One more - Taibbi on Jon Corzine:
Its not a book but hereis a paper about how much the Community Reinvestment Act lead to riskier loans and upped the chances of default.
I read the Big Short too, but one of us missed the point of it. From my reading the only fraud was committed by the people who applied for the loans and were encouraged by their mortgage brokers to lie on their loan applications. Except it was not real fraud because the people that were giving them the loans did not care if the information was true they just wanted loans to be able to sell. The people who bought the loans didn’t really care about how good they were since they thought that securitization had reduced the risk of default. All the computer models said that house prices had gone up for seventy years and there was no reason to think that was going to change. As long as prices went up it did not matter if the people could not afford the mortgages, if they could not make payments they could sell the house for a profit and the mortgage would be paid off.
Because mortgages had been so historically safe mortgage backed securities were treated as nearly cash equivalents by bank regulators. This meant banks could apply huge amounts of leverage in these securities and still comply with the laws.
The credit default swaps that people get so angry about because the banks were selling them and then betting against them is not like a car company not making a recall it is more like a bookie taking bets from stupid people. If a german bank goes to an american bank and says they want to buy mortgage backed securities the bank needs to find someone to take the other side. There were people who were convinced their was a real estate bubble and these mortgage would soon default. They made bets that the mortgages would default and the other people made bets that they would not default. The people who thought it was a real estate bubble did not have priveleged information, they just had a contrarian outlook. Those who thought the mortgages would not default had access to the same information and made the bets anyway. Sometimes the banks were convinced by the people who made the bubble bets and took the short side themselves. But the people who took the long side always had access to the same information that the banks had, they just ignored it or disagreed with what it meant.
When the real estate market collapsed the mortgages defaulted, the computer models were proven wrong, and companies that had huge leverage in the mortgages collapsed. Not because of criminal activity but because they were wrong about things they had made huge bets on.
I was just being snarky.
The bigger problem I have is the relatively recent development – say last 15 to 20 years - of paradigm control in terms of language, semantics, conflation of logic and assumption and similar high-level and meta-level lawyer-speak by Government and its agencies.
The most prominent place in the new paradigm is held by Orwellian-like (as there cannot be any other when it comes to English language manipulation) phrases that envelope the sphere of public discourse such as “admit no wrongdoing”, “revolving door”, “too big too fail”, “incompetence”, “public-private partnership” and many other.
What I would argue is that while there was no any individual and specific plan or idea on it the whole paradigm got created as a survival instinct by certain groups intertwined with Government and, in my opinion, very good at lobbying efforts.
The net result is that the whole thing – weather we are talking about “financial crisis”, “public debt”, “Iraq war” or “Middle-East policy” – is being designated as the most complex thing ever in which everything is done in accordance to law yet outcomes are similar to those of organized crime – theft, wealth redistribution, many innocent people killed and many more put in worse situation than a year before.
What is proof anyway?
Congress sets the banking rules and they were warned about the problems in the mortgage industry as well as the derivative market and did nothing. If there’s going to be a cattle call for the crime of malfeasance they should be added to the list of those responsible.
Mortgage security fraud as per Goldman emails is an example of such conduct. Those guys writing or receiving those emails should be on the hook. Just because you work for a “corporation” does not mean that you’re not personally responsible.
By the way, let’s make one thing clear - I’m not calling for banks or institutions to fail. I’m calling for an examination of each individual role in accordance with hierarchy of decision making and signatures.
That’s all.
However, this is as much as my understanding of law goes. I’m sure that there is some fine lawyer-speak – and I say this with as much prejudice as possible – that will turn it upside down.
The Goldman case is a good example. They are being sued for allowing a person shorting an investment to pick what went into the investment. However, everyone who bought the investment knew exactly what was in the investment and had access to the same information about the investment as the person who made it. If the American real estate market had followed Canada’s instead of collapsing then the person who designed it would have lost all his money instead of the people who bought it.
Furthermore banks have to hedge all their bets. Even if they believe the investments are great they still have to bet a little bit against them so if they are wrong they are not wiped out.
All of this amounts to a call to enforce what the laws should have been with the benefit of hindsight instead of what they were.
I’ve read a lot of books on this issue ( the ones I recommended are among the best but only a small fraction of what I’ve read) so sometimes I don’t really remember the books individually as well as I would like, but I seem to recall the main story in the Big Short being about investment fund managers that scoured RMBS offerings looking for incredibly crappy deals and then taking out insurance policies on those instruments even though they didn’t own any of them.
Sort of like driving around town looking for rattletrap, ill-maintained houses and taking out fire insurance policies on them ( except this tactic isn’t legal with legitimate insurance )
Not as far as I know. Did you have a point?
Yes. A person who works for a corporation is guilty of criminal conduct if the action he takes to complete a crime is on behalf of the corporation.
But then you go on to simply cite “the Goldman emails…” without any real specificity about what crimes they reveal.
The Rolling Stone article does the same thing. It explains certain conduct, then likens it to obviously criminal conduct:
A ha! Goldman blasted people with gasoline! That’s certainly a crime.
But of course, they didn’t. They did have $1.2 billion worth of toxic assets, and they did dump those assets on their clients. But that’s not necesssarily criminal. As Rolling Stone says:
The problem with that trenchant analysis is that simply because you find terms like “scienter” and “loss casuation” confusing, you cannot sweep them away and declare your analysis complete. Even if they confuse you, they are still key concepts in obtaining a criminal conviction.
If there is a specific crime that you contend Goldman (or anyone else) committed, please identify it. But claiming that elements of the crime are “legalese mumbo jumbo” is not going to work.
Yes. I haven’t seen anyone in this thread identify a specific crime.
If you’ve read this thread, that has been made abundantly clear. Institutions took mortgage loans which were either bad on their face due to improper and/or insufficient underwriting documentation or were otherwise at a very high risk of default and packaged these for sale as investment grade securities.
I really don’t think you need even a perfunctory familiarity with the law to realize that trying to sell loans with a high probability of default as investment grade constitutes fraud - do you?
Then there is the conduct of the rating agencies which gave said securities AAA ratings when it was impossible for them to inquire into the quality of the paper in those securities. As I’ve said before, that is willful negligence at best.
The deals were kind of like insurance policies in that they paid out if the instruments burned down. The difference is that the did not own what they thought was going down. I don’t see that they did anything wrong since they did not cause the fires, they merely profited from predicting the fires.
The banks were akin to sports books in that some people thought the Ravens were going to win and some people thought the 49ers were going to win. What the sports books do is try to make the odds so that equal numbers bet on both sides and they keep the vigorish.
What happened in the financial crisis is that one side wanted to make bets on the financial equivalent of betting on the 1985 Patriots to beat the Bears. The question is whether Goldman should have stopped them from doing so since in retrospect that was such a stupid bet. These were not brain damaged toddlers making the bets, they were professional investors who were very intelligent and it is not the banker’s job to protect people from their own stupidity.
The point is whether they did have a high probability of default. Most of the financial world thought mortgages were very safe investments because they had always been safe investments.
You say packaged as safe investments, that does not mean that those who bought them were under the impression that the investments were anything different than what was being sold to them. They just thought the investments were not as risky as the people selling them thought they were. Differences of opinion over what something is worth is what drives every commercial transaction in the world.
The rating agencies had the same opportunity to investigate the quality of the securities as those who assembled the security. They failed to do their job because they failed to foresee the first housing downtown in living memory, they did not have any competition so they could be bad at their job, and the people who were investing did not want to know what the real risk was they just wanted them rated highly so the banking laws would allow them to buy as much as possible.
No, you’re simply wrong. You need to look up what investment grade means. It means a low risk of default.
As for the rating agencies, it was their JOB to know what was going into the sausage and there was simply know way they ever could.
As for investors, you have things confused. They were NOT the ones paying for the ratings. You would think that’s how it should work but it isn’t. Please do some research on this.
Low risk of default is only meaningfull if there is an accurate way of meauring risk. There simply is not, it is inherently subjective. It was their opinion that the risk was low because their computer models toldthem the risk was low. Unfortunately the computers were wrong about the risk, that is not fraud, that is not knowing the future.
The rating agencies should have done their job and they could have if they had been interested. These investments were not written in Ancient Sumerian, if the people who created them knew what they contained the agencies could have as well. Unfortunately, the had the same opinion as everyone else about the riskiness of the mortgage business.
Investors were not paying for the agencies but they were the one consuming the reports and buying the investments.
You don’t seem to understand how any of this works I’m afraid and if you won’t accept my explanations, I’m not sure what I can do to help you.
First of all, there are an infinite number of ways of measuring risk so I don’t know where you got that idea. In this context, the primary way you do that is through underwriting standards. If you know that underwriting standards are lacking or non-existent, then you must also realize that the risk of default goes up astronomically.
Second, no, the agencies could never have done their jobs since they never had access to the underlying paper that constituted the MBSs or the supporting documentation.
As to your last point, I don’t see the relevance.
But what do you mean by “default” here? If an individual mortgage holder defaulted, but it was backed by an appreciated house, the to the investor that’s not a default - he still gets his money out of it.
The investors who were buying these MBSs thought that they were very low risk, because even if some of the mortgagees couldn’t pay, the investors would still have the expensive property.
Should they have evaluated the risk differently? In retrospect, absolutely. Some people did, others didn’t. It was all made much more complicated by how new this was to the investors, and how the Giant Pool of Money was demanding something to invest in that would give better returns that bonds and the stock market.
Sorry, but that’s not how you look at debt instruments. Just because i know that if company X defaults and goes into bankruptcy that I’ll get 100 cents on the dollar for my company X bonds, that does not get those bonds a AAA rating.
Come on people, this is some basic stuff here.
I WILL grant you that’s how the people putting these derivatives together looked at things and it may be possible to make a plausible argument here, but that doesn’t lessen the degree of the fraud which is the issue at hand.
intentional ignorance.
You really think Angelo Mozillo didn’t know that the stuff he was packaging and selling was rife fraud?
Funny you should say that as a petition is being signed Make Lawmakers Wear Logos Of Financial Backers On Clothing, Like In NASCAR.
No, no corruption here. Carry on. :o