Before assigning blame, one needs to identify causes. I think it’s mistaken to focus on a few specific mistakes, e.g. repeal of Glass–Steagall. That particular action was irrelevant to much of the crisis, and of course Glass–Steagall was still in effect for the Reagan-era Savings & Loan crisis which taught bankers an important lesson: “Heads we win; tails the taxpayers lose.”
Instead, blame a culture in which Greed has been elevated to divine worship; and “public interest” is anathema. Kennedy said “Ask what you can do for your country,” and later forced U.S. Steel to back down on a price increase. Can you imagine such words or actions in today’s Greed-is-Good public-be-damned environment?
It’s not appropriate to blame a general group, whether voters, homebuyers, or even brokers and bankers. Voters can hardly be expected to out-think pundits, many of whom had economics credentials yet were themselves hypnotized by the bubbles. 50% of homebuyers were even more naive than the median homebuyer. Brokers and bankers were trying to maximize their profits without breaking the law, just as the culture instructs them to do.
Presidents are powerful, so logical candidates for blame, yet every President since Carter has failed to elevate public interest properly. Should we blame all of them? Wouldn’t it almost make more sense to blame the right-thinking President we should have had, but who didn’t get elected? With the problems now clearer than ever, Obama enables the same policies and policy makers which have led to disaster.
I’ll give 10 points blame to Greenspan. He may have had more power than the Presidents on financial matters, should have known (and by his words probably did) of the dangers, yet ended up as the biggest cheerleader for the Hyperefficiency dogma that led to disaster.
I’ll give 20 points blame to Ronald Reagan. It is the Greed is Good, Government is Bad attitude that led to disastrous deregulation, and Reagan was in the vanguard of that.
I’ll leave 70 points undistributed for a possible follow-up.
People keep mentioning the repeal of Glass Steagall and while that may have been ill advised and may have led the really large institutions that were “too big to fail” and required bailing out, I’m not sure how it led to the economic collapse. It wasn’t repeal of regulation that did it, it was the failure (or reluctance) of government to impose NEW regulations where it was clearly needed.
People have also frequently mentioned homebuyers who got in over their heads and while I make no excuses for those who were using easy credit for speculative purposes, the borrower has historically NEVER been the gatekeeper of who gets credit. It has ALWAYS been the lenders responsibility to exercise due diligence when underwriting mortgages. Borrowers have ALWAYS wanted to borrow more money than they should, it is the lender who is supposed to assess the risk of lending, not the borrower.
People have also blamed securitization generally despite the fact that Fannie Mae and Freddie Mac have been securitizing mortgages since at least the 1970’s without this sort of fallout. Securitization changed in the last 10 years and it was these changes that caused the economic collapse.
People have blamed out national debt (created under Republican administrations starting with Reagan) and while I think Republicans have been fiscally irresponsible since Reagan (in the name of buying votes), I don’t see how this caused the economic collapse.
CDS stands for Credit default swaps not consolidated debt securities. They weren’t debt at all, the simplest way to explain these is to call them insurance or put options. The way simple vanilla CDSs work is you have a pool of mortgages and you are afraid of the default risk in the mortgages so you pay someone an annual premium and they promise to make you whole for any losses in your pool of mortgages.
MBS are a subcategory of CDO. Most CDO’s were in fact MBS.
Some people are balming a 40 year old law (the CRA) when the majority of the subprime mortgages were originated by institutions that are not subject to CRA and almost every change to the CRA in the last decade has made it easier and easier to meet the requirements. I know more than a few bank executives and during the bubble, noone was worrying about meeting CRA requirements, the market was hungry for this subprime stuff.
People are placing “blame” on Fannie Mae and Freddie Mac. These institutions have been around for 40 to 70 years. If they were the ONLY folks doing mortgage backed securitizations, this would never have happened but about 10 years ago, folks started getting comfortable with mortgage securities issued by banks without FNMA or FHLMC guarantees.
The home buyers did not go into Countrywide and demand a mortgage for more than the value of the house and no money down. That was dreamed up by the bankers and mortgage writers.
The Wall Street bankers needed mortgages to fill out their CDOs. They did not care about quality. They were not going to keep them. They were packaged and sold around the world giving the bankers enormous profits. Then they dreamed up SWAPS and managed to avoid regulation by convincing politicians they were not insurance. Then they sold mega trillion of dollars in swaps.
Some home owners may have bought homes they could not afford in a down economy but they bought in an up economy One that had been going up for decades… But the bankers convinced them it would work, that the value of homes would continue to go up and the home owner would make out.
There are some pretty unsophisticated people who were convinced to get mortgages when they had no back ground in home buying. They deferred to the Countrywide experts, who assured them it would give them a nest egg and a home in a better neighborhood. They were not acting criminally. You can argue the bankers were.
It was a combination of greed and a lack of government regualtion that caused the crisis.
If I were to place blame I would blame:
Greenspan: As the guy who was the primary regulator of banks and the guy who set interest rates so low that investors ended up chasing returns from Mortgage securities.
The ratings agencies: If the economic collapse were to give an oscar speech, they would have to thank the ratings agencies first and foremost, sure they were paid for their efforts but they went above and beyond to help facilitate this collapse.
The government failed to regulate where it should have (more government regulation (especially of derivatives and reserve requirements) would have prevented much of the collapse) and outfits like FNMA and FHLMC went beyond their public purpose of ensuring a vibrant housing loan market and exacerbated the problem (GNMA let its market share shrivel to almost nothing rather than chase business in an environment where the market didn’t need help providing mortgages to homeowners, a good argument for getting rid outfits like FNMA and FLHMC (or at least reabsorbing them into government) and letting GNMA be the sole instrument of federal policy in housing finance, I know folks at both places and the culture is very different, the attitude of folks at FNMA and FHLMC are more like the attitudes of government contractors (looking to make profits from a special relationship with the government) and the folks at GNMA see themselves serving a public purpose.
No but many thought it was going to make them rich, or they pulled out every bit of equity to buy cars, boats and/or pay for vacations.
I would put the blame on humans in general, we are greedy and act in self interest all the time.
Housing was overpriced, anyone who took a look at the numbers in an honest way would see that.
I personally had co-workers and real-estate friends and architect friends yell me down when I pointed out the bubble in 2005.
I am no a genius the numbers were so out of whack with the fundamentals that they should have been obvious, unless you lust after a large house, or expect to make it rich by buying something and selling it to a bigger sucker (either house or paper).
So I would mostly divide the 100 by the number of people while giving the remainder to the financial people who should have the education to know better had they also not been blinded by bubble greed.
A lot of people saw the prices were too high. But they had been climbing for decades. It was not a sudden spurt. People were convinced by financial professionals that they could count on their homes going up and covering their loans.
I did not go out and remortgage. But I do not represent everybody. People from all walks of life were convinced it was a good idea.
But people would not have been able to get those mortgages unless the loan originator, through the banks, has been given permission to offer them. The bankers needed mortgages to fuel their CDOs and SWAPS. They allowed the bad mortgages to be written.
And this is where we are bound to repeat the issues, people do not want to learn from their mistakes.
I in no way claim the 1% weren’t in part responsible.
These people saw they were too high but bought in thinking they could find a bigger sucker.
Salesmen in general try to pull as much money out of others pockets as possible, I am not saying that wall street, or NAR or banks did not have a roll, but they were fueled by the same greed that allowed the buyers to ignore the reality that it was a bubble.
the crash would have happened if the financial industry had created the CDOs or not, they just almost committed suicide and probably should be broken up and restricted again but the credit bubble would have busted without them.
The OP asked about blame and not cause though, the cause is way to complex for this question IMHO.
SO IMHO the blame is on all who ignored reality and participated in the bubble.
People bought houses they couldn’t afford in part because they thought it was a “sure deal” – the price would go up, and profit on the house would make them rich enough to afford it! Stupid? Perhaps, but brokers and pundits were pushing this line. You were smart enough to see through it, but it makes little sense to blame the masses when the expert brokers and pundits they turn to for advice appeared themselves to be “hypnotised” by the bubble.
(I wonder what portion of such brokers and pundits were also deluded, and what portion were cynically trying to profit from others’ delusions.)
They were the only one with any power in this equation, and they had the ability to chose any price they wanted to sell at. No one put a gun to their head and forced them to sell for more than they paid (with or without inflation). They didn’t have to allow bidding wars, they didn’t have to let people to buy sight unseen.
If anyone knew the true value of the house is was the owner. They knew how much they paid, how much they put in to it. We trusted them to set a price that was fair, they were greedy and took advantage of that trust.
Obviously what we need is for the government to peg house prices to inflation. The US consumer has demonstrated they aren’t capable of deciding how much a house is worth.
So you think professional ethics mean nothing? I mean, they obviously do not, in the banking and financial industries, but SHOULD they mean nothing? We should not hold the people entrusted with the money to loan to any kind of account? I’d reverse the numbers … 12 to the lenders, 3 to the public.
And that’s why the homeowner/individual debtor/citizen needs to accept their share of the responsibility/blame for the GR, because while it is always easier to point fingers at the other guy, the fact is that many (most) reading these words bear some responsibility as well, from that time you charged your value meal at McDonald’s to the Best Buy purchase that is still being paid off, to the overpriced home bought to the HELOC one used as an ATM machine, tens of millions of us redefined “debt” as “assets” and acted accordingly… until we found out otherwise.
In the spirit of this thread, here is my offering (Note that I do want to mention some names that haven’t been mentioned before, so I’m going to ignore such obvious people like Alan Greenspan, various Presidents, etc):
5 pts: Lewie Ranieri & Larry Fink - The fathers of the privatized mortgage securitization market (as opposed to FNMA/FMAC securitization), it was through their efforts that the decoupling between debtor and creditor came to be. It used to be that you borrowed from your bank and your bank had to keep the debt on the books until it was paid off, giving them an incentive to maintain high lending standards. In the late 70’s, it began to be argued that lending standards were too high, and kept many people with slightly blemished credit records from buying homes. Securitization allowed your local bank to lend you the money, but pass on the risk of default to another, eventually resulting in a decline of borrower quality.
Who gives a shit if JohnT can’t pay this ARM mortgage when the payment resets? Won’t affect our company - we sold his mortgage to Bear Stearns!
5 pts: Sandy Weill - I’m throwing the creator of Citigroup in here as a symbol of the repeal of Glass-Steagall (though the repeal really started 20 years prior to the formation of Citibank). I note that a number of people in this thread have said that the repeal of G-S was irrelevant to the crisis, but I have difficulty buying this argument as the re-attachment of speculative investment banks to depository institutions allowed the newly formed banks to use federally-guaranteed deposits as a means to increase the amount of debt on their books.
Think of it this way: You’re Salomon Brothers with a capital base of $1 billion which allows you to borrow $10 billion, which is then used to speculate on mortgage bonds and other risky assets. Thanks to Sandy Weill, in 1999 you become attached to the old First National City Bank of NY (aka Citibank), which has federally-guaranteed deposits (through the FDIC) of another $1 billion, allowing you to essentially double your borrowings to $20 billion. Now you have an investment bank that essentially doesn’t have to worry about it’s capital base as a significant percentage is guaranteed by the US Government, which emboldens the investment bank to make even riskier speculative investments.
Of course, not all investment banks went this route, but enough did so that they literally could not be allowed to fail, lest they, for the first time since 1933, impoverish individuals through the loss of their savings and checking accounts.
15 pts: The American Consumer - See above quote.
15 pts: S&P, Moody’s, and Fitch (Rating Agencies), and the idiots who bought/traded securities based on their ratings - A “AAA” (triple-A) rating was once a rare and wonderous thing, usually only bestowed on Treasuries, and for some time, the debt offerings of the bluest of blue chips. However, during the 1990s and even more into the 2000’s, the credit rating agencies were duped/conned/paid into accepting the following logic (rather simplified for this post):
*Create a securitization offering of, say, $400 million worth of mortgages. While you know that some may default, you know that far more won’t. Carve the mortgage bond into pieces (called “tranches”) so that you can argue that you have multiple bonds, and the way that you carved it up means that many of the bonds are as secure as US Government debt. As a rating agency, set up a fee structure where the people coming to you for ratings are the same people PAYING you for these ratings, then see your ratings get shopped among the three agencies so that the agency that gives the BEST rating gets more business than you.
Add subprime mortgages to the mix. And CDO’s. Assume that mortgage defaults are rare and cannot happen on a national level, and, at worst, are only localized events, despite the evidence of the Great Depression, the depression of 1873, etc.
Wait 20 years, see what happens.*
The results will NOT be pretty.
25 pts: The Depository Institutions Deregulation and Monetary Control Act of 1980 (5 pts) and the Alternative Mortgage Transactions Parity Act of 1982 (20 pts): Did you know that, until 1980, mortgage rates were fixed by the various States? Did you know that, until 1982, the following mortgage structures were illegal in the US:
Adjustable-rate mortgages, in which the interest rate becomes floating after a number of years.
Balloon-payment mortgages, which have an outsized payment when the loan comes due.
Interest-only mortgages, which require only repayment of interest (not principal too) during the first few years of the loan, only to hit borrowers with much higher monthly-payment resets later on.
Option-ARM mortgages, which allows borrowers to underpay by as much as they want during the first few years, with the unpaid monthly interest getting added onto the size of the loan.
?
(The first one was a Jimmy Carter initiative, by the way.)
Imagine life today if those mortgage structures were still illegal.
15 pts: Wendy Gramm, Robert Rubin, Larry Summers, Arthur Levitt, and William J. Ranier. In 1993, on, literally her last day as Chairwoman of the Commodities Future Trading Commission (CFTC), Wendy Gramm (yes, wife of Phil Gramm) exempted Over-The-Counter (OTC) derivatives from regulatory oversight from the one agency that was charged with this oversight function. Her successor, Brooksley Born, feared for the future of the capital markets and spent her one term as Chairwoman of the CFTC fighting for greater disclosure requirements and increasing capital reserves against losses. Alan Greenspan argued otherwise, and while Bob Rubin and Larry Summers saw merit in both arguments, they eventually sided with Greenspan when their support of Ms. Born could have made the difference. Rubin, Summers (then Treasury Secretary), Levitt (head of the SEC), Ranier (then-head of the CFTC) and Greenspan all gave their support to the Commodity Futures Modernization Act of 2000, which expressly forbade the CFTC from regulating derivatives.
Oops! Wish we had that one to do all over again!
FYI, Bob Rubin left government service to become an extremely highly-compensated executive at Citigroup, an executive that actually had no day-to-day responsibilities while earning in excess of $15 million/year.
10 pts: Wall Street compensation policies. Outsized pay scales that derive their value based on short-term revenues rather than long-term results.
“I sold $400 million in CDO’s this year, I deserve a $9 million bonus!”
… later…
“So what if my $400 million of CDO sales caused $4 billion of damage to my counterparty when they eventually tanked? My compensation isn’t based on how they perform over the long-term, just how much I sold them for in the short-term!”
Without mentioning any specific Doper by name, I do suspect you’re referring to the one whose sincere postings are every bit as stupid as his facetious postings. I had trouble distinguishing the two cases at first.
My take on this:
Clinton: easily 30%-he had the brilliant idea that banks should give mortgages to deadbeats.
(Ex) Sen. Dodd(CT):-15%-he was instrumental in forcing the banks to lend to people with poor creit.
Rep. Barney Frank (D-MA): put his ex-bofriend in control of FannyMae-pushed legislation to allow 100% morthgages to bad credit clients.Easily 10%
GW Bush: 30%
Remainder: every lawyer, RE agent, bank officer approving a loan that THEY KNEW would go bad.
