Doesn’t matter. There is no truth but socialist truth.
The word “statist” seems more apt. They appear perfectly content controlling both directly and indirectly.
Stricter regulation of credit-default swaps wasn’t going to make those subprime mortgages any less likely to go bad.
Actually, it would have, by dampening the demand on Wall Street for those mortgages, which would have translated into stricter lending standards.
And even aside from that, it would have prevented things like the collapse of AIG, which was brought down by credit default swaps. The ability of third parties to buy insurance on other people’s bonds multiplied the risk posed by the original mortgages.
Plus, credit-default swaps made possible scams like Magnetar’s, detailed by ProPublica.
How would stricter lending standards have protected lenders from the political pressure for “more affordable” home financing?
Mmkay. Read the article; not buying it.
The rot in the system is pervasive, from one end to the other; from idiots who don’t read the legal documents that they sign, to the idiots in government who enabled it.
Seriously, is abnegation of one’s regulatory duty any different, in effect or affect, from deregulation?
Jim’s point is right on – there was tremendous pressure from the IBs to originate mortgages that could be packaged up into MBS. I’ve seen a lot of these crappy mortgages. I’ve seen fraud. I’ve seen deliberate obfuscation. From toll collectors with four townhomes in a boarded up row, to someone begging for a mod who went out and bought season passes to their local football team right before pleading impoverishment.
I’ve seen so much capital extraction and gaming of the system over the last few years that it sickens me. And don’t even get me started on CDARS.
Because what’s to stop someone from, for example, doing a naked short on a company? The market gets immediate information that someone thinks the value of the company is going down,and reacts accordingly, but the actual fact that there was no real trade is not revealed until several days later when the trade doesn’t settle.
Prior to having done a naked short, our someone was smart enough to have bought a naked CDS on the same company’s debt (public or private). Once the stock is shorted, the value of the CDS will begin to climb, and it can be sold into the market for a profit. How much profit depends on how long one waits.
None of which does anything to provide capital for small companies to buy machinery or fit out a space for the new employees they’ve had to bring on since they got that big contract. It doesn’t allow farmers to buy capital equipment to better feed our nation. It is gambling in a rigged market. I don’t necessarily have an issue with gambling, but if that’s where I wanted to put my investment capital I’d already be in Vegas or Atlantic City.
The clean-up of this mess is going to be, quite literally, the work of a nation, and the last thing we need is partisan nonsense. Everyone’s culpable in some way, shape or form, through action or inaction, so we all have to face the music and start putting our nation back on track to solid economic growth instead of financial flim-flammery.
Ken, one can agree with all of that, and still point out that the problem was not “deregulation,” and that the solution is not the “regulation” (which the Democrats’ donors on Wall Street love) that constitutes the Dodd bill. And have they taken the “angel killer” language out? How is reducing the number of angels (and making it much more difficult to do a startup) going to solve what happened? If they really wanted to fix the economy, and create jobs, they’d reform SOX. But I don’t see that happening, either. Instead they’re doubling down on destroying the ability to start a new company.
Seriously, is abnegation of one’s regulatory duty any different, in effect or affect, from deregulation?
Yes, in that the two problems have different solutions. Passing new regs does nothing about the first problem…
Yes, Jim, it’s easy to say in retrospect that the “crime” would have been easy to stop if only we’d been enforcing the law. But we’re in the “1 inspector too many” mode. There are so many f**king layers of regulation that each one sits back and relaxes, secure in the belief that the next regulator, or the one after him, or the one after him…will catch things. They download pr0n all day, without a care in the world…because they know that if they don’t do their job, people like you will be quick to say that it was underregulation that was at fault. And they’ll laugh, collect their pensions at the end of a career pushing their betters around, and relax while we try to pick up the pieces.
But it’s people like you who make it possible.
Well, Rand, you actually can’t agree with Ken and say there was no deregulation. Credit default swaps, for example, were explicitly deregulated in a series of actions starting in 1993. Credit default swaps were what sank AIG, and part of what went into giving subprime bonds their “risk-free” aura.
Also, the subprime mortgages came primarily (75%) from unregulated mortgage companies. Because the companies held none of the risk, they had no incentive to not give loans to poor credit risks.
Some of the deregulation was Clinton’s fault, and some of it was the Republican congress’s fault. But it happened, and it allowed an asset bubble to get all out of control.
Seriously, is abnegation of one’s regulatory duty any different, in effect or affect, from deregulation?
Yes, very much so because it means that adding regulation won’t work. They’ll just abnegate on more regulation. Seriously, how do you get a bureaucrat to do work when they aren’t required to do it? Pass a “This time we really mean it, honest” regulation that requires bureaucrats to police themselves to do their job?
Because what’s to stop someone from, for example, doing a naked short on a company? The market gets immediate information that someone thinks the value of the company is going down,and reacts accordingly, but the actual fact that there was no real trade is not revealed until several days later when the trade doesn’t settle.
What stops the shorters? They can’t short any more, if they can’t settle the trade. And they’re still on the hook for that stock. So they’re probably bankrupt.
So why do we have a bill that stifles new businesses, creates what is essentially a slush fund, excludes two of the main players in Fannie and Freddie and creates new levels of bureaucracy when the ones we have just weren’t doing their jobs?
If Chris is correct, we don’t need all of that. just stricter controls on credit default swaps AND the underlying mortgages. Say, how about reforming the CRA and limiting the role of Fannie and Freddie? Let’s make the regulation and regulators we have work efficiently. What a novel concept!
And of course you need regulation, because everyone knows the smartest and honestest people in the world are polticians and bureaucrats (who always have the most most perfect knowledge of everything and all times), so why not trust them to run everything right?
Indeed, Bilwick. After all, they’ve done an amazing job so far.
Bill Maron – what part of “excluded credit default swaps from regulation” did you not understand? The regulators had no authority to do anything about them.
Bilwick1 & Karl – one of the regulatory reforms proposed is limits on risk capital. The nice thing about that is that it doesn’t require a great deal of intelligence or energy to regulate. Read Paul Krugman when he talks about “regulatory schemes for idiots.”
“Read Paul Krugman when he talks about ‘regulatory schemes for idiots.'” Oh, well, if that freedom-loving genius is for it, who am I to oppose?
Read Paul Krugman when he talks about ‘regulatory schemes for idiots.’
Well, I’m glad Paul Krugman is taking care of his audience.
Well Chris, those transactions were still subject to the criminal code as in fraud. There were many reports of fraudulent mortgages and selling something you know to be worthless but represented as having value is fraud. The conversation has been about a lack of civil regulation. No one is talking about if any laws were broken. You do know these are civil agencies imposing civil penalties, don’t you? The state and federal criminal systems prosecute any crimes uncovered by these agencies. You’re welcome to nitpick what I wrote to give yourself a chance at condescension. I noticed you had no substantive response to what I wrote.
Bill Maron – actually, I pointed out a substantial issue with your post. Since you ask, I’ll point out some more issues.
1) Criminal prosecutions are after the fact. Civil regulations can prevent the crime. Also, criminal cases require proving a defendants state of mind, while civil regulations don’t. It’s a more effective regime.
2) The goal of tighter civil regulations is to set up a system in which the incentives don’t reward bad acts. For example, a properly-structured mortgage company would have a credit department incentivized to NOT write mortgages. This would filter out a lot of the garbage.
3) The Community Reinvestment Act (CRA) had nothing to do with this mess. Mortgage companies aren’t governed by CRA, and they were the ones writing the bad mortgages. Nor does CRA require Wall Street to buy the bad paper. Nor does CRA apply in any way to AIG.
4) The bill does not create a “slush fund.” When rolling up a failed institution, there are a number of costs that simply have to be paid, ranging from the light bill to interim payrolls. We can either bank that money now or tax ourselves for it later.
Chris
Much of the problem was Regulatory “Arbitrage”.
it used to be Banks were limited in their lines of business and as such
existed within the span of control of one regulator.
S&L’s were regulated by FSLIC, Comm Banks by FDIC, Broker-dealers and Publically traded companies by SEC, interstate banks by Federal Reserve….
Citibank sold the idea of a Financial Supermarket. that you went to a bank for everything from Insurance to mutual funds to stocks to deposits to money markets. However no one regulator had oversight of these firms.
Instead they would see narrow slices. AIG was regulated by 50 state insurance regulators but the part that sank them was the financial products group out of London. The british weren’t regulating it because they thought SEC had it. SEC thought the state regulators had it. The states thought the brits had it and AIG was damned if they were going to say zip.
Of course AIG in New York didn’t even know what was going on in london because they were 5 hours ahead and could locally game the books also.
the point of Hedge funds was to create unregulated pools of money, that sophisticated investors could invest into but were utterly unregulated.
Long Term Capital Management (LTCM) was the first warning that these enormous leveraged funds could be systematically dangerous.
LTCM took a trillion dollar bet on the spread between the yen and the dollar
and when the bet went bad, they were threatening to take down every I Bank in New York. Alan Greenspan led a secret bailout of LTCM, and shut it down, but allowed this to continue off the view screens of any regulator even the new york fed.
this created intense moral hazard as every shyster in New York realized if you took a trillion dollar bet, and it went bad the Fed would bail you out.
hence we now have several hundred trillion of leveraged bets, sitting bad, and the Fed desperately trying to bail these out.
Jack – the “money supermarket” idea was at the heart of Gramm-Leach-Bliley (GLBA), the deregulation law passed in 1999 by a Republican congress and signed by a Democratic President.
So, yes, inasmuch as GLBA allowed Citigroup, deregulation did cause the collapse.
> Civil regulations can prevent the crime.
No they can’t. That’s ridiculous. They no more prevent the crime than criminal regulations. In fact, criminal regulations generally prevent more crime, since people are more afraid of jail than being sued.
Yours,
Tom
Historically we’ve had “deregulated” mortgage markets where essentially all mortgages were “prime.” Without any overarching regulation, and no one buying or backing risk in an insane fashion, there’s just not that much danger in mortgages. The history of mortgages preceeds the birth of America. The Germans alone have marched through a dizzying array of different structures.
But, left alone, the fatcats tend to lend money at 20% down with an income and prospects examination.
If, iff, people were lending at close to that market level, it doesn’t much matter what sort of crazy scheme anyone comes up to spread the risk. Because there fundamentally isn’t that much freaking risk. And the risk that is there is accepted by the lendee as well. When you plunk 20% down, you’re personally vested in the venture. Even a 20% drop in market values doesn’t get people to walk – because you know you’ll (1) be losing your own damn money, and (2) because you’re more willing to at least hope the market will turn around before you need to sell.
Instead of backing more zero-down, no-papers insanities, the method of subsidizing home ownership should be more along the lines of direct subsidies and credits that travel through the homeowner and into the equity.
That also can shift the market way down from a “20% down” expectation, but at least (1) the bills are paid up front and are of a known size, (2) the owner’s much-faster-than-normal rise in equity would make them walking away from mild setbacks unpalatable.
Doesn’t matter. There is no truth but socialist truth.
The word “statist” seems more apt. They appear perfectly content controlling both directly and indirectly.
Stricter regulation of credit-default swaps wasn’t going to make those subprime mortgages any less likely to go bad.
Actually, it would have, by dampening the demand on Wall Street for those mortgages, which would have translated into stricter lending standards.
And even aside from that, it would have prevented things like the collapse of AIG, which was brought down by credit default swaps. The ability of third parties to buy insurance on other people’s bonds multiplied the risk posed by the original mortgages.
Plus, credit-default swaps made possible scams like Magnetar’s, detailed by ProPublica.
How would stricter lending standards have protected lenders from the political pressure for “more affordable” home financing?
Mmkay. Read the article; not buying it.
The rot in the system is pervasive, from one end to the other; from idiots who don’t read the legal documents that they sign, to the idiots in government who enabled it.
Seriously, is abnegation of one’s regulatory duty any different, in effect or affect, from deregulation?
Jim’s point is right on – there was tremendous pressure from the IBs to originate mortgages that could be packaged up into MBS. I’ve seen a lot of these crappy mortgages. I’ve seen fraud. I’ve seen deliberate obfuscation. From toll collectors with four townhomes in a boarded up row, to someone begging for a mod who went out and bought season passes to their local football team right before pleading impoverishment.
I’ve seen so much capital extraction and gaming of the system over the last few years that it sickens me. And don’t even get me started on CDARS.
Because what’s to stop someone from, for example, doing a naked short on a company? The market gets immediate information that someone thinks the value of the company is going down,and reacts accordingly, but the actual fact that there was no real trade is not revealed until several days later when the trade doesn’t settle.
Prior to having done a naked short, our someone was smart enough to have bought a naked CDS on the same company’s debt (public or private). Once the stock is shorted, the value of the CDS will begin to climb, and it can be sold into the market for a profit. How much profit depends on how long one waits.
None of which does anything to provide capital for small companies to buy machinery or fit out a space for the new employees they’ve had to bring on since they got that big contract. It doesn’t allow farmers to buy capital equipment to better feed our nation. It is gambling in a rigged market. I don’t necessarily have an issue with gambling, but if that’s where I wanted to put my investment capital I’d already be in Vegas or Atlantic City.
The clean-up of this mess is going to be, quite literally, the work of a nation, and the last thing we need is partisan nonsense. Everyone’s culpable in some way, shape or form, through action or inaction, so we all have to face the music and start putting our nation back on track to solid economic growth instead of financial flim-flammery.
Ken, one can agree with all of that, and still point out that the problem was not “deregulation,” and that the solution is not the “regulation” (which the Democrats’ donors on Wall Street love) that constitutes the Dodd bill. And have they taken the “angel killer” language out? How is reducing the number of angels (and making it much more difficult to do a startup) going to solve what happened? If they really wanted to fix the economy, and create jobs, they’d reform SOX. But I don’t see that happening, either. Instead they’re doubling down on destroying the ability to start a new company.
Seriously, is abnegation of one’s regulatory duty any different, in effect or affect, from deregulation?
Yes, in that the two problems have different solutions. Passing new regs does nothing about the first problem…
Yes, Jim, it’s easy to say in retrospect that the “crime” would have been easy to stop if only we’d been enforcing the law. But we’re in the “1 inspector too many” mode. There are so many f**king layers of regulation that each one sits back and relaxes, secure in the belief that the next regulator, or the one after him, or the one after him…will catch things. They download pr0n all day, without a care in the world…because they know that if they don’t do their job, people like you will be quick to say that it was underregulation that was at fault. And they’ll laugh, collect their pensions at the end of a career pushing their betters around, and relax while we try to pick up the pieces.
But it’s people like you who make it possible.
Well, Rand, you actually can’t agree with Ken and say there was no deregulation. Credit default swaps, for example, were explicitly deregulated in a series of actions starting in 1993. Credit default swaps were what sank AIG, and part of what went into giving subprime bonds their “risk-free” aura.
Also, the subprime mortgages came primarily (75%) from unregulated mortgage companies. Because the companies held none of the risk, they had no incentive to not give loans to poor credit risks.
Some of the deregulation was Clinton’s fault, and some of it was the Republican congress’s fault. But it happened, and it allowed an asset bubble to get all out of control.
Seriously, is abnegation of one’s regulatory duty any different, in effect or affect, from deregulation?
Yes, very much so because it means that adding regulation won’t work. They’ll just abnegate on more regulation. Seriously, how do you get a bureaucrat to do work when they aren’t required to do it? Pass a “This time we really mean it, honest” regulation that requires bureaucrats to police themselves to do their job?
Because what’s to stop someone from, for example, doing a naked short on a company? The market gets immediate information that someone thinks the value of the company is going down,and reacts accordingly, but the actual fact that there was no real trade is not revealed until several days later when the trade doesn’t settle.
What stops the shorters? They can’t short any more, if they can’t settle the trade. And they’re still on the hook for that stock. So they’re probably bankrupt.
So why do we have a bill that stifles new businesses, creates what is essentially a slush fund, excludes two of the main players in Fannie and Freddie and creates new levels of bureaucracy when the ones we have just weren’t doing their jobs?
If Chris is correct, we don’t need all of that. just stricter controls on credit default swaps AND the underlying mortgages. Say, how about reforming the CRA and limiting the role of Fannie and Freddie? Let’s make the regulation and regulators we have work efficiently. What a novel concept!
And of course you need regulation, because everyone knows the smartest and honestest people in the world are polticians and bureaucrats (who always have the most most perfect knowledge of everything and all times), so why not trust them to run everything right?
Indeed, Bilwick. After all, they’ve done an amazing job so far.
Bill Maron – what part of “excluded credit default swaps from regulation” did you not understand? The regulators had no authority to do anything about them.
Bilwick1 & Karl – one of the regulatory reforms proposed is limits on risk capital. The nice thing about that is that it doesn’t require a great deal of intelligence or energy to regulate. Read Paul Krugman when he talks about “regulatory schemes for idiots.”
“Read Paul Krugman when he talks about ‘regulatory schemes for idiots.'” Oh, well, if that freedom-loving genius is for it, who am I to oppose?
Read Paul Krugman when he talks about ‘regulatory schemes for idiots.’
Well, I’m glad Paul Krugman is taking care of his audience.
Well Chris, those transactions were still subject to the criminal code as in fraud. There were many reports of fraudulent mortgages and selling something you know to be worthless but represented as having value is fraud. The conversation has been about a lack of civil regulation. No one is talking about if any laws were broken. You do know these are civil agencies imposing civil penalties, don’t you? The state and federal criminal systems prosecute any crimes uncovered by these agencies. You’re welcome to nitpick what I wrote to give yourself a chance at condescension. I noticed you had no substantive response to what I wrote.
Bill Maron – actually, I pointed out a substantial issue with your post. Since you ask, I’ll point out some more issues.
1) Criminal prosecutions are after the fact. Civil regulations can prevent the crime. Also, criminal cases require proving a defendants state of mind, while civil regulations don’t. It’s a more effective regime.
2) The goal of tighter civil regulations is to set up a system in which the incentives don’t reward bad acts. For example, a properly-structured mortgage company would have a credit department incentivized to NOT write mortgages. This would filter out a lot of the garbage.
3) The Community Reinvestment Act (CRA) had nothing to do with this mess. Mortgage companies aren’t governed by CRA, and they were the ones writing the bad mortgages. Nor does CRA require Wall Street to buy the bad paper. Nor does CRA apply in any way to AIG.
4) The bill does not create a “slush fund.” When rolling up a failed institution, there are a number of costs that simply have to be paid, ranging from the light bill to interim payrolls. We can either bank that money now or tax ourselves for it later.
Chris
Much of the problem was Regulatory “Arbitrage”.
it used to be Banks were limited in their lines of business and as such
existed within the span of control of one regulator.
S&L’s were regulated by FSLIC, Comm Banks by FDIC, Broker-dealers and Publically traded companies by SEC, interstate banks by Federal Reserve….
Citibank sold the idea of a Financial Supermarket. that you went to a bank for everything from Insurance to mutual funds to stocks to deposits to money markets. However no one regulator had oversight of these firms.
Instead they would see narrow slices. AIG was regulated by 50 state insurance regulators but the part that sank them was the financial products group out of London. The british weren’t regulating it because they thought SEC had it. SEC thought the state regulators had it. The states thought the brits had it and AIG was damned if they were going to say zip.
Of course AIG in New York didn’t even know what was going on in london because they were 5 hours ahead and could locally game the books also.
the point of Hedge funds was to create unregulated pools of money, that sophisticated investors could invest into but were utterly unregulated.
Long Term Capital Management (LTCM) was the first warning that these enormous leveraged funds could be systematically dangerous.
LTCM took a trillion dollar bet on the spread between the yen and the dollar
and when the bet went bad, they were threatening to take down every I Bank in New York. Alan Greenspan led a secret bailout of LTCM, and shut it down, but allowed this to continue off the view screens of any regulator even the new york fed.
this created intense moral hazard as every shyster in New York realized if you took a trillion dollar bet, and it went bad the Fed would bail you out.
hence we now have several hundred trillion of leveraged bets, sitting bad, and the Fed desperately trying to bail these out.
Jack – the “money supermarket” idea was at the heart of Gramm-Leach-Bliley (GLBA), the deregulation law passed in 1999 by a Republican congress and signed by a Democratic President.
So, yes, inasmuch as GLBA allowed Citigroup, deregulation did cause the collapse.
> Civil regulations can prevent the crime.
No they can’t. That’s ridiculous. They no more prevent the crime than criminal regulations. In fact, criminal regulations generally prevent more crime, since people are more afraid of jail than being sued.
Yours,
Tom
Historically we’ve had “deregulated” mortgage markets where essentially all mortgages were “prime.” Without any overarching regulation, and no one buying or backing risk in an insane fashion, there’s just not that much danger in mortgages. The history of mortgages preceeds the birth of America. The Germans alone have marched through a dizzying array of different structures.
But, left alone, the fatcats tend to lend money at 20% down with an income and prospects examination.
If, iff, people were lending at close to that market level, it doesn’t much matter what sort of crazy scheme anyone comes up to spread the risk. Because there fundamentally isn’t that much freaking risk. And the risk that is there is accepted by the lendee as well. When you plunk 20% down, you’re personally vested in the venture. Even a 20% drop in market values doesn’t get people to walk – because you know you’ll (1) be losing your own damn money, and (2) because you’re more willing to at least hope the market will turn around before you need to sell.
Instead of backing more zero-down, no-papers insanities, the method of subsidizing home ownership should be more along the lines of direct subsidies and credits that travel through the homeowner and into the equity.
That also can shift the market way down from a “20% down” expectation, but at least (1) the bills are paid up front and are of a known size, (2) the owner’s much-faster-than-normal rise in equity would make them walking away from mild setbacks unpalatable.