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> I find it curious the number of comments blaming government regulation, instead of greed and massive private misidentification of risk 1) Greed is a constant

by Lazare 9y ago

> I find it curious the number of comments blaming government regulation, instead of greed and massive private misidentification of risk 1) Greed is a constant. Everyone is greedy, and there's zero evidence that "greed on Wall Street" increased before or during the crisis, nor that it could be reduced. To a first approximation, "greed" has no explanatory power in cases like this, and to the extent "greed" does have explanatory power, it is a constant you need to work around. People like money, power, and prestige; this isn't news. 2) What misidentification of risk? That's the criticism of bailouts; private individuals got all the upside, and the public wore the downside. For the people who benefited from this, they correctly identified that their risk was zero. Why was it zero? Government regulation. If we lived in a world where people consciously took crazy risks and suffered huge losses trying to win outsize profits...sure. But we don't live in that world. The financial crisis was about systemic problems, underappreciated tail risk, black swan events, privatized gains, and socialised losses. > as well as firewalls between banks and financial investment firms. There's neither evidence nor a plausible story on how this might have had an impact. The biggest failures were banks that existed on one side or the other of the old Glass-Steagall lines. Countrywide had no investment banking operations; AIG wasn't a bank; Bear Stearns wasn't a retail bank. And we saw the same pattern overseas, where the old Glass-Steagall never applied to start with. How does the failure of Northern Rock (a retail bank that originated too many bad mortgages and blew up due to a bank run) tie in, considering it wouldn't have violated that firewall if it had been in the US, and it was in the UK which never had that rule to start with? How would a law preventing retail banks getting into investment banking or insurance have helped any of those institutions? Conversely the banks that weathered it best were diversified institutions that would have been banned under the old rules.

woodandsteel 9y ago
>What misidentification of risk? It's the misidentification of risk before the crash. The financial companies had a vast conspiracy to misinform the public,and the government and conservative politicians and commentators helped them out. Of course Wall Street is greedy, but the government is supposed to stop that from leading it to do things that harm the country.
dv_dt 9y ago
Nobel prize winners as well as reserve bank presidents have all mentioned Glass-Steagall lines being dropped as somewhere between a direct cause and significant contributor to the recession. So the impact that you dismiss completely is a matter of strong debate. Personally, I think that that allowing mortgage originators with securities packaging underwriters into the same room in the same company has a lower degree of scrutiny than the same thing happening separately in two separate companies and separate products. But you are certainly free to have your own opinion - the topic is complicated and abstract, and boring. More arguments on both sides here: https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall:_aftermath_of_repeal https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall:_afterm...
- Lazare 9y ago
  > So the impact that you dismiss completely is a matter of strong debate. Not, in my view, among actual experts if you review the literature, but whatever. > I think that that allowing mortgage originators with securities packaging underwriters into the same room in the same company has a lower degree of scrutiny than the same thing happening separately in two separate companies and separate products. Great story, but you could just as easily tell a story about originators from one bank trying to stiff underwriters from another with toxic loans, while an integrated bank works together and doesn't make bad loans to start with. You need to look at what happened, not what plausibly could have happened. So let's look at what actually happened with, say, IndyMac. As one history of of the crisis put it[1]: > ...the terms of Glass-Steagall allowed banks to securitize their loans and sell them in that form, but they were not allowed to underwrite or deal in mortgage-backed securities (MBS). Banks could nevertheless buy MBS as investments and sell them whenever it suited their investment strategy, or when they required cash. And then when discussing IndyMac: > IndyMac [...] pursued an aggressive growth strategy. [...] The bank originated or bought loans, securitized them, and sold them to other banks, thrifts, or investment banks, but held the mortgage-servicing rights. [...] IndyMac concentrated on adjustable interest rate mortgages (ARMs), including ones in which the minimum payment did not cover the monthly interest payment; 75 percent of IndyMac’s borrowers were only making the minimum payment. IndyMac also specialized in Alt-A loans, which only required the minimum documentation verifying the borrower’s income — and sometimes not even that. These loans were very profitable for the company. [...] Crucially, IndyMac did not engage in any investment bank activity, and all of its activities would have been allowed under the original Glass-Steagall Act. IndyMac seems to me to be an iconic example of the crisis; they were a pure-play retail bank that gambled heavily on originating extraordinarily crap mortgages which they then sliced, diced, and sold on to suckers. Some of those suckers ended up being pure-play investment banks like Bear Stearns or Lehman Brothers; when the crisis hit they all went under. All of which was bad! Much of it should probably have been illegal. Thankfully some of it is now illegal due to Dodd-Frank. But crucially none of this would have been prevented by Glass-Steagall, or was allowed by Gramm–Leach–Bliley. For good or ill, originating bad loans and then selling them to third-party suckers is simply not a thing that Glass-Steagall tried to prevent. So when you say: > I think that that allowing mortgage originators with securities packaging underwriters into the same room in the same company has a lower degree of scrutiny I don't think that story seems to have much relation to IndyMac. My story - of independent originators dumping toxic waste onto an unsuspecting market - seems to have a lot more relevance. [1] https://www.cato.org/publications/policy-analysis/repeal-glass-steagall-act-myth-reality https://www.cato.org/publications/policy-analysis/repeal-gla... (Yes, a think tank, yes, with a bias. Check the facts before blindly trusting.)

by Lazare 9y ago

woodandsteel 9y ago

>What misidentification of risk? It's the misidentification of risk before the crash. The financial companies had a vast conspiracy to misinform the public,and the government and conservative politicians and commentators helped them out. Of course Wall Street is greedy, but the government is supposed to stop that from leading it to do things that harm the country.

dv_dt 9y ago

Nobel prize winners as well as reserve bank presidents have all mentioned Glass-Steagall lines being dropped as somewhere between a direct cause and significant contributor to the recession. So the impact that you dismiss completely is a matter of strong debate. Personally, I think that that allowing mortgage originators with securities packaging underwriters into the same room in the same company has a lower degree of scrutiny than the same thing happening separately in two separate companies and separate products. But you are certainly free to have your own opinion - the topic is complicated and abstract, and boring. More arguments on both sides here: https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall:_aftermath_of_repeal https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall:_afterm...

Lazare 9y ago
> So the impact that you dismiss completely is a matter of strong debate. Not, in my view, among actual experts if you review the literature, but whatever. > I think that that allowing mortgage originators with securities packaging underwriters into the same room in the same company has a lower degree of scrutiny than the same thing happening separately in two separate companies and separate products. Great story, but you could just as easily tell a story about originators from one bank trying to stiff underwriters from another with toxic loans, while an integrated bank works together and doesn't make bad loans to start with. You need to look at what happened, not what plausibly could have happened. So let's look at what actually happened with, say, IndyMac. As one history of of the crisis put it[1]: > ...the terms of Glass-Steagall allowed banks to securitize their loans and sell them in that form, but they were not allowed to underwrite or deal in mortgage-backed securities (MBS). Banks could nevertheless buy MBS as investments and sell them whenever it suited their investment strategy, or when they required cash. And then when discussing IndyMac: > IndyMac [...] pursued an aggressive growth strategy. [...] The bank originated or bought loans, securitized them, and sold them to other banks, thrifts, or investment banks, but held the mortgage-servicing rights. [...] IndyMac concentrated on adjustable interest rate mortgages (ARMs), including ones in which the minimum payment did not cover the monthly interest payment; 75 percent of IndyMac’s borrowers were only making the minimum payment. IndyMac also specialized in Alt-A loans, which only required the minimum documentation verifying the borrower’s income — and sometimes not even that. These loans were very profitable for the company. [...] Crucially, IndyMac did not engage in any investment bank activity, and all of its activities would have been allowed under the original Glass-Steagall Act. IndyMac seems to me to be an iconic example of the crisis; they were a pure-play retail bank that gambled heavily on originating extraordinarily crap mortgages which they then sliced, diced, and sold on to suckers. Some of those suckers ended up being pure-play investment banks like Bear Stearns or Lehman Brothers; when the crisis hit they all went under. All of which was bad! Much of it should probably have been illegal. Thankfully some of it is now illegal due to Dodd-Frank. But crucially none of this would have been prevented by Glass-Steagall, or was allowed by Gramm–Leach–Bliley. For good or ill, originating bad loans and then selling them to third-party suckers is simply not a thing that Glass-Steagall tried to prevent. So when you say: > I think that that allowing mortgage originators with securities packaging underwriters into the same room in the same company has a lower degree of scrutiny I don't think that story seems to have much relation to IndyMac. My story - of independent originators dumping toxic waste onto an unsuspecting market - seems to have a lot more relevance. [1] https://www.cato.org/publications/policy-analysis/repeal-glass-steagall-act-myth-reality https://www.cato.org/publications/policy-analysis/repeal-gla... (Yes, a think tank, yes, with a bias. Check the facts before blindly trusting.)