What he said was “What seemed particularly egregious to me (I don’t know if it was illegal) were banks that underwrote large loans, then bet against those loans in the derivative market”
If you are a bank with that underwrites a large loan, you are exposed if the client does not pay back the loan. By betting against repayment in the derivative market you are lessening your exposure.
The recession was actually caused bypoor monetary policy.
Apparently we have a different notion of how loan underwriting actually works on Wall Street. A big investment bank is hired by the borrower to do “due diligence,” and then help sell the bonds to a large variety of investors. For such a bank to encourage its customers to buy such bonds, while the underwriting bank is happily betting against them, seems unethical.
There was a great deal of egregious behavior on Wall St. that led to the financial crisis. You seem to be unaware of that, puddleglum. I’ll repeat the question I asked in an earlier thread: What books have you read on the crisis that give you this sanguine view? My question is sincere: I’ve read several accounts of the crisis but never found one that supports right-wing talking points. What am I overlooking?
It was also the risk. We were lucky in having a Fed Chair and a Treasury Secretary who were willing to use innovative solutions, and a Republican President who was smart enough to stay out of the way. There are plenty of politicians who are ideologically against “bailouts” - if one of them was in power things could have turned out a lot worse.
That seems a bit simplistic. The bad loans were not because the banks suddenly forgot how to assess creditworthiness, they were because it was financially advantageous to write risky loans. And that was because there were sophisticated mechanisms to hide the bad loans in products with higher ratings than merited.
Real Main Street banks which did not sell the loans didn’t get affected at the beginning - they did when when the crash, lower property values and unemployment turned good loans into bad ones.
So the question is whether splitting up the banks would have reduced this problem.
Well, in a perfect world we’d put them in stocks in the village square. In ours the blame is so distributed that it is hard to convict anyone. The risk departments of the banks gave optimistic reports - should the execs ignore that and decrease their profitability?
Plenty of lower level people did get fired. The upper levels, even if they did get fired, had contractually severance pay, and would go boo hoo with their $10 million.
If the threat of punishment proactively prevented crime, we’d have no speeding and no theft. You have to remove the incentives for them to do the bad things, not threaten punishment if it blows up before they quit with their bundles of bucks.
I don’t see why it is unethical to sell bonds while betting against the bonds. It is like a broker helping some people buy a stock while selling the stock himself. It is up to the buyer of a bond to assess the creditworthiness of the people issuing the bonds. If they come to a different conclusion than the bank, then it is fine for both the buyer and the bank to act on their opinions. Unless the bank is lying to the buyer of the bonds about what are in the bonds.
The only book I read about the crisis was the Big Short. I found nothing in it about unethical people cheating poor defenseless bond buyers. It was about how a few contrarian managed to make alot of money because the conventional wisdom was wrong. However, the conventional wisdom is usually correct. The hero of The Big Short who made all that money betting against sub prime mortagages has lost 4 billion out of the 20 billion he managed over the past 2 years. This during a time great growth in the stock market.
The idea that it was fraud or criminal conduct that caused the financial crisis is wrong. What caused the subprime crisis was a mistaken belief by most people that housing prices would continue to go up. Given this belief the banks and lenders acted rationally. Long Short
Moreover the recession caused most of the housing crisis and notthe other way around.
Certainly a clever poker player will want the opponent to misread his hand. But I prefer merchants who are honest with me. I feel that I often get good advice and deals from merchants where I live*, motivated as they are for repeat business.* (OTOH, I’ve not been impressed by any advice from Schwab, though I attribute that to incompetence rather than corruption.)
Certainly I’d feel cheated if a sell-side analyst paid millions of years in bonuses touted stocks to me while bad-mouthing them privately. But I suppose that’s your dog-eat-dog professional shark mentality and why these people get their multi-million dollar bonuses.
But bank executives certainly agree with puddleglum. IIRC they’ve testified before Congress that their business is strictly on a caveat emptor model, banks versus the customers.
This is what I meant by the banks’ actions having “no public purpose.” Ultimately, huge sums are taken from the public (in the form of over-paid homes in the key example) and converted to various profit sources for rent-seekers in the financial sector. Yes, some financial insiders were themselves hypnotized by the same price bubble. Yet many were not – and those had no motive to record their thoughts.
Defenders of such financial inefficiencies and malfeasances will often speak of “price discovery” and “liquidity.” In fact, the “price discovered” is for the benefit of the rent-seekers and to fleece the public. In the past, the smartest folks often became scientists, artists, service entreprenurs, or engineers and served the public interest. Now the smartest gravitate to the hugely profitable financial sector, skimming rents off the economy, with assistance of government misregulation. And as for “liquidity” how did that work out for all y’all? When Wall St. foibles led to the 2007-2008 liquidity crisis, which had to be bailed out by the Feds, the same entity about which, during the good times, the same greedy capitalists can only say nasty things?