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> That was the moment that I realized that some of these people live in a reality distortion zone where it really wasn't their fault. To be fair, the public is

> That was the moment that I realized that some of these people live in a reality distortion zone where it really wasn't their fault. To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation. Supply without demand is largely useless, after all. Similarly, the public hasn't shutdown the routes after the fact but rather accepted a smokescreen of a solution. The blame primarily rests on the shoulders of the banks and credit rating agencies because they provided the supply. They also were the best informed side of the transaction and engaged in a certain degree of deception that they should be punished severely for. The best lies, or distortions of reality, do have a kernel or two of truth.

cpprototypes 10y ago
99% of the blame should go to the banks and credit agency. The book The Big Short explains this well. Yes, the public participated in bad loans. But there was a natural limit to this, there's only so many people and homes. If it stopped there, the crisis would have been much more limited. But what did banks do once they hit the limit? Invent CDO and then synthetic CDO to create "artificial" supply for the bad loans. These derivatives are what really made the crisis very bad.
- fweespee_ch 10y ago
  Fwiw, I agree the banks and credit agency share the vast majority of the blame. I'd agree that share is likely around 90%. I'm sorry that wasn't clearer. I was just discussing the art of self deception depends heavily on a kernel or two of truth to hang itself.
haberman 10y ago
Mortgages (or any loan really) implies risk. This is part of why the loan is profitable: repayment isn't guaranteed. It is the bank's job to protect itself from risk. That is why it takes collateral and assesses that collateral. It's why the bank requires a down payment, especially if the borrower is on the edge of what they can afford. If the buyer defaults, the bank takes the collateral back and it's their job to make sure they are in an ok place afterwards. So yeah, when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse, but you're definitely going to save us because we're too big to fail," then yes, it means it's their fault. The public may have been complicit, but it's not the public's job to keep the financial industry healthy when the profits from that industry are kept privately.
- forgetsusername 10y ago
  >when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse That's an interesting interpretation of the events. In fact, there were institutions that were coerced by the government to participate in the bailout. Much of the derivatives betting was zero-sum, and done amongst the banks. The winners of those bets would have been more than happy to watch their competitors fail (fire sale!).
  - haberman 10y ago
    Institutions had to be coerced into letting the government buy their toxic assets through TARP? I would love to see a reference on that.
    - sokoloff 10y ago
      Claim by Jamie Dimon that they didn't want TARP funds but were pressured to take it: http://cnsnews.com/news/article/jpmorgan-chase-ceo-bank-took-tarp-because-we-were-asked-treasury-secretary http://cnsnews.com/news/article/jpmorgan-chase-ceo-bank-took...
      - haberman 10y ago
        So that speaks very highly of JPMorgan, and none of my criticism then applies to them. It's all the banks that were going to fail without TARP that I am criticizing.
    - slavik81 10y ago
      > June 11, 2009 | SINCE the economy hit an iceberg in October, America's biggest banks have felt a bit like shipwreck survivors: required to wear lifebelts provided by the government, despite complaints from some that they could have kept afloat on their own. http://www.economist.com/node/13832261 http://www.economist.com/node/13832261 > April 16, 2009 | THE WORST nightmare of many bankers, natural capitalists, is being under the direct control of the government. So it's no surprise that American banks want to throw off the yoke of government meddling and pay back any accepted TARP money as soon as possible. Predictably, Goldman Sachs is leading the charge. http://www.economist.com/blogs/freeexchange/2009/04/i_dont_want_your_tarp http://www.economist.com/blogs/freeexchange/2009/04/i_dont_w...
dcposch 10y ago
Agree. Banks, credit agencies, and the whole sell side, selling bad debt in bad faith to organizations like pension funds, carry the brunt of the responsibility. At the same time, the millions of poor and lower middle class people who took out loans way beyond their means -- and then defaulted on them -- aren't blameless victims, either. Say I'm a shift manager at a grocery story, but I want to buy an $700,000 McMansion. So the bank offers me a Negative Amortization Loan. (Those were fairly common in the few years before 2008.) The page clearly says that the loan will never be repayed if I make the minimum payment--the principal will grow every month. It clearly states the minimum monthly payment, a bit over half my paycheck. It's amoral and greedy for the bank to make that offer. At the same time, it's irresponsible and greedy for me to take it.
- haberman 10y ago
  Taking out a loan you can't really afford is taking a risky and ill advised gamble, but at least it's a gamble where you have skin in the game. If you default on your mortgage you will lose the house and suffer long term harm to your credit and your ability to get future loans. What is evil about the bankers' gamble is that when things go bad, they get bailed out and get to keep everything. They have nothing on the line.
  - ikeboy 10y ago
    You're writing this on an article about how GS paid billions to settle a claim. How is that "nothing on the line"?
    - haberman 10y ago
      The claim was for fraud. The fact that GS defrauded investors is its own independent transgression, separate from the risky bets that the government de facto insured them from. If I default on my mortgage and commit fraud, I don't have the luxury of saying "the fraud sentence is enough, can't I at least keep my house?"
      - 10y ago
bicknergseng 10y ago
> a large number of people made poor choices Is it really a poor choice to buy a house? Should people have known that banks were intentionally misleading them? The banks are the ones that should have been telling potential homebuyers that they weren't qualified, but they weren't doing that. Yes, the banks were also incentivized to make that kind of loan, but creating the derivative products that intentionally obscured the high risk of those loans and reselling those products as "low risk" derivatives is definitely on the banks and ratings agencies.
prostoalex 10y ago
> To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation. I disagree. Whether following the buy-vs-rent calculator (and opting for a purchase vs renting) or buying in hopes of selling at a higher price later on, everyone made a perfectly rational decision - people still buy real estate today when it makes sense to them, and every day investors buy growth stocks which produce no dividends, so the only plan is to sell them at a higher price later on. Normally though a risky speculative behavior is constrained by market's readiness to finance it. Most mortgage originators will loan very quickly at 60% LTV, will due their due diligence at 80% LTV, and do a whole lot more for lending at more than 80% LTV, and would want to be compensated by higher interest rate. Same for investment properties - most likely I will have to accept higher interest rate, higher down payment, as lenders are trying to control their own risk. The only time when lenders' guard is down is when a reputable third party tells them they will underwrite the risk in the event of a default. This reputable third party was known as AIG Financial Products, and if AIG tells the lender they will make them whole in an event of a default, then there's little reason to be diligent. If AIG FP did not exist, a lot of loans would receive a higher risk rating, which would increase the diligence onus on the lenders and financial burden on the borrowers, thereby removing a lot of those questionable transactions off the market.

cpprototypes 10y ago

99% of the blame should go to the banks and credit agency. The book The Big Short explains this well. Yes, the public participated in bad loans. But there was a natural limit to this, there's only so many people and homes. If it stopped there, the crisis would have been much more limited. But what did banks do once they hit the limit? Invent CDO and then synthetic CDO to create "artificial" supply for the bad loans. These derivatives are what really made the crisis very bad.

fweespee_ch 10y ago
Fwiw, I agree the banks and credit agency share the vast majority of the blame. I'd agree that share is likely around 90%. I'm sorry that wasn't clearer. I was just discussing the art of self deception depends heavily on a kernel or two of truth to hang itself.

haberman 10y ago

Mortgages (or any loan really) implies risk. This is part of why the loan is profitable: repayment isn't guaranteed. It is the bank's job to protect itself from risk. That is why it takes collateral and assesses that collateral. It's why the bank requires a down payment, especially if the borrower is on the edge of what they can afford. If the buyer defaults, the bank takes the collateral back and it's their job to make sure they are in an ok place afterwards. So yeah, when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse, but you're definitely going to save us because we're too big to fail," then yes, it means it's their fault. The public may have been complicit, but it's not the public's job to keep the financial industry healthy when the profits from that industry are kept privately.

forgetsusername 10y ago
>when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse That's an interesting interpretation of the events. In fact, there were institutions that were coerced by the government to participate in the bailout. Much of the derivatives betting was zero-sum, and done amongst the banks. The winners of those bets would have been more than happy to watch their competitors fail (fire sale!).
- haberman 10y ago
  Institutions had to be coerced into letting the government buy their toxic assets through TARP? I would love to see a reference on that.
  - sokoloff 10y ago
    Claim by Jamie Dimon that they didn't want TARP funds but were pressured to take it: http://cnsnews.com/news/article/jpmorgan-chase-ceo-bank-took-tarp-because-we-were-asked-treasury-secretary http://cnsnews.com/news/article/jpmorgan-chase-ceo-bank-took...
    - haberman 10y ago
      So that speaks very highly of JPMorgan, and none of my criticism then applies to them. It's all the banks that were going to fail without TARP that I am criticizing.
  - slavik81 10y ago
    > June 11, 2009 | SINCE the economy hit an iceberg in October, America's biggest banks have felt a bit like shipwreck survivors: required to wear lifebelts provided by the government, despite complaints from some that they could have kept afloat on their own. http://www.economist.com/node/13832261 http://www.economist.com/node/13832261 > April 16, 2009 | THE WORST nightmare of many bankers, natural capitalists, is being under the direct control of the government. So it's no surprise that American banks want to throw off the yoke of government meddling and pay back any accepted TARP money as soon as possible. Predictably, Goldman Sachs is leading the charge. http://www.economist.com/blogs/freeexchange/2009/04/i_dont_want_your_tarp http://www.economist.com/blogs/freeexchange/2009/04/i_dont_w...

dcposch 10y ago

Agree. Banks, credit agencies, and the whole sell side, selling bad debt in bad faith to organizations like pension funds, carry the brunt of the responsibility. At the same time, the millions of poor and lower middle class people who took out loans way beyond their means -- and then defaulted on them -- aren't blameless victims, either. Say I'm a shift manager at a grocery story, but I want to buy an $700,000 McMansion. So the bank offers me a Negative Amortization Loan. (Those were fairly common in the few years before 2008.) The page clearly says that the loan will never be repayed if I make the minimum payment--the principal will grow every month. It clearly states the minimum monthly payment, a bit over half my paycheck. It's amoral and greedy for the bank to make that offer. At the same time, it's irresponsible and greedy for me to take it.

haberman 10y ago
Taking out a loan you can't really afford is taking a risky and ill advised gamble, but at least it's a gamble where you have skin in the game. If you default on your mortgage you will lose the house and suffer long term harm to your credit and your ability to get future loans. What is evil about the bankers' gamble is that when things go bad, they get bailed out and get to keep everything. They have nothing on the line.
- ikeboy 10y ago
  You're writing this on an article about how GS paid billions to settle a claim. How is that "nothing on the line"?
  - haberman 10y ago
    The claim was for fraud. The fact that GS defrauded investors is its own independent transgression, separate from the risky bets that the government de facto insured them from. If I default on my mortgage and commit fraud, I don't have the luxury of saying "the fraud sentence is enough, can't I at least keep my house?"
    - 10y ago

bicknergseng 10y ago

> a large number of people made poor choices Is it really a poor choice to buy a house? Should people have known that banks were intentionally misleading them? The banks are the ones that should have been telling potential homebuyers that they weren't qualified, but they weren't doing that. Yes, the banks were also incentivized to make that kind of loan, but creating the derivative products that intentionally obscured the high risk of those loans and reselling those products as "low risk" derivatives is definitely on the banks and ratings agencies.

prostoalex 10y ago

> To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation. I disagree. Whether following the buy-vs-rent calculator (and opting for a purchase vs renting) or buying in hopes of selling at a higher price later on, everyone made a perfectly rational decision - people still buy real estate today when it makes sense to them, and every day investors buy growth stocks which produce no dividends, so the only plan is to sell them at a higher price later on. Normally though a risky speculative behavior is constrained by market's readiness to finance it. Most mortgage originators will loan very quickly at 60% LTV, will due their due diligence at 80% LTV, and do a whole lot more for lending at more than 80% LTV, and would want to be compensated by higher interest rate. Same for investment properties - most likely I will have to accept higher interest rate, higher down payment, as lenders are trying to control their own risk. The only time when lenders' guard is down is when a reputable third party tells them they will underwrite the risk in the event of a default. This reputable third party was known as AIG Financial Products, and if AIG tells the lender they will make them whole in an event of a default, then there's little reason to be diligent. If AIG FP did not exist, a lot of loans would receive a higher risk rating, which would increase the diligence onus on the lenders and financial burden on the borrowers, thereby removing a lot of those questionable transactions off the market.