

Almost everyone at both Business Schools that I'm associated with have diverted all the usual curriculum to The Credit Crunch, and every spare moment is spent pursuing the possible causes. There are several conferences being organised (I'm preparing a couple of papers to pitch) and I'd expect that we should start to see some clarity in a few months time.

Most of the Investment Banks are trying to get a leg up on the competition as well, so they've got their own efforts going on, many of which are cross pollinated into academia.

So I expect some consensus to start building over the next year. I'd suggest Graham revisit the topic then.

Thanks for posting - I had no idea he had such a big mouth.
posted by Mutant at 10:55 AM on November 17, 2008 [7 favorites]

drat: "...which were simply..."
posted by pharm at 10:57 AM on November 17, 2008

“This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks.

Damn straight they distributed the risks! Now we're all fucked, not just the subprime lenders!

Thanks deregulation!

(but seriously: The default swaps did distribute the risk, but people took on more risk then they were capable of dealing with, making it possible for counterparies to go under. You could try to be responsible by buying a CDS for a deal you thought was too risky, but what happens when AIG, the company you bought the CDS from is about to go under too? What happens when you buy AAA rated bonds to be safe and they go under?)

The unregulated CDS market seems to have distributed risk into places where risk wasn't supposed to be, and pretty much everyone got screwed.

As an aside, I saw a clip of Ted Turner on CNN and apparently had some AAA rated bonds in Icelandic banks, which are now worthless.
posted by delmoi at 11:02 AM on November 17, 2008

Countdown until someone calls out Malor for repeating his Zimbabwe analogy...

Well, given that Zimbabwe suffered hyperinflation, it was way off. In fact, we've seen deflation so far.

Note that I agree 100% with Malor's analysis, fwiw.

What analysis? All he ever does is spout a bunch of lurid synonyms for DOOM.
posted by delmoi at 11:07 AM on November 17, 2008 [4 favorites]

So, the big bad borrowers brought down the banks, who were powerless but to acquiesce to their demands? That's pretty funny. Who knew the whiners had such power?
posted by krinklyfig at 11:11 AM on November 17, 2008 [2 favorites]

mutant: Well, this is rather premature. Nobody has a clear picture of what caused The Credit Crunch at present...

Are you implying that his explanation might turn out to be right? He's clearly driving toward the "government forced us to loan to poor people" explanation. Is that credible to you?
posted by diogenes at 11:11 AM on November 17, 2008

Sheesh...denial ain't just a river in Egypt...amirite?
posted by ahdeeda at 11:14 AM on November 17, 2008

MeFi is all about doing things you've never done before, so in that spirit I will now defend Phil Gramm just a little, in one way.

Blaming borrowers exclusively is wrong, sure, but it's not much less hypocritical than the easy political win of blaming big, faceless evil bankers, which everyone from Obama to Palin did during the election. "It's not your fault, voters." was the constant call.

Everyone hates bankers. Blaming bankers get votes. It was all quite shameless.
posted by rokusan at 11:14 AM on November 17, 2008 [1 favorite]

When Phil Gramm speaks, all I can picture in my head is a cartoon turtle saying what he is saying. Is this wrong?
posted by Pollomacho at 11:16 AM on November 17, 2008 [4 favorites]

lurid synonyms for DOOM

good band name.

All he ever does is spout a bunch

One could describe a whale the same way, but it would be incomplete. I think you're half right (i.e. Malor is definitely a perma-bear and a bit of a Cassandra), but I also think it would be unfair to say that Malor is not attempting at some level to analyze our current global economic/financial/credit crisis. After all, one person's analysis may be another person's poetry; b/c economics, considered broadly, is a social science and thus involves the irrational behavior of human beings (i.e. the way the systems, financial institutions and money mechanisms we set up tend to resist our best laid plans), it is not entirely quantifiable.

Malor is very good at deflating a lot of the ideology that masquerades as economic "analysis," and for that I am grateful. But I appreciate all views on fiscal matters here, even those (like Mutant's) that don't usually correspond to mine. I'm not looking for an echo chamber.
posted by ornate insect at 11:25 AM on November 17, 2008

rokusan writes "Everyone hates bankers. Blaming bankers get votes. It was all quite shameless."

But a loan to the originator is an investment. What sort of investment does the originator want? They were never required to do no-doc, NINJA or other risky loans. But the market for loan derivatives meant they could pretend the risk didn't exist, and nobody would be the wiser who bought the packaged bad risk retranched as AAA. Sure, plenty of borrowers made bad decisions, but, as the saying goes, when you owe the bank $1000 and can't pay it back, you have a problem. When you owe the bank $1,000,000 and can't pay it back, the bank has a problem (times several million problems). And risk spread out is still risk, but now we all are responsible for it. A borrower will take any money you give them, and many will make bad decisions and get in over their heads if you let them. That's why getting a loan for a house used to be (and probably is once again) difficult, unless you're a good risk. Time to go back to sensible investments for loan originators, if they want to make sensible investments, that is.
posted by krinklyfig at 11:30 AM on November 17, 2008

This talking point about Democrats mandating minority loans is particularly vicious and resonates with a surprising number of people. Probably about 42% of the country if I had to guess.
posted by butterstick at 11:34 AM on November 17, 2008 [3 favorites]

I have the feeling it isn't so much that the risk was distributed amongst the companies and investors but that the risk was concealed from investors behind complexity and deferred until after bonuses were paid out by individuals working within but not actually for the companies.
posted by srboisvert at 11:35 AM on November 17, 2008

My two cents -

The big problem wasn't with irresponsible loans, which may have been unwise but the impact of which mostly would have been limited to those making them.

It wasn't with CDOs on the surface, which probably would have had the effect Gramm is desperately trying to convince us they actually did, if it wasn't for two more things -

It wasn't entirely because companies were able to create CDOs on loans they had no other relationship with, and to do so over and over as many times as they wanted to.

It was mostly because there was no requirement that the buyers of CDOs, the insurers, actually have the money to pay up if they were wrong.

Without the last part, all the other stuff would have allowed companies to make spectacular gambles and all kinds of other alternatively crazy or genius arrangements, but at the end of the day everyone would settle up one way or another and there wouldn't be any market-wide disaster. Like a group of people sitting down to play poker, the money would move around, but at the end of the game there would still be the same total amount of money at the table as there was when everyone sat down. Also, everyone would know what a chip was worth.

Where we are at today starts with a whole lot of money suddenly disappearing because people were playing with money they didn't have. It then extends to nobody trusting the chips anymore, because they may be worth something but quite likely aren't. Nobody wants to play anymore.
posted by Bokononist at 11:36 AM on November 17, 2008 [5 favorites]

Blaming borrowers exclusively is wrong, sure, but it's not much less hypocritical than the easy political win of blaming big, faceless evil bankers, which everyone from Obama to Palin did during the election. "It's not your fault, voters." was the constant call.

Nonsense. Emphasis added by me. The finance industry is clearly more to blame in even the most premature yet intellectually objective analysis of this crises. Outstanding loans in jeopardy are estimated to total somewhere in the 50-70 billion dollar range. Lets be generous and call that 100 billion. Loan originator impact ends right here, and the leverage of the rest of the industry via their shiny imaginary financial toolkits starts after that.

Seems pretty cut and dry to me. Instead of blaming the bankers "exclusively" can I blame them for 90% of it?
posted by butterstick at 11:40 AM on November 17, 2008

Bokononist writes "It was mostly because there was no requirement that the buyers of CDOs, the insurers, actually have the money to pay up if they were wrong."

I thought that CDOs were sold as insurance, more or less. Are you saying it should be like selling an option, where you have to meet margin requirements or own the underlying equity?
posted by krinklyfig at 11:43 AM on November 17, 2008

I'd also like to point out this:

Many lawmakers, for example, insisted that Fannie Mae and Freddie Mac, the nation’s largest mortgage finance companies, take on riskier mortgages in an effort to aid poor families.

As being questionable at best. "Many lawmakers" i.e. Republicans bitching about the CRA. Smells like faux balance to me.
posted by butterstick at 11:53 AM on November 17, 2008 [1 favorite]

“When I am on Wall Street and I realize that that’s the very nerve center of American capitalism and I realize what capitalism has done for the working people of America, to me that’s a holy place,” he said at an April 2000 Senate hearing after a visit to New York.

and somehow Barack Obama is the anti-christ.
posted by butterstick at 12:00 PM on November 17, 2008

Fake Phil Gramm: "The problem of John McCain not being elected wasn't John McCain's fault. It was all of those predatory voters."
posted by mark242 at 12:00 PM on November 17, 2008 [5 favorites]

I thought that CDOs were sold as insurance, more or less. Are you saying it should be like selling an option, where you have to meet margin requirements or own the underlying equity?

Or, like selling insurance, where you have to show an ability to pay claims before you can issue policies.
posted by Bokononist at 12:02 PM on November 17, 2008

I find it sad that the republicans, being the party that constantly beats "personal responsibility" drum, continually refuses to demand the same value of business. Quite the opposite, it seems.
posted by Thorzdad at 12:08 PM on November 17, 2008 [1 favorite]

Blaming the credit crunch 90% on any one actor is way off base, a large number of parties are responsible and trying to quantify blame is a pointless. Government trying to implement social policy, central bankers trying to stave off the inevitable by keeping interest rates artificially low, bankers doing what they do, real estate speculators, illiterate consumers, and last but not least, my personal favorite, S&P and Moodys.

I predict RICO indictments on S&P and Moodys executives before the EOY 2009.
posted by sfts2 at 12:26 PM on November 17, 2008

Obama to the rescue!
posted by telstar at 12:58 PM on November 17, 2008 [1 favorite]

Bokononist writes "Or, like selling insurance, where you have to show an ability to pay claims before you can issue policies."

OK, that makes sense (incidentally, this is also what Gramm suggests towards the end of the article). But is a hedge really considered insurance? I guess what I'm getting at is, do we then suggest that regulating CDOs like we do the insurance industry would work? Or do we just need an open exchange?
posted by krinklyfig at 1:20 PM on November 17, 2008

Okay Butterstick, you're right that because of the nature of releveraged leveraged leverage that caused this it will always be the financial institutions who did harm 10x for every harm deliberately hastened by greedy/foolish home-buyers. That was the nature of the pyramid scheme at work, here, sure. One bad loan then multiplied out again and again.

My annoyance is with the politicians conveniently, selfishly and shallowly assigning blame in a way that rallies voters against the big faceless greed-masters, muddying the issue and turning it into cheap-shot politics.

In that regard, Gramm's turnip sounds about right.
posted by rokusan at 1:22 PM on November 17, 2008

krinklyfig: I thought that CDOs were sold as insurance, more or less. Are you saying it should be like selling an option, where you have to meet margin requirements or own the underlying equity?"

"Less" rather than "more." They were not actually sold as insurance products, which would have made them subject to more regulation than they were. Even though some of them were sold by insurance companies (like AIG), they weren't insurance policies.

AFAICT (and if someone would like to correct me on this, please do) there were no formal requirements for selling CDSs. It was all caveat emptor; if you wanted to open up Krinklyfig's Pretty Good Swap Shop, and sell a few billion bucks worth of CDSs even though your only assets were the change in your pockets, there wasn't anything stopping you. It was supposed to be up to the idiots who might buy your crappy swaps to do their homework, and basically factor in the risk of you going under — this is called counterparty risk — when buying the swap.

Only, and this is again as far as I can tell, the buyers of CDSs did an amazingly shitty job of judging counterparty risk. They bought swaps from sellers who had far more of them outstanding than they ever could pay off — and what's the point of buying an (effective, de facto) insurance policy if the insurance company can't possibly pay in the event of a claim? I haven't heard a good explanation of exactly how this occurred, but I think a major part of it was that CDS trading was so opaque. It was hard to tell if the person you were buying a CDS from was going to be able to pay up or not, because you had no idea what their obligations were.

IMO, the downside of everything happening right now is that it's likely to result in an orgy of regulation, when the only thing that really needs to happen (and would have stopped the whole business from getting out of control) is pretty simple: establish a central clearinghouse for CDSs and have reporting requirements so that counterparty risk can be better quantified by people shopping for them. If that had been possible, I think a lot of people would have run screaming away from CDS deals that they made based on bad or incomplete information.
posted by Kadin2048 at 1:28 PM on November 17, 2008 [1 favorite]

My annoyance is with the politicians conveniently, selfishly and shallowly assigning blame in a way that rallies voters against the big faceless greed-masters, muddying the issue and turning it into cheap-shot politics.

Sure, that's not a good thing. But once the moral relativism is portioned out, it's not exactly inaccurate. Facelessness is how we got here, since we're talking about a totally opaque unregulated system that seems to elicit constant "wait, they were allowed to do WHAT?" from everyone who starts to learn more about it.

Looking for some fault with politicians that campaign on this is a bit of a stretch, and seems like a desperate way to find some kind of "balance" that gives us a perspective to look at Phil Gramm and not vomit. And I see a lot of this in the linked article. It tries to "balance" the equation, but the sum is already out there for all to see.
posted by butterstick at 1:36 PM on November 17, 2008 [1 favorite]

Well if he isn't going to live with the mortgage mess on his hands what about his past as a pornographer:

In 1973 Gramm invested in three adult films promoted by his brother-in-law, George Caton. Only the third, "White House Madness"—a soft-core pornographic political satire set in the White House during the Nixon administration—was actually produced. The film flopped and Gramm lost his $7,500 investment. Gramm's production credit is noted on the film's IMDB page.

posted by PenDevil at 1:46 PM on November 17, 2008 [1 favorite]

IMO, the downside of everything happening right now is that it's likely to result in an orgy of regulation, when the only thing that really needs to happen (and would have stopped the whole business from getting out of control) is pretty simple: establish a central clearinghouse for CDSs and have reporting requirements so that counterparty risk can be better quantified by people shopping for them. If that had been possible, I think a lot of people would have run screaming away from CDS deals that they made based on bad or incomplete information.

Well said. I'm surprised that people paying for these swaps each month just assumed that they'd get backed up, considering how opaque this whole thing was. Maybe that's just my hidsight being 20/20, but I know how much digging these people do on their investments. I would imagine them being just as industrious in protecting them. The fact that people didn't run screaming from the CDSs seems like there was at least a tacit admission that they were assuming the underlying "assets" would just continue to appreciate.

Or maybe the appetite for risk was just that immense.... i dunno.
posted by butterstick at 2:06 PM on November 17, 2008

kadin: when the only thing that really needs to happen (and would have stopped the whole business from getting out of control) is pretty simple: establish a central clearinghouse for CDSs and have reporting requirements so that counterparty risk can be better quantified by people shopping for them. If that had been possible, I think a lot of people would have run screaming away from CDS deals that they made based on bad or incomplete information.

I believe this is on the agenda.

*Googles*

Yep: see here.
posted by Infinite Jest at 2:32 PM on November 17, 2008

butterstick: Outstanding loans in jeopardy are estimated to total somewhere in the 50-70 billion dollar range. Lets be generous and call that 100 billion.

Where'd you get that estimate from? There's something like 10 trillion dollars in residential mortgage debt in the US alone, and more than 5% of the loans are delinquent already. Subprime loans might be smaller than the average loans, but some big states with very high delinquency rates tend to have very high prices to match. And that's not counting credit cards, car loans, etc. So 100 billion seems low.
posted by sfenders at 3:34 PM on November 17, 2008

Yeah, see, I'm not an economist, but I thought that the big problem with the CDS system was that there wasn't enough information going around to accurately rate the tranches… Maybe I don't know 'em from turnips, but if Phil Gramm was selling me a turnip, I'd want to see it before I gave him my money.
posted by klangklangston at 4:34 PM on November 17, 2008

Blaming borrowers exclusively is wrong, sure, but it's not much less hypocritical than the easy political win of blaming big, faceless evil bankers

Most borrowers went into the bank / broker's office with the idea that a) this was a fiduciary relationship and b) they were obviously qualified to borrow the money since the bank was willing to lend to them. There was significant informational asymmetry here.

And "blame" is not the game here. It is one of assigning responsibility. Borrowers have long had the ability to walk away from their loans -- this ability was explicitly codified into state-level legal protections in response to previous rapacious lending incidents that are gone from living memory.

So if borrowers want to walk on their loans now, more power to them (this is why we can't have nice things like 0% down, low-doc loans any more).

The Search For Responsibility should then look further up the food chain, to the originating brokers. These guys were the operators who swung the deals, lied to their customers, and made billions of dollars. Nearly all of them are skating free from their misdeeds, though they've killed the golden goose with their collective actions.

Wall Street then took these loans, bundled them, and sold them. As middlemen, they were matching people with money with people who wanted to borrow it, so I see no crime here, other than the totally specious investment-grade ratings assigned to tranches of loans modelled egregiously unconservatively.

Buyers of these instruments got sold a bill of goods, but hey, that's free market capitalism.

Foremost on this shitlist should be the state & federal regulators, and the Congress. They're supposed to be the adults in this situation, but they either were in on the play or oblivious to what was going down, 2003-2007.
posted by troy at 5:22 PM on November 17, 2008 [2 favorites]

Where'd you get that estimate from?

Ben Stein, about a year ago. How horribly wrong can one man be?

Mortgage debt rose from $7T in 2002 to $13T in 2007.

That's $6T of net borrowing, $3T of which was from 2005 ~ 2007.

10% of that $3T going bad is $300B and in the bag already.
Another 10% of that $3T going bad is $600B total and nearly certain.
Another 10% going bad would be $900B total and entirely probable.
Another 10% going bad would be $1.2T total and getting to where Roubini estimates this will end up.
posted by troy at 5:29 PM on November 17, 2008

What Gramm's blaming on The Community Reinvestment Act is plain predatory lending. There's nothing like making a healthy profit and getting credit for giving the downtrodden a hand up. And then when your predatory loans turn to the shit they are, blame the victim.

There is a bit of a fiduciary relationship required here. Borrowers are going to banks to see what loan they qualify for and the finacial institution or financial professional gives them a number.

Today I saw a typical loan of this type. Single parent, high school education, no special skills, $17.00 an hour job, always tops out at $32K to $34K a year, gets an Earned Income Tax Credit (2 kids). With a $300/month car loan and $4,000.00 credit card debt, GMAC gives her two mortgages. 0 money down (all closing costs covered by the mortage because she didn't have any spare $$$) she qualified for a mortgage of $140,000 at 6.5% and since the home she was buying was $162,000 a second mortage of $28,000 at 8.9%. The second mortage was treated as the down payment.

So she began 18 months ago with no equity and now has a negative equity situation with foreclosure looming. Two kids are going to be pulled out of school to go live with relatives in the middle of a school year and financial ruin coloring their childhood.

Should she have taken on these loans? Obviously not. But I would argue that she thought she was doing the right thing for her kids, getting them out of the city to an ex-urb with new schools and fresh air. At no time does it appear that she was given adequate counsel about the risks she was taking on.

And understanding how top driven the mortgage market was, with Wall Street waiting to package as many loans as they could get in order to create more investment opportunities (as heard on This American Life's GIANT POOL OF MONEY), I can't the lender as anything short of predatory.
posted by readery at 7:19 PM on November 17, 2008 [2 favorites]

Lies of omission and lies of commission were, IMO, the root cause. In an open market, the risks would have been known and accounted-for. But because the risks were secreted, they could not be adequately assessed by the risk-takers.

More and more I become convinced that the only way to run this world is by ensuring those in positions of great power are living completely open, transparent lives. Everything they touch and everything they do should be done without any secrecy whatsoever.

If you wish a private life, do not put yourself in a position to destroy others.
posted by five fresh fish at 7:31 PM on November 17, 2008 [2 favorites]

klangklangston: "Yeah, see, I'm not an economist, but I thought that the big problem with the CDS system was that there wasn't enough information going around to accurately rate the tranches… Maybe I don't know 'em from turnips, but if Phil Gramm was selling me a turnip, I'd want to see it before I gave him my money."

I think you mean MBSs and not CDSs; they're related in that they both played a role in the current situation, and both suffered from a lack of transparency, but they're different animals. Mortgage-Backed Securities were the "gift wrapped" end-products of the sub-prime mortgage game, and came sorted into tranches and sold off to a lot of credulous buyers as a "good as a T-Bill" investment, when they really weren't. Credit Default Swaps were an insurance-like product sold by companies like AIG that pay out if a particular company or institution defaulted.

I think a hydrogen bomb analogy is apt. Individual retail borrowers were the carefully shaped charge around the primary fission core of MBSs. Those two alone would have blown up and made a hell of a mess, but combined with a few trillion bucks worth of CDSs that get detonated by the shock produced by the MBS implosion, and you have something that's orders of magnitude more powerful.

My personal feeling — and I'm admittedly just armchair-quarterbacking it here — is that it's the CDSs that deserve the most attention, since they're what made it jump from being a relatively simple (if painful for those involved) bubble pop, into a systemic problem through inappropriately managed risk.
posted by Kadin2048 at 8:11 PM on November 17, 2008

No, it wasn't the "minorities" who are to blame, but Gramm isn't talking about minorities. He's completely correct that the economy works better with less regulation. He forgot to mention that the economy also works better when the consumers aren't overgrown children, buffoons or morons with more money than sense.

See, the conventional wisdom over the last 10-15 years until September was that the old school guys were dummies. They didn't get it. They never understood the crowdsourced social network effects of the Economy 2.0, which means that Japan and Korea invent everything, China builds everything, and we consume everything exclaiming "Isn't it cool?!" like 10 year old schoolgirls.

We are represented on one side of the transaction by Dick Fuld, and we are represented on the other not by the struggling Hispanic family, but by the all-knowing real estate mogul 2.0, Casey Serin.

CDSs and CDOs are amoral instruments. They are value neutral. They encourage risk-taking only to the extent total gibbering idiots like Casey Serin think it's somehow clever business strategy to buy 8 houses in 9 months by committing fraud on their mortgage applications. There has to be a mortgage to put in the bundle. Casey put in 8 all by his lonesome. There are hundreds of thousands of Casey Serins out there.

You want to understand the situation? You have Dick Fuld's greedy sociopathy on one side married to Casey's greedy sociopathy on the other.

But the blame doesn't stop there. Because while real estate may have been the trigger, the Great Unwinding now underway extends beyond that narrow field. You know who is to blame for the rest of it, for what we are starting to see now and the total and utter shitstorm that will befall us next year?

You. The American consumer. You, with your infantile psychology and addict's attitude toward money.

You are the idiots who waited in line to buy an iphone with their credit card, only to buy another one a year later while still under contract with AT&T on the first iphone. So-called grown ups who can't resist buying a new toy so they buy it twice and hand over thousands for the privilege of making telephone calls.

You talk about predatory lenders, but you actually watch a show called Flip This House. Phil Gramm and Bear Stearns didn't support that show. You did. Because you thought you could do what they did. It looks easy, so it must be easy.

No rigor. No seriousness. No sober attitude or humility. No respect for the time value of money, what Einstein called the greatest force in the universe. We had too much easy money. Too many "get rich tips" and not enough number crunching. Too much Powerpoint and not enough Excel. Too much spending and speculation, not enough saving and investment. Too much Jim Cramer and not enough Louis Rukheyser.

I blame the HDTV early adopters, the Hummer drivers, and the purified water drinking retards who think they're drinking spring water because they can't be bothered to read the goddamn label. Throw in the Tumblrs, Techcrunchrs, and other thumb Twiddlers on Ivy League-connected VC Welfare who spent more time in the office playing foosball and taking naps than learning how to read a balance sheet or make a sales call. Toss in the owners of subzero fridges and Viking stoves. Goddamn Viking stoves. How many meals of Chicken Fettuccine Alfredo from the Macaroni Grill did you reheat on those? Toss in anyone who ever insisted on Calphalon, Baldwin hardware, or crown molding. I'm sure that at the ripe old age of 28, you earned it.

I blame all the people who wasted all that money when the exact same thing or better could be had for a fraction of the price if only they put in the effort to look next door. In almost every circumstance, you don't have to have the best. You can live without. The thing you have isn't broken, so why are you replacing it?

Have you every asked yourself why are so many of the things produced in the world are not good enough for you. Who the hell are you?

You had to have that Starbucks vente latte. You had to have T-shirts from American Apparel instead of Sears. The Moleskine notebook for $12.99 instead of the Office Depot one for $1.29. I hope those ideas you wrote in it made you at least $11.70. You bought the mass production niche marketing hook, line, and sinker. You all agreed to be different and unique in exactly the same way. Keep up with the Joneses, they use Martha Stewart paint on their walls. Follow the crowd, chase the trend, run rabbit run.

This the fault of all of you who read Tipping Point but never read Trading Up, because the former is a fairy tale, and the latter is your biography. You loved reading Everything Bad is Good for You, because it felt like you finally won all those arguments with your parents. Playing videogames and watching Lost means I'm smart! But you never read Why We Buy, because then you'd realize your a sucker.

But it didn't have to be this way. Once upon a time we were excellent. Then we got too fat and happy. Now we have a dumb population, no growth, rising unemployment, massive unemployability, and a government in hock almost as much as We the People. We loved deregulation when it meant dot-com IPOs, day trading and interest-only mortgages. Now that we actually have to pay some bills, we want socialism.

This is the fault of everyone--big or small, corporate or individual--who bought now and promised to pay later. Guess what? Now it's later.

Welcome to the motherfucking reckoning. Two point oh.
posted by Pastabagel at 9:45 PM on November 17, 2008 [11 favorites]

Oooh, yeah. I seen them guys skulking around Hanover Street. I didn't know they had a name, though. "Predatory borrowers." Wow. One of 'em had this raggedy T-shirt with "AIG" on it. And another had "citi" tattooed on his arm, in, like Mystral. And this guy Phil runs all these guys? Like the "Threepenny Opera?" Far out.
posted by carping demon at 11:36 PM on November 17, 2008

Pastabagel: There are hundreds of thousands of Casey Serins out there.

I've heard this before, but I'm skeptical that there are hundreds of thousands of people with 8 mortgages. Can you back that statement up? If you can't, you shouldn't be repeating it. I think it distorts the root cause of the problem in a malicious way.
posted by diogenes at 3:53 AM on November 18, 2008

So its an exaggeration, his point is valid. Rampant consumerism plays a big part not only in this problem, but climate, energy, etc etc etc.

Plus I love the 'American' angle, like only Americans think like this.
posted by sfts2 at 4:12 AM on November 18, 2008

Casey Serin isn't representative of anything. He's an oddball corner case, a sideshow. Fuld was an educated and experienced professional, at the very top of the upper echelons of power and finance, and more than typical representative of the industry.

Let me re-state what was said above - if "we" are represented by idiots buying homes we can't afford (and it's not that cut and dried, fly-by-nite mortgage brokers and get-rich-quick realtors have a lot to answer for), "we" are less than 100bln in the tank. GM loses that much, by itself, every other year (or so it seems sometimes).

Them, the, financial industry, is so deep into the red, a government handout of close to trillion bucks isn't likely to help much. This is because with no oversight or accountability due to deregulation, they played games with those assets to the point where even if every single one of them paid off, the whole house of cards would have toppled any-fucking-way. Let that sink in a bit. Even if we were all good doobies, and could pay off the ARM and ballon-payment boobie-trapped mortgages, there was so much imaginary value in the system, it would have blown apart regardless.

Now, let's look at the the fall out of "us", the economy 2.0 everyman, falling down - housing and commodities prices fall. This isn't bad, as they were over-valued anyway. New car sales and consumer spending is down. This is bad, and would cause a small recession.

The fall out of "them" failing? Industry and commerce grind to a halt, and we lose ten years worth of growth in the equities market, with the indexes falling faster every day.

Yeah. Almost equivalent.
posted by Slap*Happy at 4:13 AM on November 18, 2008 [1 favorite]

sfts2: So its an exaggeration, his point is valid. Rampant consumerism plays a big part..."

I'm not disagreeing with his larger point about rampant consumerism. I'm questioning the idea that "predatory borrowing" on the scale of Casey Serin was a large factor.
posted by diogenes at 5:12 AM on November 18, 2008

Let me re-state what was said above - if "we" are represented by idiots buying homes we can't afford (and it's not that cut and dried, fly-by-nite mortgage brokers and get-rich-quick realtors have a lot to answer for), "we" are less than 100bln in the tank.

Did you really have to re-state that? It's obviously wrong, doesn't stand up to the most casual scrutiny. I don't know what the real number is, but it's a lot more than 100 billion. Check the United States foreclosure rate over the past year. More than that amount has very likely been already directly lost just to US houses gone to foreclosure, never mind all the other debt that will default, and the impaired value of that which might not, and connected events in other parts of the world, before you start adding in the leverage afforded by the various crazy schemes layered on top of it all. It's bigger than you think.

The first time I visited New York City, I got hustled out of $40 by a team of con artists in Times Square. I kinda knew it was stupid even as I went along with the deal that seemed to good to be true, but couldn't believe they could be quite that crooked and get away with operating out in the open on the busy street. I do blame the victim, as well as the salesman who led them on. Not everyone who was part of the problem was like Casey Serin, there are dozens of different motivations involved, a thousand individual reasons why people in large numbers went to such excess. Some of them more noble than others. There is plenty of blame to go around, and I wouldn't say that individual reckless borrowers deserve the largest share of it, but they should certainly get some of it. I personally know some of them who got sucked in to the trap in a big way. They're good people, but they really should have known better.

Aside from that, I think the G-20 statement says it reasonably well:

"During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions."

Mutant: Many six months after the 1987 crash we started to move towards a general agreement of the cause, but arguments continued until perhaps two years later. Now the 1987 Crash is textbook material ...

I don't see how another six months of arguing about it going to turn up anything that will change the general shape of our understanding of the causes of this. It's just the details of the aftermath that should still await explanation. Looks very much to me like another textbook case of what some call a credit bubble, made larger than was possible before thanks to all that financial innovation and globalization. Stability breeds instability in more or less the usual way.

There is still plenty of room to argue about the details, but it seems a lot easier to understand than 1987 did. Possibly because I was just a teenager in 1987! But also it's just larger and therefore easier to see. I think far more people saw it coming this time, and the nature of the basic problem was widely understood well in advance of the market crash. There are various different interpretations of why exactly it happened, but I don't think more time is likely to change that; after all, there are still various different interpretations of the Great Depression to argue about.

Don't get me wrong, I look forward to seeing what you Business School guys will come up with. Having this much data about such an event will no doubt go a long way to improving your econometric models. I just wanted to point out we've already had a few years of arguing about the causes of the problem, which is more fundamentally important than the mechanics of the crash.
posted by sfenders at 5:38 AM on November 18, 2008

I don't know what the real number is... let's stop right there.

Let's say it's a million homes (it's not that much) averaging $300,000 (it's not that much) and those million homes are complete write-offs (they're not). That's 300 bln.

The financial sector is in a hole more than a trillion dollars deep.

Can't blame that on poor immigrants getting hand-outs from Fanny and Freddy, no matter how you slice it.
posted by Slap*Happy at 5:54 AM on November 18, 2008 [1 favorite]

Let's say it's a million homes (it's not that much)

I don't think so, but feel free to provide some actual evidence. RealtyTrac says 739714 foreclosure filings in 2008 Q2 for example. The rate has increased since then. They claim to have had 1.5 million properties listed as in foreclosure just at the time of that press release a few months ago. It is that much, and more.

And then, like I mentioned, to be comparing comparable things, you ought to include the effect on valuation of all the other mortgage debt on the market before you expect to get near a trillion dollars. It is not so easy to calculate what this "should" be exactly under any circumstances, let alone those we face at the moment, but you know it's going to be large.

I don't have any idea about "poor immigrants". In fact when I think of the stereotypical bad credit risk, I think of some people in my own family who I love dearly.
posted by sfenders at 6:17 AM on November 18, 2008

About 51 million first mortgages in the U.S.. In 2007 1.5% were in default - about 2% in 2008.

Slap*Happy has it right, that's about a million homes. I had figured an average $200K per home - for $204 billion in bad mortgage.

A very small percent of those are CRA loans, and from what I have read, banks that made CRA loans are less likely to be in trouble than non-CRA institutions because the government was overseeing the CRA funding.

And dammit - the comma is broken on my keyboard.
posted by Xoebe at 6:28 AM on November 18, 2008

No, I don't actually know how many non-multimillionaires bought eight homes. But the number should be zero. But as few as there are at eight, there are a few more at 7, a few more still at 6, etc. I was exaggerating. Casey Serin was embraced at the time and stands as a symbol of greed powered by ignorance. But if you want to know to what extent speculation drove the market, that data is readily available, and has been all along:

2005: According to a study released by the National Association of Realtors on Tuesday, second homes accounted for more than a third of residential real estate transactions in 2004.

2005: In 2004, when the housing bubble was really gathering steam, the National Association of Realtors calculated that 23 percent of homes purchased were for investment, and 13 percent were for second homes.

2006: "We think 40 percent of the people who are buying homes are merely speculators,"

2006: Second-home sales were mixed in 2006, with the combined total of vacation- and investment-home sales accounting for 36 percent of all existing and new residential transactions -- down from 40 percent of sales in 2005, according to the National Association of Realtors.

2006: ""I believe that you can live out your fantasy," Frisby says. "That is what I'm doing. That is what my wife is doing. That is what other people are doing when they build or buy a house like this." - Behind the Ever-Expanding American Dream House

2008: Speculators Make Up 20 Percent of Foreclosures in the Metro Area

The first time I visited New York City, I got hustled out of $40 by a team of con artists in Times Square.

Same thing happened to me but it was in Philly and it was $5. I think you'll agree that in retrospect, given the lesson we learned, we got a bargain.
posted by Pastabagel at 6:31 AM on November 18, 2008 [2 favorites]

Good reply Pastabagel. I agree that speculation was a large factor, but I don't think that everyone who bought a second home or purchased a home for investment was a predatory borrower.

For the record, I'm renting while I wait for sanity to return, and I have no love for speculators. I just loathe the spin from the free marketers that liberals and predatory borrowers are to blame. Casey Serin is used by them to back up their claims.

Back to Gramm, Krugman has some more details showing that the arguments coming from Gramm and his ilk are bogus. In summary, Fannie and Freddie started ramping down their mortgage lending in 2003, and the asset-backed securities issuers started ramping up. These lenders weren't subject to the Community Reinvestment Act (the current bogeyman of the Right).
posted by diogenes at 7:15 AM on November 18, 2008

About 51 million first mortgages in the U.S.. In 2007 1.5% were in default - about 2% in 2008.

Okay. Knowledge I have inadvertently absorbed this year while reading Calculated Risk includes the fact that "in default" is not the same as "in foreclosure" is not the same as "foreclosure completed". The "about 2%" you mention very likely refers to those that were somewhere in the foreclosure process at one specific time in 2008. Not all of them will have ended with completed foreclosure. Many completed foreclosures will have already finished by that time and are not included in that number. It does not tell you anything much at all about how many actually did complete over the entire course of the year, unless you make some assumptions about what percentage of them do on average, and how long it takes. What you'd be looking for is "foreclosures completed" in 2007/08. And then you'd have to compare it with a "normal" level of foreclosures, and then estimate the actual direct losses, and then try to work out any relationship you might want to find between that and what exactly happened to bank balance sheets et cetera, which again I remind you depends in large part on how many foreclosures are expected to occur in the future, not just how many have already happened. That much would be somewhat necessary in any case, eg for loan loss provisions. So yeah, I guess it is all a bit complicated before you even get to mortgage backed securities.

Where one might find the exact number of foreclosures so far, if you are of the opinion that it makes some difference to anything substantial here beyond noting that it's a much larger number than we'd like it to be, is beyond my ability to find with the quick web search that is all the effort I'm going to give it. In looking for it I did happen to find this: Lessons from the Subprime Meltdown (LR Wray, December 2007). It includes an overview of how it all went wrong which seems about right to me.

As for Gramm, well, "It is only in retrospect that we can see the boom for what it was - mass delusion propagated in part by policy makers and those with vested interests who should have known better." Someone needs to let him know that it's okay to give up those delusions now that the boom is over.
posted by sfenders at 4:03 PM on November 18, 2008 [1 favorite]

"It is only in retrospect that we can see the boom for what it was - mass delusion propagated in part by policy makers and those with vested interests who should have known better."

That's much the same language as that used by Iraq war apologists.

Plenty of intelligent and eloquent people knew from the get-go that the Iraq war lead-up was based on lies and pushed by profiteering war-mongers. Plenty of intelligent and eloquent people have known for ages that the US economy was built on a foundation of sand and hyped by hucksters.

Fuck you, Gramm, for being a wilfully ignorant participant in the destruction of the US economy. If you didn't know where things were heading, it was only because you were determined not to look.
posted by five fresh fish at 4:09 PM on November 18, 2008 [1 favorite]

Indian banks smug as banking crisis rolls past
posted by telstar at 6:26 PM on November 18, 2008

I've heard this before, but I'm skeptical that there are hundreds of thousands of people with 8 mortgages. Can you back that statement up? If you can't, you shouldn't be repeating it. I think it distorts the root cause of the problem in a malicious way.

Half the realtors I've had the misfortune to come into contact with had a string of rental properties.

There are ~500,000 licensed Realtors® in California alone.
posted by troy at 8:54 PM on November 18, 2008