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Why Sub-Prime Lenders Didn’t Cause the Housing Crash (2015)

77 points by colinprince 9y ago

ktRolster 9y ago
In retrospect (as the housing prices have mostly recovered: http://www.doctorhousingbubble.com/wp-content/uploads/2013/01/united_states.png http://www.doctorhousingbubble.com/wp-content/uploads/2013/0... ), the hosing crisis can be seen as an irrational bubble, with the major problem being that the banks were under-capitalized for the risk they were taking on. After several years of injecting capital into the banks for several years, they are fine. Arguably the banks didn't worry about the risk because they trusted the government would help them out.
- norikki 9y ago
  > the banks didn't worry about the risk because they trusted the government would help them out This is euphemistic for the banks stealing money from taxpayers through crony capitalism.
  - Godel_unicode 9y ago
    You're aware that those taxpayers actually got a very good deal, right? Roughly 10% return on investment, we effectively just invested public funds in good companies at cheap prices. https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
    - paulddraper 9y ago
      If it was such a fantastic deal, why wasn't someone else willing to step in and take it?
      - Godel_unicode 9y ago
        I did, and my portfolio is super happy about it. I cheerfully 'bailed out' Ford too.
        thinkcontext 9y ago
        No, you bought after the crash. The relevant question is would you have sold an insurance policy before the crisis and been able to stay solvent through it.
        Godel_unicode 9y ago
        I'm not saying that I bought before the crash, neither did the government. I literally did exactly what the government did; bought shares of banks and automotive companies after the crash, at severely reduced prices, and held for a substantial gain. The government absolutely did not sell an insurance policy before the crash. Even if you're arguing that there was a guarantee that the banks would be bailed out, which argument has merit, the banks didn't pay for that guarantee. We did it for different reasons (I won't pretend I was either magnanimous or delusional enough to think my investment by itself would buoy the stock price enough to keep the companies alive) but the actual actions are the same. Edit: technically both the government and I bought during the crash rather than after; my ROI wishes I'd been better at calling the bottom, but that's life.
        thinkcontext 9y ago
        Buying stock was only a small part of what the government did for the finance industry. Guaranteeing money market funds, opening up the discount window, bailing out AIG and paying off counterparties at 100%, sinking $100B+ into Fannie and Freddie, etc. The government had essentially given the finance industry an insurance policy before the crash that paid off during the crash. And you are right, they didn't have to pay for it in money, perhaps its possible to argue that they paid for it in regulation. If the firms had had to buy such a policy on the open market what would the price have been?
      - nopzor 9y ago
        because at the time very few people had the guts to?
        paulddraper 9y ago
        (1) I don't think it actually turned out great. (2) Even if it had, "it worked out" isn't a good justification for gambling with taxpayer money.
        Godel_unicode 9y ago
        What result would have met your test for worked out? Gambling with taxpayers money is a pretty good description of the job of government (will this transportation system get used (consider Detroit's highway system)? Are we encouraging business the right way? Will this law reduce crime?)
        paulddraper 9y ago
        Uncertainity about the usage of a hypothetical transportation system is qualitatively different than investing money to a company that has been mis-managed so badly it's going bankrupt.
        nopzor 9y ago
        re: (1), so you think it didn't turn out a hell of a lot better than most imagined?
      - ethan_g 9y ago
        Some people did, like Warren Buffett. https://qz.com/67052/heres-how-warren-buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/ https://qz.com/67052/heres-how-warren-buffett-made-3-1-billi...
    - pasquinelli 9y ago
      what do i get from that return?
      - Godel_unicode 9y ago
        The Treasury has money which didn't come from taxes to spend on federal budget items...? Not sure what you're asking. And as a nice sweetner, you got a financial system which isn't a smoking ruin.
        pasquinelli 9y ago
        so, military spending then, that's what i get. i ponied up actual cash which was lent to banks to cover them, but the return on those loans don't come back to me as actual cash. it goes to the federal budget, which is mostly military spending. it would've been better if the financial sector hadn't fucked up. it would be better if the financial sector wasn't protected--with my money--when it tries to make itself a smoking ruin. it should be protecting itself.
        Godel_unicode 9y ago
        You might want to look at a pie/donut chart of government spending. Mostly you got medic{are,aid} and social security. I think most people would agree that reducing the tax payer burden of those programs without reducing benefit is an objectively good thing. I don't disagree that the financial system should strive to be better, but during a crisis is definitely not the time to make that happen. https://www.cbo.gov/sites/default/files/cbofiles/images/pubs-images/50xxx/51110-Land_Overall.png https://www.cbo.gov/sites/default/files/cbofiles/images/pubs...
        pasquinelli 9y ago
        i know, but the subject was the return on the investment from bailing out the banks, but that return went to the federal budget, and the bailing out came out of people's pockets. it isn't comparing like for like at all.
    - ktRolster 9y ago
      That article is a little deceptive. It is mainly tracking TARP, it doesn't track the money injected into banks by other methods (like the FED directly buying subprime loans and manipulating the market). http://www.zerohedge.com/sites/default/files/images/user5/imageroot/von%20havenstein/Fed%20Balance%20Sheet%201.28.jpg http://www.zerohedge.com/sites/default/files/images/user5/im...
      - Godel_unicode 9y ago
        I totally disagree. The Fed isn't taxpayer's money (except maybe inasmuch as its actions effect the money supply). When people talk about "tax payer dollars" they are talking about funds the federal government has gotten directly from the people through taxes. That is exactly what TARP was.
    - yardie 9y ago
      QE is still a loan that needs to be paid back and we haven't nearly touched the principle.
    - ethan_g 9y ago
      I don't know why this was getting downvoted, because it's correct. All the banks repaid their TARP loans from the Fed at a significant profit (https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program). Even QE, which is not a direct bailout but certainly helped banks' profits, was substantially profitable for the treasury the last I heard. (edit) Let me add, I was no fan of the bail-outs when they happened. But I can't deny they were, in retrospect, really profitable.
ChuckMcM 9y ago
I think the article is junk but that first comment by Dodson is solid gold.
- exit 9y ago
  what makes the whole article junk?
  - ChuckMcM 9y ago
    It ignores the whole cycle of leveraging and recycling that occured when weaponizing mortgage and asset backed securities into CDOs and insurance risk swaps. Sub-prime mortgages were the gasoline on that fire, they took what was perhaps a cabin burning in the woods and turned it into a 10,000 acre wildfire. With out sub-prime mortgages as an accelerator the who CDO mess burns out slowly and in when it starts burning the market moves away in a controlled manner. To discount or even disconnect the sub-prime lenders from that fire is disingenuous at best in my opinion.
    - klenwell 9y ago
      Put another way: if you've seen the movie The Big Short, it's like they cut out all the Florida scenes. If you haven't seen The Big Short, it's still on Netflix.
      - thinkcontext 9y ago
        Not the Florida scenes, they say subprime grew but it was still small compared to prime. The layering and diving and combining is the Jenga scene.
  - dogruck 9y ago
    It ignores the role of government in demanding the issuance of more sub-prime loans.
- Finnucane 9y ago
  A lot of speculators were indeed left 'holding the bag', as it were, when the credit game collapsed and there were no more greater fools to sell to. But the reason there were no more such fools is that the lenders had scraped the bottom of the barrel, and there was no one left to lend to. There's no question that credit standards were loosened across the board, and it was possible for almost anyone to get a loan. For a while, foreclosure rates were low as long as it was possible to refi or sell your way out of a problem. Another thing that happened was a lot of people borrowed against rising equity and spent the money as if it were free cash, and found out the hard way later that it wasn't. And that's before we even get into the effects of fraud--underwriting fraud, appraisal fraud, fraudulent bond ratings, forged paper trails, and on and on. The bubble floated on an ocean of fraud. It was an unrestrained orgy of greed and criminality on every level.
ChicagoDave 9y ago
This article has to be founded by some pro-banking group. The article completely misses the part where the ratings agencies were incapable of reviewing capitalized mortgage pools to rate them appropriately. Regardless of the balance of prime to sub-prime, the inherent falsehoods within the ratings returned from Moody's, Standard & Poor, and Fitch are what made our financial system "untrustworthy" and that's what led to the financial crisis.
- CryptoPunk 9y ago
  Maybe ratings agencies would do their job and refuse to rate things they can't see into if they were actually competition in the ratings sector, instead of a monopoly by the three ratings agencies, enshrined into law with regulations. Much of the ratings sector is for all intents and purposes impossible for any outside firm to compete in, because of government regulations that are supposed to ensure high quality ratings. As it happens, the ratings agencies have some of the highest profit margins in the market, which is a classic sign of lack of competition, and rent-seeking.
  - klenwell 9y ago
    Funny you suggest market competition. In The Big Short movie, it's competition that the ratings agency rep played Melissa Leo cites to explain their corrupt ratings: Georgia: If we don't give them the rating, they go to Moody's. Right down the street. If we don't work with them, they will go to our competitors. Not our fault. Simply the way the world works. Vinnie: Holy shit. Georgia: Yes, now you see. And I never said that. https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be&t=3m18s https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be...
    - CryptoPunk 9y ago
      At the micro level, that could very well be, but at the macro level, competition for reputation should create a business interest in not giving out inaccurate ratings. When the entire market is dominated by three agencies (two alone have 80% of the market), with the US government considering ratings given by them alone as sufficient for approval for certain listings, then regulatory management of the industry has effectively replaced reputational competition as the primary driver of quality.
joeax 9y ago
This article is little more than an argument about semantics. Whether prime or subprime, the real culprit was mortgage-backed securities. At the height of the bubble, banks were merely underwriting loans and they couldn't sell them fast enough as MBSs/CDOs, a market of which was experiencing its own shadow bubble. Banks were basically shifting risk off of themselves. When housing crashed (and subsequently the MBS bubble pop), banks like WaMu and Wachovia were left holding too many loans (prime and subprime) and no market to offload them, which quickly lead to their insolvency.
- lisper 9y ago
  One thing I think is important not to lose sight of: the institutions went bust, but the people at the top who made the decisions that led to the problem all received and retained compensation in amounts that anyone hanging out here would consider "set for life." Tens of millions of dollars. To cite but one example: http://www.foxnews.com/story/2008/09/26/wamu-gives-new-ceo-mega-payout-as-bank-fails.html http://www.foxnews.com/story/2008/09/26/wamu-gives-new-ceo-m...
  - vorg 9y ago
    Having escaped prosecution and collected a "pension", the criminals who caused the problem are now trying to rewrite history in their favor, hence the article which will no doubt be the first of many more like it.
    - TwoBit 9y ago
      The problem with calling them criminals is that they didn't break laws. Maybe that's the underlying cause of all this.
      - colechristensen 9y ago
        That has not been judged. In _The Chickenshit Club_ Jesse Eisinger argues that prosecutors are just cowards unwilling to take the reputation of losing a case so they simply refuse to go after cases with any small chance of losing. http://www.npr.org/2017/07/11/536642560/is-the-justice-department-shying-away-from-to-prosecuting-corporations http://www.npr.org/2017/07/11/536642560/is-the-justice-depar...
cm2187 9y ago
A lesser known but major contributor to the financial crisis is the commercial real estate market. As far as I know, Lehman went bust because of their massive commercial morgage position, that Fuld accumulated in 2007, trying to catch a falling knife. And commercial real estate blew major holes in balance sheets all over the place.
CryptoPunk 9y ago
Another good reevaluation of the causes of the financial crisis that similarly argues against sub-prime mortgages being the main culprit: http://econlog.econlib.org/archives/2016/05/dont_solve_prob.html http://econlog.econlib.org/archives/2016/05/dont_solve_prob.... The explanation is much simpler than others offered, but often simple problems are the ones most overlooked.
- eru 9y ago
  Indeed. The economy could have easily dealt with a few banks failing---if the central banks would have kept nGDP up. Australia, and even more Israel, barely noticed the Great Depression. Britain also did much better than American and the Euro area, thanks to a competent reaction by the Bank of England.
  - CryptoPunk 9y ago
    The article points to the FDIC and the misalignment of incentives it creates when it is combined with small undiversified banks, as the primary cause of the crisis. The note on the central bank's monetary policy relates to the Great Depression, not the 2008 crash.
    - eru 9y ago
      You are right. I was interpreting things a bit more liberally: the housing crisis and banking crash would have stayed relatively small, if the Great Recession wouldn't have started: At some point nGDP started to fall, giving the housing market and banks more trouble.
olivermarks 9y ago
One of an endless stream of academia forensics after the fact. Another argument is that it was wealthy house flippers who capsized the market and not poor people being given large loans they couldn't repay. https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ https://qz.com/1064061/house-flippers-triggered-the-us-housi...
- wmil 9y ago
  At the end of the day most of the theories aren't exclusive. It takes a lot of people to create a global economic disaster.
  - mannykannot 9y ago
    True, but this article is trying to narrow the range of causes.
- prostoalex 9y ago
  The article just states the flippers were "those with credit scores in the middle and top of the credit score distribution", not necessarily wealthy. A wealthy flipper, e.g. a value-add REIT, would not generate as much debt in the first place (as they can just utilize their own bank account) and would be less likely to default en masse since they have spare cash and can wait out the downturn in the markets.
jamesblonde 9y ago
The Toronto housing market is starting to crash now. That leaves just 3 housing markets that kept walking on water after the crash - Australia, Sweden, and Norway. Tick tock.
- randomdata 9y ago
  Not likely. The Toronto housing market saw its laws changed at the end of April. The market has lost some confidence because of that, but it is likely to only be temporary. Once buyer confidence is restored, it will be business as usual. Vancouver's market also "crashed" in mid-2016[1] after their new – similar to Ontario's – laws came into effect. Six months later, after buyer confidence came back, an all-time record high was set. [1] http://creastats.crea.ca/vanc/images/vanc_chart05_xhi-res.png http://creastats.crea.ca/vanc/images/vanc_chart05_xhi-res.pn...
chiefalchemist 9y ago
Knowledge@Wharton: Because of the way the economy was going back then, people were feeling much better, there was more money, jobs were better, salaries were better. So people had that money to basically throw around. Ferreira: It’s like today. If you ask me today who is getting more loans, riskier borrowers or the middle class, [it’s] the middle class that sees a market that’s stable, that had jobs for the past five, six years, people that were able to save for their down payment — they are the ones getting earlier into this market. --- So we're on the cusp of repeating 2008? So soon?
- quuquuquu 9y ago
  It's been almost 10 years already. That is decently long compared to bubbles of years passed. We average about one per decade. I think it makes sense. Lenders have a never ending impetus from Wall St to grow revenue and profit. When all of the rich and moneyed people (13.5m people in the USA are millionaires) have already taken on loans, who do you go to next? It becomes a cycle of just digging deeper and deeper into the question of "how do we sell this large capital asset to someone who barely has the ability to pay it back in the next 30 years". Eventually, small economic cracks (sub prime defaults) lead to medium economic cracks (minor layoffs) which eventually, if the hysteria is massive enough, lead to massive economic cracks (major layoffs, shutting down business arms, pull backs in investment) Eventually the govt is expected by market actors to become a lender of last resort, the dust settles, assets are repo'd, and over time... ... the cycle begins anew. So, keep an eye out for the cracks that may be forming right now. Soon there will be another Lehman, another Enron, another Oil Crisis, another speculative bubble bursting due to credit on credit on credit on credit.
  - chiefalchemist 9y ago
    Yes. But must we immediately repeat the same series of bad moves? Have we not learned anything?
    - quuquuquu 9y ago
      Oh, I completely agree with you! I hate bubbles, I hate predatory lending, etc. However I am very sad to say that my observation is that this is happening again, either from ignorance or deliberate action. I would love to be wrong :(
TwoBit 9y ago
This article is bunk.
- oblib 9y ago
  Agreed, and not much more needs to be said about it.
mcguire 9y ago
"It was a new type of lending focusing on riskier borrowers who didn’t have money for the standard 20% down payment, who didn’t have a history of stable employment, or who didn’t have a high enough credit score to apply for conventional standard loans, so-called “prime” loans. Lenders became quite creative in terms of finding ways to provide loans to those individuals, to those families." We bought a house in late 2006/early 2007. We had money for 20% down; a history of stable, highly paid employment; and a pair of high credit scores. We had to twist the goddamn lender's arm to get a standard, non-whacked-ass "creative" loan. It was obvious in mid-2005 that they were writing unsustainable loans. It was obvious that as soon as the business cycle had any kind of hiccup, the wheels were going to start coming off. "Ferreira: Yes. Let’s split the housing market into four major components. There’s the prime sector. That’s always around 60% of the market. That’s the bulk of the mortgage market. There are the governmental loans — HUD, FHA and VA — which are about 10% to 15% of the market. Then there’s sub-prime. Sub-prime started in the mid-1990s with about 5% to 10% of the market. And that increased to 20% — big, but a third the size of the prime sector. And then you have all-cash transactions: investors or wealthy people. And that’s about 10% of the market. So during the whole time period, even at the height of the housing boom, sub-prime was never more than 20% of the market. And the prime sector was 60% or more and increasing." The sub-prime market was, as expected, the first up against the wall when the wheels started coming off. And the result was that 20% of the market, rather than 5-10%, were forced to sell quickly or be foreclosed. 20% of the market is going to have a bigger effect on overall prices than 5-10%. On the other hand, that doesn't let prime lenders off the hook, since everyone was pushing bigger loans that overextended more borrowers, as in, "[T]he phenomenon was widespread. It was not concentrated solely on the sub-prime sector." But this is where Ferriera starts going off the rails. "More equity helps. Having a higher down payment helps." No, having lower payments helps. It doesn't matter whether you've got 20% or 0% if you physically cannot make the payments. Lenders were writing loans that overextended borrowers. "So around 2008 and 2009, in certain markets, you had about 10% to 20% of the stock of homes being foreclosed. Those markets were the weaker markets, such as inland California, areas like Fresno and Modesto, or smaller markets in Florida, for example." I seem to recall it being the stronger markets, like Las Vegas. But anyway... "Knowledge@Wharton: [...] I guess, in some respects, then, we still don’t have a full, true understanding about housing cycles and how they affect the markets, or the potential of the U.S. having another bubble down the road." We may not have a full understanding, but we do have, and did have, enough of an understanding that you cannot lend more money to people than they can be expected to pay back. It makes no sense to frame the issue as prime vs. sub-prime or wealthy vs. poor. It was purely a case of lenders not doing their jobs. So, then: "Ferreira: Unfortunately, I don’t think so. Let me give you an example about lenders. Lenders got all the blame, especially sub-prime lenders, for the crisis. So what’s happening right now in this recovery? Are we giving thank-yous to the lenders because perhaps they’re helping with the recovery? Absolutely not." And rightfully so! Lenders deserved the blame. And then they didn't "[help] with the recovery"; they stopped making loans at all.
Dowwie 9y ago
Another recent study confirms this narrative as well. No citation to the 2015 study: https://hceconomics.uchicago.edu/research/working-paper/credit-growth-and-financial-crisis-new-narrative https://hceconomics.uchicago.edu/research/working-paper/cred...
dogruck 9y ago
This article is horribly biased against lenders. We all can agree that lenders did loosen their criterion -- but why? They did so because legislator and judges were criticizing them for refusing sub-prime loans. The government said, hey, you're not giving enough loans to minorities who dominate the sub-prime population. So, the lenders complied.
notyourday 9y ago
Reading HN version of the events is live stepping into alternative reality. Just for the fun of it I did Ctrl-F for a word "conforming" and it was nowhere to be found in the comments. Subprime is irrelevant. Prime is irrelevant. The only thing that was relevant was conforming vs. non-conforming loans. Non-conforming loans started the fall ( oh, and nearly all subprime loans were non-conforming but that's not that relevant as the total amount of money in subprime non-conforming was just not that high compared to the amount of money in prime non-conforming ) because conforming loans were sold to F&F and removed from the books. Originating conforming just did not may that much which is why it was difficult to get them while a barely walking corpse could get NINJA 3/1 loan with a payment lower than the APR and a balloon at 5 years. And it was not the CDOs that mattered. It was CDS that did not trigger when the underlying collapsed. That was fraud. Fraud that the treasury secretary at the time oversaw. It was fraud that Goldman became a bank to get the protection of US Government and was allowed not to behave like a bank, etc, etc, etc.

77 points by colinprince 9y ago

In retrospect (as the housing prices have mostly recovered: http://www.doctorhousingbubble.com/wp-content/uploads/2013/01/united_states.png http://www.doctorhousingbubble.com/wp-content/uploads/2013/0... ), the hosing crisis can be seen as an irrational bubble, with the major problem being that the banks were under-capitalized for the risk they were taking on. After several years of injecting capital into the banks for several years, they are fine. Arguably the banks didn't worry about the risk because they trusted the government would help them out.

norikki 9y ago
> the banks didn't worry about the risk because they trusted the government would help them out This is euphemistic for the banks stealing money from taxpayers through crony capitalism.
- Godel_unicode 9y ago
  You're aware that those taxpayers actually got a very good deal, right? Roughly 10% return on investment, we effectively just invested public funds in good companies at cheap prices. https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
  - paulddraper 9y ago
    If it was such a fantastic deal, why wasn't someone else willing to step in and take it?
    - Godel_unicode 9y ago
      I did, and my portfolio is super happy about it. I cheerfully 'bailed out' Ford too.
      - thinkcontext 9y ago
        No, you bought after the crash. The relevant question is would you have sold an insurance policy before the crisis and been able to stay solvent through it.
        Godel_unicode 9y ago
        I'm not saying that I bought before the crash, neither did the government. I literally did exactly what the government did; bought shares of banks and automotive companies after the crash, at severely reduced prices, and held for a substantial gain. The government absolutely did not sell an insurance policy before the crash. Even if you're arguing that there was a guarantee that the banks would be bailed out, which argument has merit, the banks didn't pay for that guarantee. We did it for different reasons (I won't pretend I was either magnanimous or delusional enough to think my investment by itself would buoy the stock price enough to keep the companies alive) but the actual actions are the same. Edit: technically both the government and I bought during the crash rather than after; my ROI wishes I'd been better at calling the bottom, but that's life.
        thinkcontext 9y ago
        Buying stock was only a small part of what the government did for the finance industry. Guaranteeing money market funds, opening up the discount window, bailing out AIG and paying off counterparties at 100%, sinking $100B+ into Fannie and Freddie, etc. The government had essentially given the finance industry an insurance policy before the crash that paid off during the crash. And you are right, they didn't have to pay for it in money, perhaps its possible to argue that they paid for it in regulation. If the firms had had to buy such a policy on the open market what would the price have been?
    - nopzor 9y ago
      because at the time very few people had the guts to?
      - paulddraper 9y ago
        (1) I don't think it actually turned out great. (2) Even if it had, "it worked out" isn't a good justification for gambling with taxpayer money.
        Godel_unicode 9y ago
        What result would have met your test for worked out? Gambling with taxpayers money is a pretty good description of the job of government (will this transportation system get used (consider Detroit's highway system)? Are we encouraging business the right way? Will this law reduce crime?)
        paulddraper 9y ago
        Uncertainity about the usage of a hypothetical transportation system is qualitatively different than investing money to a company that has been mis-managed so badly it's going bankrupt.
        nopzor 9y ago
        re: (1), so you think it didn't turn out a hell of a lot better than most imagined?
    - ethan_g 9y ago
      Some people did, like Warren Buffett. https://qz.com/67052/heres-how-warren-buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/ https://qz.com/67052/heres-how-warren-buffett-made-3-1-billi...
  - pasquinelli 9y ago
    what do i get from that return?
    - Godel_unicode 9y ago
      The Treasury has money which didn't come from taxes to spend on federal budget items...? Not sure what you're asking. And as a nice sweetner, you got a financial system which isn't a smoking ruin.
      - pasquinelli 9y ago
        so, military spending then, that's what i get. i ponied up actual cash which was lent to banks to cover them, but the return on those loans don't come back to me as actual cash. it goes to the federal budget, which is mostly military spending. it would've been better if the financial sector hadn't fucked up. it would be better if the financial sector wasn't protected--with my money--when it tries to make itself a smoking ruin. it should be protecting itself.
        Godel_unicode 9y ago
        You might want to look at a pie/donut chart of government spending. Mostly you got medic{are,aid} and social security. I think most people would agree that reducing the tax payer burden of those programs without reducing benefit is an objectively good thing. I don't disagree that the financial system should strive to be better, but during a crisis is definitely not the time to make that happen. https://www.cbo.gov/sites/default/files/cbofiles/images/pubs-images/50xxx/51110-Land_Overall.png https://www.cbo.gov/sites/default/files/cbofiles/images/pubs...
        pasquinelli 9y ago
        i know, but the subject was the return on the investment from bailing out the banks, but that return went to the federal budget, and the bailing out came out of people's pockets. it isn't comparing like for like at all.
  - ktRolster 9y ago
    That article is a little deceptive. It is mainly tracking TARP, it doesn't track the money injected into banks by other methods (like the FED directly buying subprime loans and manipulating the market). http://www.zerohedge.com/sites/default/files/images/user5/imageroot/von%20havenstein/Fed%20Balance%20Sheet%201.28.jpg http://www.zerohedge.com/sites/default/files/images/user5/im...
    - Godel_unicode 9y ago
      I totally disagree. The Fed isn't taxpayer's money (except maybe inasmuch as its actions effect the money supply). When people talk about "tax payer dollars" they are talking about funds the federal government has gotten directly from the people through taxes. That is exactly what TARP was.
  - yardie 9y ago
    QE is still a loan that needs to be paid back and we haven't nearly touched the principle.
  - ethan_g 9y ago
    I don't know why this was getting downvoted, because it's correct. All the banks repaid their TARP loans from the Fed at a significant profit (https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program). Even QE, which is not a direct bailout but certainly helped banks' profits, was substantially profitable for the treasury the last I heard. (edit) Let me add, I was no fan of the bail-outs when they happened. But I can't deny they were, in retrospect, really profitable.

ChuckMcM 9y ago

I think the article is junk but that first comment by Dodson is solid gold.

exit 9y ago
what makes the whole article junk?
- ChuckMcM 9y ago
  It ignores the whole cycle of leveraging and recycling that occured when weaponizing mortgage and asset backed securities into CDOs and insurance risk swaps. Sub-prime mortgages were the gasoline on that fire, they took what was perhaps a cabin burning in the woods and turned it into a 10,000 acre wildfire. With out sub-prime mortgages as an accelerator the who CDO mess burns out slowly and in when it starts burning the market moves away in a controlled manner. To discount or even disconnect the sub-prime lenders from that fire is disingenuous at best in my opinion.
  - klenwell 9y ago
    Put another way: if you've seen the movie The Big Short, it's like they cut out all the Florida scenes. If you haven't seen The Big Short, it's still on Netflix.
    - thinkcontext 9y ago
      Not the Florida scenes, they say subprime grew but it was still small compared to prime. The layering and diving and combining is the Jenga scene.
- dogruck 9y ago
  It ignores the role of government in demanding the issuance of more sub-prime loans.
Finnucane 9y ago
A lot of speculators were indeed left 'holding the bag', as it were, when the credit game collapsed and there were no more greater fools to sell to. But the reason there were no more such fools is that the lenders had scraped the bottom of the barrel, and there was no one left to lend to. There's no question that credit standards were loosened across the board, and it was possible for almost anyone to get a loan. For a while, foreclosure rates were low as long as it was possible to refi or sell your way out of a problem. Another thing that happened was a lot of people borrowed against rising equity and spent the money as if it were free cash, and found out the hard way later that it wasn't. And that's before we even get into the effects of fraud--underwriting fraud, appraisal fraud, fraudulent bond ratings, forged paper trails, and on and on. The bubble floated on an ocean of fraud. It was an unrestrained orgy of greed and criminality on every level.

ChicagoDave 9y ago

This article has to be founded by some pro-banking group. The article completely misses the part where the ratings agencies were incapable of reviewing capitalized mortgage pools to rate them appropriately. Regardless of the balance of prime to sub-prime, the inherent falsehoods within the ratings returned from Moody's, Standard & Poor, and Fitch are what made our financial system "untrustworthy" and that's what led to the financial crisis.

CryptoPunk 9y ago
Maybe ratings agencies would do their job and refuse to rate things they can't see into if they were actually competition in the ratings sector, instead of a monopoly by the three ratings agencies, enshrined into law with regulations. Much of the ratings sector is for all intents and purposes impossible for any outside firm to compete in, because of government regulations that are supposed to ensure high quality ratings. As it happens, the ratings agencies have some of the highest profit margins in the market, which is a classic sign of lack of competition, and rent-seeking.
- klenwell 9y ago
  Funny you suggest market competition. In The Big Short movie, it's competition that the ratings agency rep played Melissa Leo cites to explain their corrupt ratings: Georgia: If we don't give them the rating, they go to Moody's. Right down the street. If we don't work with them, they will go to our competitors. Not our fault. Simply the way the world works. Vinnie: Holy shit. Georgia: Yes, now you see. And I never said that. https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be&t=3m18s https://www.youtube.com/watch?v=mwdo17GT6sg&feature=youtu.be...
  - CryptoPunk 9y ago
    At the micro level, that could very well be, but at the macro level, competition for reputation should create a business interest in not giving out inaccurate ratings. When the entire market is dominated by three agencies (two alone have 80% of the market), with the US government considering ratings given by them alone as sufficient for approval for certain listings, then regulatory management of the industry has effectively replaced reputational competition as the primary driver of quality.

joeax 9y ago

This article is little more than an argument about semantics. Whether prime or subprime, the real culprit was mortgage-backed securities. At the height of the bubble, banks were merely underwriting loans and they couldn't sell them fast enough as MBSs/CDOs, a market of which was experiencing its own shadow bubble. Banks were basically shifting risk off of themselves. When housing crashed (and subsequently the MBS bubble pop), banks like WaMu and Wachovia were left holding too many loans (prime and subprime) and no market to offload them, which quickly lead to their insolvency.

lisper 9y ago
One thing I think is important not to lose sight of: the institutions went bust, but the people at the top who made the decisions that led to the problem all received and retained compensation in amounts that anyone hanging out here would consider "set for life." Tens of millions of dollars. To cite but one example: http://www.foxnews.com/story/2008/09/26/wamu-gives-new-ceo-mega-payout-as-bank-fails.html http://www.foxnews.com/story/2008/09/26/wamu-gives-new-ceo-m...
- vorg 9y ago
  Having escaped prosecution and collected a "pension", the criminals who caused the problem are now trying to rewrite history in their favor, hence the article which will no doubt be the first of many more like it.
  - TwoBit 9y ago
    The problem with calling them criminals is that they didn't break laws. Maybe that's the underlying cause of all this.
    - colechristensen 9y ago
      That has not been judged. In _The Chickenshit Club_ Jesse Eisinger argues that prosecutors are just cowards unwilling to take the reputation of losing a case so they simply refuse to go after cases with any small chance of losing. http://www.npr.org/2017/07/11/536642560/is-the-justice-department-shying-away-from-to-prosecuting-corporations http://www.npr.org/2017/07/11/536642560/is-the-justice-depar...

cm2187 9y ago

A lesser known but major contributor to the financial crisis is the commercial real estate market. As far as I know, Lehman went bust because of their massive commercial morgage position, that Fuld accumulated in 2007, trying to catch a falling knife. And commercial real estate blew major holes in balance sheets all over the place.

CryptoPunk 9y ago

Another good reevaluation of the causes of the financial crisis that similarly argues against sub-prime mortgages being the main culprit: http://econlog.econlib.org/archives/2016/05/dont_solve_prob.html http://econlog.econlib.org/archives/2016/05/dont_solve_prob.... The explanation is much simpler than others offered, but often simple problems are the ones most overlooked.

eru 9y ago
Indeed. The economy could have easily dealt with a few banks failing---if the central banks would have kept nGDP up. Australia, and even more Israel, barely noticed the Great Depression. Britain also did much better than American and the Euro area, thanks to a competent reaction by the Bank of England.
- CryptoPunk 9y ago
  The article points to the FDIC and the misalignment of incentives it creates when it is combined with small undiversified banks, as the primary cause of the crisis. The note on the central bank's monetary policy relates to the Great Depression, not the 2008 crash.
  - eru 9y ago
    You are right. I was interpreting things a bit more liberally: the housing crisis and banking crash would have stayed relatively small, if the Great Recession wouldn't have started: At some point nGDP started to fall, giving the housing market and banks more trouble.

olivermarks 9y ago

One of an endless stream of academia forensics after the fact. Another argument is that it was wealthy house flippers who capsized the market and not poor people being given large loans they couldn't repay. https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ https://qz.com/1064061/house-flippers-triggered-the-us-housi...

wmil 9y ago
At the end of the day most of the theories aren't exclusive. It takes a lot of people to create a global economic disaster.
- mannykannot 9y ago
  True, but this article is trying to narrow the range of causes.
prostoalex 9y ago
The article just states the flippers were "those with credit scores in the middle and top of the credit score distribution", not necessarily wealthy. A wealthy flipper, e.g. a value-add REIT, would not generate as much debt in the first place (as they can just utilize their own bank account) and would be less likely to default en masse since they have spare cash and can wait out the downturn in the markets.

jamesblonde 9y ago

The Toronto housing market is starting to crash now. That leaves just 3 housing markets that kept walking on water after the crash - Australia, Sweden, and Norway. Tick tock.

randomdata 9y ago
Not likely. The Toronto housing market saw its laws changed at the end of April. The market has lost some confidence because of that, but it is likely to only be temporary. Once buyer confidence is restored, it will be business as usual. Vancouver's market also "crashed" in mid-2016[1] after their new – similar to Ontario's – laws came into effect. Six months later, after buyer confidence came back, an all-time record high was set. [1] http://creastats.crea.ca/vanc/images/vanc_chart05_xhi-res.png http://creastats.crea.ca/vanc/images/vanc_chart05_xhi-res.pn...

chiefalchemist 9y ago

Knowledge@Wharton: Because of the way the economy was going back then, people were feeling much better, there was more money, jobs were better, salaries were better. So people had that money to basically throw around. Ferreira: It’s like today. If you ask me today who is getting more loans, riskier borrowers or the middle class, [it’s] the middle class that sees a market that’s stable, that had jobs for the past five, six years, people that were able to save for their down payment — they are the ones getting earlier into this market. --- So we're on the cusp of repeating 2008? So soon?

quuquuquu 9y ago
It's been almost 10 years already. That is decently long compared to bubbles of years passed. We average about one per decade. I think it makes sense. Lenders have a never ending impetus from Wall St to grow revenue and profit. When all of the rich and moneyed people (13.5m people in the USA are millionaires) have already taken on loans, who do you go to next? It becomes a cycle of just digging deeper and deeper into the question of "how do we sell this large capital asset to someone who barely has the ability to pay it back in the next 30 years". Eventually, small economic cracks (sub prime defaults) lead to medium economic cracks (minor layoffs) which eventually, if the hysteria is massive enough, lead to massive economic cracks (major layoffs, shutting down business arms, pull backs in investment) Eventually the govt is expected by market actors to become a lender of last resort, the dust settles, assets are repo'd, and over time... ... the cycle begins anew. So, keep an eye out for the cracks that may be forming right now. Soon there will be another Lehman, another Enron, another Oil Crisis, another speculative bubble bursting due to credit on credit on credit on credit.
- chiefalchemist 9y ago
  Yes. But must we immediately repeat the same series of bad moves? Have we not learned anything?
  - quuquuquu 9y ago
    Oh, I completely agree with you! I hate bubbles, I hate predatory lending, etc. However I am very sad to say that my observation is that this is happening again, either from ignorance or deliberate action. I would love to be wrong :(

TwoBit 9y ago

This article is bunk.

oblib 9y ago
Agreed, and not much more needs to be said about it.

mcguire 9y ago

"It was a new type of lending focusing on riskier borrowers who didn’t have money for the standard 20% down payment, who didn’t have a history of stable employment, or who didn’t have a high enough credit score to apply for conventional standard loans, so-called “prime” loans. Lenders became quite creative in terms of finding ways to provide loans to those individuals, to those families." We bought a house in late 2006/early 2007. We had money for 20% down; a history of stable, highly paid employment; and a pair of high credit scores. We had to twist the goddamn lender's arm to get a standard, non-whacked-ass "creative" loan. It was obvious in mid-2005 that they were writing unsustainable loans. It was obvious that as soon as the business cycle had any kind of hiccup, the wheels were going to start coming off. "Ferreira: Yes. Let’s split the housing market into four major components. There’s the prime sector. That’s always around 60% of the market. That’s the bulk of the mortgage market. There are the governmental loans — HUD, FHA and VA — which are about 10% to 15% of the market. Then there’s sub-prime. Sub-prime started in the mid-1990s with about 5% to 10% of the market. And that increased to 20% — big, but a third the size of the prime sector. And then you have all-cash transactions: investors or wealthy people. And that’s about 10% of the market. So during the whole time period, even at the height of the housing boom, sub-prime was never more than 20% of the market. And the prime sector was 60% or more and increasing." The sub-prime market was, as expected, the first up against the wall when the wheels started coming off. And the result was that 20% of the market, rather than 5-10%, were forced to sell quickly or be foreclosed. 20% of the market is going to have a bigger effect on overall prices than 5-10%. On the other hand, that doesn't let prime lenders off the hook, since everyone was pushing bigger loans that overextended more borrowers, as in, "[T]he phenomenon was widespread. It was not concentrated solely on the sub-prime sector." But this is where Ferriera starts going off the rails. "More equity helps. Having a higher down payment helps." No, having lower payments helps. It doesn't matter whether you've got 20% or 0% if you physically cannot make the payments. Lenders were writing loans that overextended borrowers. "So around 2008 and 2009, in certain markets, you had about 10% to 20% of the stock of homes being foreclosed. Those markets were the weaker markets, such as inland California, areas like Fresno and Modesto, or smaller markets in Florida, for example." I seem to recall it being the stronger markets, like Las Vegas. But anyway... "Knowledge@Wharton: [...] I guess, in some respects, then, we still don’t have a full, true understanding about housing cycles and how they affect the markets, or the potential of the U.S. having another bubble down the road." We may not have a full understanding, but we do have, and did have, enough of an understanding that you cannot lend more money to people than they can be expected to pay back. It makes no sense to frame the issue as prime vs. sub-prime or wealthy vs. poor. It was purely a case of lenders not doing their jobs. So, then: "Ferreira: Unfortunately, I don’t think so. Let me give you an example about lenders. Lenders got all the blame, especially sub-prime lenders, for the crisis. So what’s happening right now in this recovery? Are we giving thank-yous to the lenders because perhaps they’re helping with the recovery? Absolutely not." And rightfully so! Lenders deserved the blame. And then they didn't "[help] with the recovery"; they stopped making loans at all.

Dowwie 9y ago

Another recent study confirms this narrative as well. No citation to the 2015 study: https://hceconomics.uchicago.edu/research/working-paper/credit-growth-and-financial-crisis-new-narrative https://hceconomics.uchicago.edu/research/working-paper/cred...

dogruck 9y ago

This article is horribly biased against lenders. We all can agree that lenders did loosen their criterion -- but why? They did so because legislator and judges were criticizing them for refusing sub-prime loans. The government said, hey, you're not giving enough loans to minorities who dominate the sub-prime population. So, the lenders complied.

notyourday 9y ago

Reading HN version of the events is live stepping into alternative reality. Just for the fun of it I did Ctrl-F for a word "conforming" and it was nowhere to be found in the comments. Subprime is irrelevant. Prime is irrelevant. The only thing that was relevant was conforming vs. non-conforming loans. Non-conforming loans started the fall ( oh, and nearly all subprime loans were non-conforming but that's not that relevant as the total amount of money in subprime non-conforming was just not that high compared to the amount of money in prime non-conforming ) because conforming loans were sold to F&F and removed from the books. Originating conforming just did not may that much which is why it was difficult to get them while a barely walking corpse could get NINJA 3/1 loan with a payment lower than the APR and a balloon at 5 years. And it was not the CDOs that mattered. It was CDS that did not trigger when the underlying collapsed. That was fraud. Fraud that the treasury secretary at the time oversaw. It was fraud that Goldman became a bank to get the protection of US Government and was allowed not to behave like a bank, etc, etc, etc.