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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 b

• 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...
      • blitmap 9y ago
        Are they not bound by ethical rules of conduct like lawyers? :o
      • Tuna-Fish 9y ago
        That's questionable. The most common way that liability for fraud was offloaded was to have the bank purchase the service of validating loan applications from some willing schmuck. That is, by law the originating institution is required to verify that the applications it processes meets some guidelines. Since the applications absolutely did not, and the bank was unwilling to lie about it itself, what they did was purchase the service of looking through the application from whoever who was willing to sign that the application meets requirements for the least amount of money, and over time picking the "institutions" that had the lowest denial rates (which of course trended to 0). This way, the defense of the bankers was essentially: "We did not defraud our customers, instead our dastardly subcontractor did, and we had absolutely nothing to do with it." However, I bet that a jury could be convinced that they had both sufficient information that they should have known that their subcontractors were fraudulently approving applications, and a duty to make this not happen. The ultimate reason why no heads rolled is that those heads are extraordinarily politically connected.
        • saimiam 9y ago
          >The ultimate reason why no heads rolled is that those heads are extraordinarily politically connected. This is probably very true That said, in business, if someone is willing to put their signature on a dotted line, it isn't your job to remind them of its implications. Personal example: a friend of mine sold his house recently. The HVAC system was suspected but not known to have a leak - it had lost about a pound of coolant in a month. The leak was suspected a few days before close. He got the HVAC refilled, told the technician to write "may have a small leak" in his report, and sent this report to the buyer. The buyer agreed to close the deal anyway. Morally, his job was to properly identify and fix the leak before selling the house. In reality, the buyer signed the dotted line given the information available to her. If the HVAC now needs repairs costing several thousand dollars, no judge is going to tell him to accept liability.
          • ScottBurson 9y ago
            I don't think that example applies to this situation. In this case, the people doing the signing were hired by the banks to do it. The banks are surely responsible -- ethically, and probably legally -- for the actions of their agents, even if the only way they directed these people was by firing the ones who tried to act responsibly.
      • sundvor 9y ago
        Indeed. And: How do you define criminal? In my mind it's someone doing something which is morally corrupt, which should be punished by the just. These guys by their reckless profiteering performed one of the largest stick ups in recent history yet walked away scot-free, having stolen from thousands of families on a grand scale that no petty "in the flesh" stick up criminal could. Standing on the outside, it's very hard to see the laws as not being a massive inside job - the top tier looking after the top tier of society.
      • rando444 9y ago
        I don't understand how this myth persists. Of course they broke laws. Do you think Goldman Sachs would have paid out a 5 billion dollar settlement if they thought they could win in a courtroom?.. of course not. The problem isn't that they didn't break laws.. it's the justice department's fault for accepting cash settlements instead of actually taking people to trial and holding them accountable. The criminals always win in this scenario because nobody goes to jail, the fines are less than the profit, and there are no lessons to be learned other than to not get caught. Matt Taibbi does a really good job of examining this shift in the Justice Department's strategy in his book The Divide: American Injustice in the Age of the Wealth Gap, which I recommend if this is a subject you are interested in.
        • jjeaff 9y ago
          The reason in many cases they accept fines instead of jail time is because it is very hard to pin the actions of large corporations on any one person. What is one specific law that one of these executives broke? I have yet to see anyone specify what law they broke. Just like the Wells Fargo CEO, bad incentives are not illegal. He didn't personally break any laws or illegally sign anyone up for an account without their knowledge. He may have even known that a bunch of their accounts were fake, but there is no evidence he had any knowledge of specific accounts.
    • woodandsteel 9y ago
      The reason their actions were not illegal is they had lobbied in previous decades to have the laws written so that they could get away with it.
      • chiefalchemist 9y ago
        And the people (i.e., We The People) who were being played were the ones to pay for the bail out? Courtesy of the Fed Gov? SMH Good work if you can get it.
        • GatorD42 9y ago
          It's very unpopular to say this but I think it's important not to make assumptions about bankers' actions before the crisis. Many people and bankers expected house prices to continue appreciating and made decisions based on that assumption: https://www.russellsage.org/sites/all/files/Rethinking-Finance/Willen.rsage_paper_2_11pw.pdf https://www.russellsage.org/sites/all/files/Rethinking-Finan... Also, taxpayers made a profit on the bank bailouts. The bailouts that cost taxpayers a lot money were of GM and Chrysler: https://www.thebalance.com/auto-industry-bailout-gm-ford-chrysler-3305670 https://www.thebalance.com/auto-industry-bailout-gm-ford-chr... Wikipedia has details on TARP, the ProPublica page I usually cite for the return on bank bailouts is down: https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
          • grandalf 9y ago
            Taxpayers making "profit" is the wrong metric. Why should those who mismanaged risk get bailed out? Better to fire sell it to someone more capable.
            • Godel_unicode 9y ago
              And nevermind the fact that the economy would grind to a halt for decades while that allegedly more capable group figured things out? That sounds like a Great Leap Forward in economics.
    • KGIII 9y ago
      Some of them went to jail, some were fined. http://www.pbs.org/wgbh/frontline/article/were-bankers-jailed-in-past-financial-crises/ http://www.pbs.org/wgbh/frontline/article/were-bankers-jaile... Few, but some.
• woodandsteel 9y ago
  I agree, the article is highly misleading because it leaves this out and tries to take the lenders off the hook. >Nobody was predicting a Great Recession. But Econ 101 says there will always be a recession at some point. Once prices started skyrocketing far above the historically-sustainable levels, the lenders knew they were going to crash at some point, and so they should have cut back on lending. They didn't because they had used securitization to lay their risk off on suckers around the world. And that in turn made the recession far worse than it would have been otherwise.
• riazrizvi 9y ago
  Professor Ferreira seems to be ignorant of the banking mechanisms involved. There is a direct link between sub-prime loan underwriting and prime loan underwriting: 1. Mortgage loans are packaged by retail banks into blocks of loans. These banks need to be able to sell them on to Wall Street investors if the retail banks are to continue to writing more mortgages without breaking their limits. 2. In a block of loans, it is not known who will default, so using a special financial contract (a CDO) an investor can 'buy the first 10 defaulting loans', say, in the block. In return they get a fat coupon, and of course, they pray no-one does default. These risky loan-block 'slices' (or 'tranches') are called subprime. 3. What remains in the block are less risky slices, called prime. 4. It's easy to get investors to buy the prime debt, because it's almost risk free money, especially to institutional players. So limit to lending had always been 'who wants to buy the shit at the bottom', the subprime debt. 5. Ratings agencies colluded with banks to mislead investors about the riskiness of the subprime tranches. They marked the debt as AAA when it should have been far lower. Investors across the world trusted the ratings agencies, so these AAA securities with fat coupons flew off the shelves into funds that were managed by semi-corrupt custodians who were getting paid short-term bonuses. Banks in Iceland, Germany, Greece, etc. 6. Because the hardest to shift debt was no longer hard to shift, the mortgage lenders sought more people to write mortgages for, and they lowered their lending standards across the board. Whether they lent to high credit scoring individuals or not, they impaired their own lending standards by leveraging people beyond their means. This leverage is why the housing bubble's bursting caused such a country-wide crisis. 7. The Professor seems to think subprime lending refers to lending between the bank and the low credit grade home buyers. However, when we say the housing crisis was caused by sub-prime lenders, we are talking about the institutional players who defrauded investors about the riskiness of these subprime CDO tranches, since this was the root cause of excessive lending to all levels of home buyer.
  • dmurray 9y ago
    This is just wrong. Individual mortgages, not just tranches of mortgage-linked liabilities, are considered prime or subprime [0]. At some point, holders of subprime mortgages began to default more than lenders' models predicted, either because the models were unintentionally wrong or because they were fraudulent, and there's a huge grey area where they could be a little of both. [0] http://www.investopedia.com/ask/answers/07/subprime-mortgage.asp http://www.investopedia.com/ask/answers/07/subprime-mortgage...
• prostoalex 9y ago
  I disagree. You can underwrite and sell a mortgage-based security today. In fact, it's a rather active sector of the market https://www.wsj.com/articles/mortgage-backed-securities-market-heats-up-1504644057?mod=e2fb https://www.wsj.com/articles/mortgage-backed-securities-mark... But they're not necessarily going to receive a AAA credit rating. Which means they will be eschewed by pension funds, sovereign wealth funds and anything systemic. The worst of the worst will get the junk rating and will vie for their little corner of the market, competing for speculative money with oil fracking companies, emerging market bonds and other similarly-priced risky debt. The investment-grade rating is what opened the big money floodgates.
  • bradleyjg 9y ago
    It's a fairly small sector of the market. Monthly average mortgage origination in 2016 were $158B. That article talks about $16B in MBS. That's not nothing, but it is a small section of the market. The government has dominated the mortgage market since the crash and via that indirectly exerts a lot of control over the housing market. For example, it is the GSE's requirement that mortgagees in nominally 100 year flood plains carry flood insurance and that NFIP, despite its outdated maps and low policy maximums, is sufficient. If the mortgages were mostly held by private lenders its likely they would require properly underwritten flood policies to at least the full value of the mortgage.
• mempko 9y ago
  It's important to point it out because media blamed "poor people taking out loans they can not afford". This message shifted the blame away from the real problem.
  • grzm 9y ago
    > because media blamed It is important to hear information from different sources. I certainly didn't hear a single unified media voice on this (or any other topic, for that matter).
• skookumchuck 9y ago
  > Banks were basically shifting risk off of themselves. FDIC means that banks are not held responsible for losing depositor money, and depositors no longer pay attention to how risky the bank's financial practices are.
  • deleted 9y ago
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  • grzm 9y ago
    The FDIC provides insurance which is paid by the member banks. They're held responsible in the same sense that individuals who pay car insurance are held responsible in car accidents. It's in their best interest not to lose deposits, at least as far as the FDIC is concerned. https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...
    • skookumchuck 9y ago
      When was the last time you or anyone you know checked the solvency or the soundness of the financial practices of the bank your checking account it in? I'm betting on "never". I haven't either. This wasn't true before the FDIC. Banks tried to project an image of conservative solidarity. They don't bother with that anymore.
      • grzm 9y ago
        Can you point to where the FDIC as an institution is responsible for this? The primary banking crises of my lifetime were the S&L in 1980 and the 2008 bailouts, neither of involved the FDIC. In the S&L crises, the responsibilities of the FSLIC (which were responsible for insuring the S&Ls) were transferred to the FDIC, and FDIC banks ended up contributing into the bailout, but I would have a hard time seeing the FDIC (as opposed to the FSLIC) as a direct cause of the S&L crises. As for "solvency", I frankly do take into account bank reputation (admittedly as a proxy for solvency or soundness) when opening an account. I also know the difference between a credit union, a bank, and a savings and loan company, and other financial services companies. I know the regulations between these differ. I also know that the regulations of accredited banks (as opposed to other financial institutions) are pretty stringent and don't allow them to hand out loans of the type that played a role in the 2008 crisis. One of the reasons these crises happened in the S&L and mortgage industries was because the regulations that covered those particular instruments and institutions weren't as stringent as the banks. It's easy and understandable to conflate banks and other financial institutions because often they're inter-related, but they are separate, and to really understand what happened requires taking these differences into account. Please don't read this as some sort of apologia for the financial industry: it's not. In my opinion there are systemic problems. I do take issue with landing this at the feet of the FDIC.
• Nomentatus 9y ago
  It says all the loans were unsafe - that the housing price dropped so much making a distinction between prime and subprime loans was semantic. Your thesis might still be true if the market wouldn't have collapsed without subprime loans driving it higher, but that's not the mood I remember. We would have overshot anyway I believe.