The New Republic

Good for Reed, I appreciate his doing the right thing.

- WandreyCer

October 27, 2009 at 6:23pm

Explain how this is the right thing? Repeal of GS occurred under Clinton-with Robert Ruben leading the charge. Now one guy checks in and the world is supposed to move? I guess you guys are still clueless on how the system blew up-thinking it was repeal of GS or lack of regulation. First, thoughout Europe-where regulation is at the highest-in many countries their housing prices doubled just like here. Some say it's due to low interest rates, others the push for low-income lending, few, if any, attach repeal of GS to housing bubble. Second, quasi-government agencies-Fnmae and Fmac were world leaders in purchasing directly, and through securitizations, the risky loans. Without that leadership, some/much, of the bubble could not have happened. Third, the big banks (who could make loans and do securitizations) did buy a signficant chunk of the low-income loans-but-they bought AAA tranches (they could have easily earned more through A or AA paper-but they didn't) and they further insured the investments with credit default swaps--hardly risky endeavors. Fourth, assume GS was in place, then, what would have happened-the exact same thing. Banks and other entities made the low-income loans, investment banks and others securitized them, and the banks would have bought them. Finally, the post-GS banks were following the international rules of capital requirements-which starts at 8%, but moves down to 4%---the world, the regulators---said 4% was OK for AAA residential paper. So, which regulators were wrong: the ones who repealed GS or the ones who said AAA residential paper neede only 4% reserves? Think, my man, think.

- lobosven

October 27, 2009 at 7:58pm

Not quite true. Regulation had become extremely lax over the 1990s in London too, no matter what it said on paper. But in general the countries that have fairly robust regulation, e.g. Switzerland, Germany, haven't suffered the same crash we have had. Smaller countries like Ireland that were playing in a bigger game than they could handle have had real problems, like a micro-version of our housing market collapse.

- ironyroad

October 27, 2009 at 8:57pm

There is the other unique variable-the push for low-income loans. How can London's regulations become "extremely lax" when you progressives have been running the show for decades. What "robust" regulations do you refer to in Switzerland and Germany? The banks who had trouble ran the gamut-including France-as they bought these residential AAA securities. If they're rated AAA, and you buy credit default insurance, and the world banking "regulation" specifies 4% capital reserve-what regulation can you envision? I've said elsewhere, 26 years ago when I bought my first house, I needed: 20% down, proven income, proven assets, home costs (debt service, insurance and real estate taxes) at no more than 28% of income and all debt costs at no more than 33% of income. That worked. No bubble or financial crisis with those standards in place. Question, remains-who allowed those standards to be relaxed and why? Funny thing, Mr. Road, my investment banking buddies and I were quite amused at the loan business: we'd get the letters (borrow 100%, no costs, low rates-1%), it was clear to us what was happening. We had friends who left good jobs to work in subprime market-fine. We saw Wall Street pricing risky loans at unheard of spreads to treasuries-just way too low based upon historic norms. Call it greed. Call it stupidity. But very smart people saw the housing prices skyrocket, knew what type of loans were being made and still bought the paper-including banks and pension funds in Switzerland and Germany.

- lobosven

October 27, 2009 at 9:12pm

I don't think progressives have been in charge in London in the sense you mean: http://www.guardian.co.uk/commentisfree/2008/dec/02/will-hutton-banking-rbs

- ironyroad

October 27, 2009 at 11:03pm

Craziest commentary I've ever read-Road. I worked in Japan, with their banks, in the mid/late 1980's until about 2002. Their system was simple: crossownership of stocks with their clients and wildly aggressive lending throughout the world (they'd take, as collateral, memberships in golf courses which cost millions of dollars in that inflated world). Then, by 1990, it collapsed and the government spent over a decade hiding the problem. Rmember this: their stock market was at 45,000 around 1989-it's never been above 20,000 since. Their homes and commercial real estate-across the board-fell over 60%. I can't speak to the rest of Europe's lending practices. I believe that Scandinavian countries are more cooperative than larger, more diverse countries. I find it a little weird that Britain led the world in lending and investment banking throughout the industrial and colonial ages-and now-make simple, fully secured, short term loans which they call at first sign of trouble. Sounds like a typical progressive rant about the hated big business and banking world. Finally, my question/issue was/is: with progressives controlling British government-did they not impose the kind of regulations that Obama is considering today?

- lobosven

October 27, 2009 at 11:39pm

Because they weren't/aren't "progressives" in the older sense you mean, or not when it came to banking and finance at least. New Labour totally bought into the unregulated capitalism that was touted as the way to universal prosperity. If anything, Blair was even more aggressive that conservatives had been about not putting brakes on the financial markets so that London would remain a key center in global finance. To that extent, I find the assumption behind your question kind of strange -- I mean, everyone knows this, right? It's not a fact at issue.

- ironyroad

October 28, 2009 at 1:28am

lobosven: I'm not aware of too many people claiming that the repeal of GS was the sole cause of our current problems. Arguably the sustained low interest rates that diverted investment funds away from US treasuries was a bigger problem. However: Without that leadership (F&F), some/much, of the bubble could not have happened What leads you to believe this? F&F were not issuing the poor mortgages, they were just maintaining their market share as they are required to (the wisdom of that is another discussion). Are you saying that if F&F hadn't been buying the securitised mortgages, no-one else would have? The "global pool of money" that was buying what F&F wasn't would just have sat out? By this argument, the less money in the system the better off we would have been. Had GS being in place, Citi would not have been able to form CitiFinancial (for example) and thus there would be even less money. So in this case (with which I do not agree), GS would have helped? the big banks (who could make loans and do securitizations) did buy a signficant chunk of the low-income loans-but-they bought AAA tranches (they could have easily earned more through A or AA paper-but they didn't) and they further insured the investments with credit default swaps--hardly risky endeavors. I'm struggling with this; it is an interesting point of view to describe insuring the investments with CDS as "hardly risky" (albeit with hindsight). However I think the larger question here is why the banks were buying these securities? They were buying them to fob them off onto investors. A behavior which GS would have prohibited. Yes the merchant banks would have still been doing this, but they could then have gone under. assume GS was in place, then, what would have happened-the exact same thing. Except that we could probably have let the failed institutions go down since they would not have been depository holders. Otherwise yes, the banks could still have written bad mortgages that were on-sold. But, as I noted above, you can't look at GS in a vacuum.

- Nari224

October 28, 2009 at 11:05am

Nari, Nari, Nari. We all know the bubble and financial crisis had mutliple causes. We're trying to find the leading causes. While conservative, i spend 70% of my time with progressive talk show radio, TV and this periodical. I hear, non-stop, Bush caused the crisis. First, GS, at best, in a minimal contributer. Second, lower interest rates will fuel housing demand-more people qualify for their first house or for a larger house. I'm having trouble believing that this factor was biggest contributor, as, a signficant amount of the doubling (40/50%) had already occured before Feds lowered short term rates. In addition, they couldn't lower long term rates-they have no power here-and many mortgages were 30 year fixed. Third, FF is my catch-all for the dramatic move, largely led by progressives, to extend home loans to poor people. As you well know, for decades, the progressive mantra had been: banks redline minority neighborhoods, thereby discriminating against them. Nevermind that the Boston Fed study which attempted to prove this was faulty and useless. Starting with the Community Redevelopment Act, continuing through the political appointees to FF by Clinton (many of whom resigned in disgrace), advancing through the Clinton administration change of the FF rules (allowing them to count unemployment income as income), bulldozing through Clinton's push for FF to buy more and more poor person loans. Yes, without FF, and progressives, you could not have witnessed a 4/6% rise in home ownership from 1992 through 2002. Fourth, my point on GS was more subtle: if it didn't exist, banks would make loans, someone else would securitize and buy those loans, then banks would by the securities. That's what happened. In addition, they bought AAA paper (slighlty riskier AA or A paper was ignored-establishing another subtle point-the banks weren't looking to make every last cent of profit). And, the banks purchased credit default swaps to further insure their investments. They weren't fobbing them off on investors. Of course, banks with investment banking arms participated in the securitization efforts-selling paper to European banks and pension funds. Highly regulated institutions with smart people evaluating the risks. Hardly risky, meaning, if the banks were totally profit driven and risk intolerant, they would have bought A tranches and never paid money to insure them with credit default swaps. If you can't accept the notion that when done, the banks thought such purchases were prudent, then explain why international banking regulations allow a 4% reserve for that paper and why, by the hundreds of billions, highly regulated European banks and pension funds also bought the AAA paper? Not sure your point: if investment banks securitize bank loans-they make wonderfu fees and largely don't hold the paper. the GS bank-which can't make the fees-either, holds the crummy loans (same result as financial crisis) or buy the securitized paper (same result as financial crisis).

- lobosven

October 28, 2009 at 12:39pm

lobosven: I wouldn't agree that the repeal of GS was a minimal contributor, but it wasn't a make or break, no. However that a growing number of people (including Rubin) involved in its repeal are now publicly saying it was a mistake might give one some pause to think about it, as you inveigh us to do. Lower Federal interest rates drove global investment money from treasury bonds (where it traditionally sat, nice and safe and not able to create bubbles) to other investments namely, US residential mortgages. This is what drove the issuing of lower and lower quality mortgages; the insatiable thirst for more "AAA" investments from this money that was no longer in treasuries. Lower interest rates also encouraged people in the US to continue to "up-size" or buy additional properties for investment purposes, both of which had an artificial inflationary effect on house prices (as we have now seen with the collapse of the market). Oh, and this then gets you a new mortgage, which is no longer at your older fixed 30 year rate, so yes, I would imagine lower rates would strongly drive this process. As for the CRA, how did it meaningfully contribute to the crisis? The data I have seen shows that FEWER mortgages originating from the CRA defaulted as compare to non-CRA mortgages. The biggest offenders are middle and upper class America, not the poor. Actual results of the program matter a lot more than who was in charge at any one given time. To your question about why regulated entities purchased "AAA" paper, I would think the answer to that is rather self-explanatory. As is the argument that they would make to their regulators for exemptions or flat out concealment once US institutions managed to ensure that securities were not regulated in the US and started to make buckets of money from them. But it is funny that countries whose regulators stood firm and were watching diligently (as opposed to actively ripping up regulations), such as Canada and Australia, managed to come through this rather unscathed. Its hard to argue that they are smaller than say, Iceland or Ireland, and hence the varying results are just due to scale. As to the rather tiresome Bush v. Clinton issue... when you're in charge the buck stops with you. Do we have any evidence that a Gore or Kerry presidency would have gone differently? Not really, and it probably wouldn't have made much of a different. But we didn't have a Gore or Kerry presidency, we had a Bush one, and he and his party were champions of the deregulation that answer your odd questions about why the banks acted in a entirely predictable manner. And it is their fault that they actively pursued a "light" government touch and actively encourage the reckless greed that brought us down. Don't run for government if you don't want to govern, and especially don't whinge about the "bad luck" that happens on your watch like Bush did when the whole thing falls to bits.

- Nari224

October 28, 2009 at 1:26pm

Nari-that's all nice, but, we have three branches of govenment, Bush being just one. In 2004/05 periods-when there was still time to reduce the impacts of the bubble and the resulting financial crisis-Reserve Chair testified that we needed to reign in Fmae/Fmac. Mccain sponsored a bill to do the same. I've seen the testimony in the House-Mr. Frank "no need-we can roll the dice more", Black Caucus members accusing GOP witnesses proposing more regulation of being racists. A bill passed in the House-died in the Senate committee (progressives opposed). It's also difficult to accept your approach to economics and politics: whatever happens during a presidency is his fault (if it's bad) or her good works (if we like it). I accept that many Americans believe this and vote that way-but-come on, is that how you really look at the world. It also kinda saddens me that the average progressive meme: business bad and evil, Wall Street blinded by greed (except that JP Morgan and Goldman had different risk policies-while operating under the same regulations-and are thriving), government good and helpful------forces you to miss the real story. I'm not endorsing bob ruben, just pointing out the facts, I kinda wonder about him---when questioned about his involvement in his bank (he was like strategic advisor guy)---he ran to the hills and pretended he wasn't involved. My real message: we better, first, truly understand the causes of the bubble and the resulting financial crisis, and second, if regulation is necessary (not this bring back GS or change how they're paid stuff), let's talk. I'm on record, above, saying: I know this model worked for home loans: proven income and assets, 20% equity, 28/33% income ratios. I might not insure a bank who makes loans which don't meet those standards, or I might require more capital reserves for a bank who makes that loan or invests in a securitized pool with even one loan like that in it. But, if we want some additional home ownership, and relax those standards, let's agree on some limit on how many of those loans or pieces of securitized bonds that any domestic bank can own (you can relax some and maybe do some good). So, I do think we can find some common ground.

- lobosven

October 28, 2009 at 4:28pm

Yes, we have three branches of Government and Bush was the head of the party that controlled all 3 for the most critical period of the leadup to the crisis. So, sucks to be him I guess. Actually, it's much worse to be us, but anyway. Again with F&F? How they are the lynch pin of the crisis? What would have toughening the oversight of them (as McCain proposed) do? Did Barney screw up? Yep. If F&F were completely fixed up on the day McCain reacted to a very public warning sounded by the OFHEO would it have made any difference? That's seems an incredible argument, but I'm willing to hear you make it. Now half way through I'm losing you sorry. "business bad and evil?". No. Private entities acted in exactly the way we would expect them to when appropriate and intentioned regulatory oversight is removed. Just like they always have in the past throughout recorded history and will almost certainly do so in the future. However if you are asserting that our current problems are completely unrelated to greed and avarice, go for it. You'll be very lonely, but I'm sure you'll find some fellow travelers. It's also a bit incredible to hear someone assert that JP Morgan and Goldman are thriving with the presumption that they're still that way all due to their own clever abilities and nothing to thank the Government for (or, more specifically, the government's bailout of AIG). I don't think the origins of the crisis are that mysterious - too much money chasing too few investment opportunities. Faux investments will always be generated as a result. The key is to ensuring that everything is clear and transparent - none of this "off book" rubbish. Then the market can act as it is supposed to. While I have no problems at all with forcing loan originators to hold some "skin in the game" when issuing loans (this will fix a lot of problem and will be more effective than mandating LTVs and the like) and fixing a number of problems in the residential mortgage market (of which GS is one component), concentrating on the mortgage market seems to miss the bigger picture. Bubbles can happen in many places. Even with Tulips! Basically, we need to fix "To big to fail" and fix our current problems with transparency if capitalism to survive. While it exists, people and firms can act foolishly with impunity and we will all be the worse for it. Either that or you do not believe that well regulated markets are the best solution we have and we need to be looking for alternatives.

- Nari224

October 28, 2009 at 5:16pm