Libertarian Mythology

Great Debates
141

Yes, let’s look at how that “competitive market regulation” worked out in reality, shall we?
This instant message exchange between two unidentified Standard & Poor’s officials about a mortgage-backed security deal they were supposed to be rating on 4/5/2007:

Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right…model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
Here’s the ratings agency bit in context in a bit of quote art I did about how dereguilation led to the financial meltdown :

*“Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.”

Alan Greenspan
Chairman of the Federal Reserve Bank,
April 2005

“Mr. Howard made it clear to the mortgage broker that he could not read or write, but his loan application erroneously claimed he had had 16 years of education.”

Center for Responsible Lending report
“IndyMac: What Went Wrong?”
June 30, 2008

“I would reject a loan and the insanity would begin,”
one former underwriter
told CRL. “It would go to upper management and the next
thing you know it’s going to closing… I’m like, ‘What the Sam Hill?
There’s nothing in there to
support this loan.’”

Center for Responsible Lending report
“IndyMac:
What Went Wrong?”
June 30, 2008

“That was your homework—to watch Boiler Room.”—Lisa Taylor, Ameriquest loan agent, quoted in the Los Angeles Times, February 4, 2005

What is that movie? Boiler Room? That’s what it’s like. I mean,
it’s the [coolest] thing ever. Cubicle, cubicle, cubicle for 150,000
square feet. The ceilings were probably 25 or 30 feet high. The
elevator had a big graffiti painting. Big open space. And it was
awesome. We lived mortgage. That’s all we did. This deal, that deal.
How we gonna get it funded? What’s the problem with this one? That’s all everyone’s talking about . . . 
We looked at loans. These people didn’t have a pot to piss in. They can barely make car payments and we’re giving them a 300, 400 thousand dollar house…

Then the next one came along, and it was no income, verified assets. So you don’t have to tell the people what you do for a living. You don’t have to tell the people what you do for work. All you have to do is state you have a certain amount of money in your bank account. And then, the next one, is just no income, no asset. You don’t have to state anything. Just have to have a credit score and a pulse.
[reporter] Alex Blumberg: Actually, that pulse thing. Also optional. Like the case in Ohio where twenty-three dead people were approved for mortgages…

Match the allegation with the institution.

**Allegation **

  1. Handed out copies of the movie Boiler Room as a training tape

  2. Partnered to sell its “PayOption Arms” with a brokerage owned by a five-time felon, whose convictions included gun-related charges

  3. Forbade loan officers to check borrower income on certain loans

  4. Ran an "art department" in its Tampa office, where documents were altered

  5. Settled allegations of institutionalized marketing deception that covered two million customers

  6. Developed “FastQual,” a program designed to approve borrowers in twelve seconds

  7. Incentivized brokers and loan officers through “yield spread premiums” and other compensation schemes to put borrowers into more expensive loans

  8. Tapped two kegs of beer at weekly staff meetings

**Institution **

A. Citigroup

B. Countrywide

C. Ameriquest

D. IndyMac

E. Merit Financial

F. New Century

G. All of the above

Quiz Answers: 1C, 2B, 3D, 4C, 5A, 6F, 7G, 8E.

http://www.ocnus.net/artman2/publish…_printer.shtml

Case in point: this instant message exchange between two unidentified Standard & Poor’s officials about a mortgage-backed security deal on 4/5/2007:Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right…model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.

http://www.cnbc.com/id/27321998/S_P_…ctured_by_Cows

"The big saying was ‘A skinny file is a good file,’ " said Nancy Erken, a WaMu loan consultant in Seattle. She recalled helping credit-challenged borrowers collect canceled checks, explanatory letters and other documentation that they could afford their loans.
"I’d take the files over to the processing center in Bellevue and they’d tell me ‘Nancy, why do you have all this stuff in here? We’re just going to take this stuff and throw it out,’ " she said…

In an internal newsletter dated Oct. 31, 2005, and obtained by The Seattle Times, risk managers were told they needed to “shift (their) ways of thinking” away from acting as a “regulatory burden” on the company’s lending operations and toward being a “customer service” that supported WaMu’s five-year growth plan.
Risk managers were to rely less on examining borrowers’ documentation individually and more on automated processes, Melissa Martinez, WaMu’s chief compliance and risk oversight officer, wrote in the memo.
Soon after, WaMu’s risk managers were called to an “all-hands” meeting at the company’s posh new conference center near Seattle-Tacoma International Airport. Dale George, a former senior credit-risk officer in Irvine, Calif., recalled that Martinez emphasized “the softer side of risk management” at the meeting.
"The whole tone it set was that ‘Maybe the next file I review I should pull back, hold off on downgrading (a loan), not take a sharp pencil to what production was doing,’ " he said.
“They weren’t going to have risk management get in the way of what they wanted to do, which was basically lend the customers more money.”…

**

“Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife’s parents,” she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan.
"When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying ‘the judgment is no good, because I didn’t do it.’ "**

http://seattletimes.nwsource.com/htm…11_wamu25.html
Here’s the remainder of the cnbc structured by cows link :
A former executive of Moody’s says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities. Former Managing Director Jerome Fons, who worked at Moody’s until August of 2007, says Moody’s was focused on “maxmizing revenues,” leading it to make the firm more “issuer friendly.”

How about that? You remove regulations and corporations who have a fiduciary duty to their shareholders to maximise revenue set about maximising revenue by any means they can!
And they do this because the guys at the top could whore themselves out to the highest bidder and increase the ratings agencies’ profits by multiples of their regulated-era earnings, and consequently earn multiples of their regulated-era incomes.

142

Exclude the middle much?

Why has this become the standard response when ever responsibility gets implied?

It is a pension fund managers job to decide what investments to make. That they were lazy, took shortcuts, and blindly followed ratings is their failings. Triple A rating is not a guarantee, it does not mean zero chance of failure.

I don’t expect **elucidator ** to back up his statements, since he seems only interested in posting snark and getting a rise out of people, perhaps you have the stones to answer my question: If it was a government agency was responsible for the ratings, and screwed up, what would you like to see happen?

I know it’s far fetched, and entirely out of the realm of possibilities, but humour me. This thread (and the dozen others) is full of criticism for the failings of private industry. But what if the government behaved in exactly the same way? What would happen if a government rating agency screwed up?

143

Seems you’d like to see people lose their jobs and go to jail. What if a government agency screwed up in the same manner? Should politicians go to jail if a government agency failed?

144

But what it does mean that if you have a bunch of AAA securities, from different sources, large numbers of them should not go under. it means that AAA securities should not be rotten to the core.

Easy. At the very least, those who ran the agency should be out on their ears. If they committed fraud for personal gain, they should be sent to prison and their gain reclaimed. There should be a more independent agency watching the watchers. If there are structural reasons for the problem, they should be corrected.
While Fannie Mae didn’t start the meltdown, the fact that its management had an incentive to take additional risks did not help. That is an example of a structural problem.

Of course the actual rating agencies suffered none of the consequences our hypothetical government agency would, and they are fighting tooth and nail against structural remedies.

145

Can’t answer for him, but there is a nice chunk of the Bush Administration who would be better off in the slammer.

146

Perhaps, but what about actual government agencies? It doesn’t seem like anyone from FHWA and Mn/DOT went to jail following the 35W collapse.

To me the scenarios are the same. The government was acting as a rating agency certifying bridges as safe to use, and failed. Consequences? None. Handwaving? Plenty.

Only after the bridge fell and people died did they bother going around and looking at the other bridges they were supposed to inspect. And only then did they realize more than a few needed to be immediately shut down.

And Tim Pawlenty may end up being president, even though he was in charge when the bridges should have been inspected. Prison time? Hell no.

For all the complaints about bank bail outs, when the government fucks up it’s tax payer money that gets paid out to the victims.

But they’re not. At least the Enron guys went to jail.

147

I’m not sure I’m getting your point. When people who hate government and think government shouldn’t do anything get into power, of course they screw things up. That doesn’t mean government doesn’t work. If a crook takes over a business and runs it into the ground, losing shareholder value and ripping off his customers, that doesn’t mean capitalism is wrong.

The guy who headed the Bush SEC was not a fan of regulation of business. Was it any surprise that when people came to them with info on Madoff they ignored it?
If you hire a bunch of pacifists for your army, you are very likely not going to win too many battles.

148

Why is Dick Fuld not in jail? Seriously? I worked in the biz for 7 years and worked at Lehman’s fixed income Hong Kong during the 1996 anything goes bull market before Asia collapsed for a year.

Or Goldman Sachs? I mean, the top management committee decided to go against the aggregrate trading position of the firm and insure themselves with an insurer (AIG FP) that Goldman knew could not pay for the insurance if the the market crashed. Eg, Goldman bet big that Uncle Sugar would bail out AIG. Whaddya know, Hanky Panky Paulsen, ex Goldman CEO, did exactly that with a US government led bailout of AIG at 100 cents on the dollar. Everyone in the biz was gobsmacked that the payout wasn’t at least haircut 10% but done at par.

Hell yes, these people should be in jail. Millions of people in America lost jobs or out of their homes as at least an indirect result. Compound that globally. It goes way beyond irresponsibility. I’m not looking to take scalps but to argue that these people are not responsible and shouldn’t be punished is in some kind of crack smoking alternative universe. “Oh, it’s alright, caveat emptor and all that.”

Goldman seems to be doing pretty well these days by the way.

Correct me if I’m wrong, but wouldn’t true libertarians have decided that all of Wall Street and a whole host of banks (and GM and Chrysler) should have been allowed to go bankrupt instead?

149

Is there a free market equivalent to a death penalty? Now that corporations are people, can’t we drag them out into the street and shoot them?

150

Can we do it for government officials too?

151

What crime did he commit? Normally people in jail have committed a crime.

Is that a crime?

152

And what if they didn’t? Yes, it’s just as bad when a government agency fails as when a private one does, but that completely ignores the fundamental question: Which one is more likely to fail in the first place?

153

Gross fraud would be a good start for both. They defrauded shareholders and bondholders by making false statements as to their financial health, and did a lot of hanky panky off balance sheet activities that ended up torpedoing Lehmans and nearly destroying Goldies. Except Hanky Panky Paulson, who let me say again was the ex CEO of Goldmans, decided to make an example of Lehmans and save the others including Goldies. I mean, after all, if you’re going to let a buldge bracket firm implode, Lehmans was the firm everyone hated and it wasn’t as big. Forget Bear Stearns as it was essentially an extension of JPMorgan and bankrolled by JPMorgan to do all the dodgy crap that would have hurt JPM’s balance sheet and credit rating.

Some linkson Dickhttp://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877326,00.html

154

Okay, which is more likely, and by how much? Show your work.

155

Let’s see. If a private company does something that results in short term gain and a long term problem, the CEO makes a fortune during the gain period, tens of millions of bucks, and if the Board is very stern gets fired when it blows up, no doubt getting more money to leave. Once in a blue moon the government will prosecute, even more rarely they will win, and even more rarely the penalty will be worse than giving up a fraction of the ill-gotten gains. The CEOs day to day operations is monitored by a board he appoints.

The government worker is unlikely to see any money from an infraction, and risks getting the attention of Congresspeople some of whom are going to want to see him fail.

156

Well, I guess if you start with the assumption that manufacturers are all ‘crap makers’, and that individuals are powerless to discern crap from quality, then I guess I can see how you can build up this straw-man world of yours. Fortunately, it’s not an accurate picture of reality.

Yes, I agree that executing people once in a while probably isn’t an improvement. Good thing no one on this side of the space-time continuum suggested it.

These arguments keep getting more and more ridiculous.

157

So, Sam, how much did that testing lab in your basement cost? I can’t see another way the average consumer could tell that the cheap toothpaste they just bought is poisonous. The US tried to deal with this by inspecting shipments at the port, which slowed them down, which hurt Chinese exports, which probably got the Chinese government to act.

158

How did Fannie and Freddie and the government do at calculating the risk they were exposing taxpayers to? Last I checked the Fannie and Freddie liability count was at $371 billion dollars and counting.

The litany from the left is that the problem with the financial markets is that they were under-regulated. Even if that were true, where is the evidence that the govenrment knew this at the time? It’s easy to assign omniscience to government after the fact, but where were they then? Why didn’t they step in and regulate more?

If you’re going to say it’s because of Bush, I will point out that it was actually the Bush administration that was raising the alarm to some degree, and it was the Congress that was balking - primarily Democrats. They certainly weren’t calling for more regulation of the financial markets.

Were Democratic activists at the time calling for more regulation? Was there a widespread understanding on the left that credit had to be tightened and interest rates raised? Maybe I missed the alarm, but if there wasn’t, then I don’t see how you can claim that the problem was lack of regulation.

The fact of the matter is that what happened was a systemic failure driven by the fact that rapidly improving computing and communications made the financial markets so complex that no one knew the risks. It was a global problem. It was beyond the ability of government or the markets to recognize and control, and there was plenty of complicity in government for making the problem worse.

Right. And so that gets publicised, and the BBB takes a credibility hit, and fewer companies use them, and eventually they lose their influence and a more credible organization fills the gap. That’s how the market works.

How long did the corruption and Mob influence in New York’s regulatory infrastructure endure? What alternatives did the citizens have? Corruption destroyed New York’s trade show economy. It severely damaged waste removal and shipping costs. It drove a lot of blue collar business out of New York and into New Jersey, then the corruption followed there.

You’re always comparing the shades-of-grey real world when discussing the market, and comparing it against some government ideal that has never existed.

I don’t know. I don’t know enough about it. In theory, if you can point to a specific way in which the market fails due to externality, information asymmetry, monopoly power, or some other inherent problem, I would support using government to correct the market failures.

And you don’t think that this would become known? Such bogus ratings already exist - degree mills use them, various industries try to come up with lame seals of approval and all that. People are generally smart enough to see through it, or they learn through cultural osmosis that the only seals that matter are the ones from the big firms that have been around for a long time and have a brand to protect. And of course, looking at what people do today in a society where government is seen as a guarantor of safety is not necessarily what they’d do if they knew they were responsible for their own safety decisions.

Cite? Perhaps a study showing that any old seal has the same effect as one by a credible agency like UL?

Do you know how important JD Power ratings are to car manufacturers? If a car company slips in the overal JD Power ratings, the other car companies use it against them in their own advertising. JD Power carries a lot of market weight because it has spent years build a reputation for accuracy and integrity.

The regulating power of markets is much greater than the left is ever willing to give it credit for. When the Enron scandal happened, the market immediately punished not just Enron, but other companies that had similar-looking fuzzy financial structures. GE spent hundreds of millions of dollars to restructure their financial arm, and they brought in reams of outside auditors to report on their financial health and publish the information transparently - not to please government regulators, but to recover their share price and to protect the brand. This wasn’t done out of the goodness of their hearts, but because the market forced them to act or face punishment.

Have a look at the tech industry. There are all kinds of certifications and seals. Dolby certified, THX certified, ANSI standards, etc. These are all highly technical, and most customers don’t understand even remotely what they mean. But ‘THX approved’ carries a lot more market weight than ‘Certified Ultra-Good’ or whatever crappy seal some third-rate manufacturer might put on their products.

And again, no government is forcing audio and video manufacturers to adhere to minimum standards of sound quality. There’s nothing stopping Denon or Onkyo from selling a receiver or speakers that sound like an AM radio - other than that if they do that, they’ll destroy the brand equity they’ve spent decades building up.

And what does a consumer do who’s looking for a guarantee of good quality? He buys a brand name. Buy a Denon amp, and you can be pretty sure it will sound good. You pay a premium for that to be sure, but you’re paying to have the risk removed. Other companies that don’t have that brand recognition compete by paying LucasFilm for THX Ultra certification. Lucasfilm in turn knows that if they certify some crap as THX Ultra, people will stop caring about their certification, and manufacturers will stop paying them to be certified.

Then there’s the next line of defense for consumers - the retailers themselves. We’re actually pretty good at knowing who sells good stuff and who doesn’t. Stores like Best-Buy have a vested interest in making sure that they don’t sell utter shite to the public. Their buyers will see through bogus ‘seals of approval’. The market is full of intermediaries like this who act as part of the market’s regulatory infrastructure.

Let me ask you - if you were looking for a good stereo system, would you buy one from Radio Shack? Radio Shack used to make some very good stereo gear, but they also made some absolute crap and tried to trade on their brand recognition to sell the crap. The result was the almost overnight destruction of their brand equity when it comes to stereo gear, and they’ve spent years trying to get it back. But to this day, if you mention Radio Shack to most people, the first thing they think about is crappy stereo gear, and Radio Shack is a non-entity in that market, despite still selling a few (much better) pieces of equipment.

Really? Using THX certification again as an example, they publish their testing standards, and they publish the certification results for the equipment. There’s not a lot of room for plausible deniability there.

Then why don’t all companies cut corners to save money? Why are most products today higher in quality than they were 50 years ago? How come I rarely seem to buy something in a store and get it home to find out it’s a total piece of crap that obviously didn’t have the quality advertised? Even when I buy defective goods, I can generally see that the defect was not intentional or the result of some nefarious capitalist exploiting me.

There are of course exceptions. Dell’s exploding capacitors come to mind. But we have legal remedies for that (and government doesn’t regulate that level of quality anyway).

But I thought the mere existence of laws shows that they were necessary. Now you’re saying that laws are passed based on the tug-of-war between opposing sides who spin and obfuscate and hide the truth?

How is this an indictment of markets, and not an indictment of the regulatory process of government?

159

Your tone suggests you see this as a bad thing.

So now let’s consider the government: Is it more or less likely to to act for short gain, or to solve long term problems? Here’s a hint, the US has major elections every 4 years, kind of major every 2, and is essentially locked into continual campaigning.

The CEO may appoint the board, but share holders vote them in.

You also failed to answer the question: Okay, which is more likely, and by how much? Show your work.

160

If I read a story that says Crest toothpaste is poisoning people, I’ll use Colgate. If I’m aware of the generally poisonous potential of crappy toothpaste, I won’t buy my toothpaste from no-name brands at the dollar store.

Remember the Tylenol poisoner? Johnson and Johnson wasn’t at fault. It wasn’t a regulatory failure or a market failure. It was a criminal act by a deranged person.

If the market had no power to regulate, Johnson and Johnson would have just issued a press statement saying, “Hey, not our fault.” They didn’t do that. What they did was recall every bloody bottle of Tylenol on shelves, paying retailers for all of it. They went WAY out of their way and way beyond anything legally required of them to protect their brand equity. They knew the market would destroy them if people came to associate Tylenol with sudden death through poisoning. They knew that so long as the potential existed for even a single bottle of poisoned Tylenol to be out there, people wouldn’t buy their product. The market was a much harsher taskmaster than the government.

Tylenol’s market share dropped from 35% to 8% overnight. How do you explain this given your thesis that the public is incapable of discerning quality without having a testing lab in their basements?

Then J&J redesigned the bottles to prevent that kind of tampering in the future, and had to rebuild their assembly lines for the new bottles. They then spent millions of dollars on advertising to educate the public on the steps they had taken, AND they heavily discounted Tylenol for the next year while they built back their market share. The result of all this was that J&J reclaimed their market share within a year.

This is an example of the regulatory power of the market. Government lagged behind all the way, and eventually a new law was put on the books demanding that manufacturers use the kind of tamper-proof bottles J&J designed. But in fact, other manufacturers had already begun doing the same, because they saw the damage Tylenol took because of the actions of a lunatic. The industry also moved away from liquid capsules and towards ‘caplets’ and pills, even though government didn’t mandate that, because market studies showed that people now felt less comfortable with liquid capsule delivery.