So far, only the New York Times has the story — nothing from the WSJ or Bloomberg yet:

The FCIC found that the crisis was caused by “widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street” — but I expect this to be explosive in advance of the actual FCIC release on Thursday.

The many causal factors highlighted in the FCIC report:

• Alan Greenspan’s malfeasance — his refusal to perform his regulatory duties because he did not believe in them — allowed the credit bubble to expand, driving housing prices to dangerously unsustainable levels; Greenspan’s advocacy for financial deregulation was a “pivotal failure to stem the flow of toxic mortgages” and “the prime example” of government negligence;

• Ben S. Bernanke failed to foresee the crisis;

• The Bush administration’s “inconsistent response” — saving Bear, but allowing Lehman to crater — “added to the uncertainty and panic in the financial markets.”

• Bush Treasury secretary Henry M. Paulson Jr. wrongly predicted in 2007 that subprime meltdown would be contained.

• The Clinton White House, including then Treasury Secretary Lawrence Summers, made a crucial error in “shielding over-the-counter derivatives from regulation [CFMA]. This was “a key turning point in the march toward the financial crisis.”

• Then NY Fed President, now Treasury secretary Timothy F. Geithner failed to “clamp down on excesses by Citigroup in the lead-up to the crisis;” Further, a month before Lehman’s collapse, Geithner was still in the dark about Lehman’s derivative exposure;

• Low interest rates brought about by the Fed after the 2001 recession “created increased risks” but were not chiefly to blame, according to the FCIC (I place some more weight on Ultra-low rates than they do);

• The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions. The impact of which an incestuous relationship between bankers and regulators, Congress and bankers, and classic regulatory capture by the industry.

• The credit-rating agencies “cogs in the wheel of financial destruction.”

• The Securities and Exchange Commission allowed the 5 biggest banks to ramp up their leverage, hold insufficient capital, and engage in risky practices.

• Leverage at the nation’s five largest investment banks was wildly excessive: They kept only $1 in capital to cover losses for about every $40 in assets;

• The Office of the Comptroller of the Currency along with the Office of Thrift Supervision, “federally pre-empted” (blocked) state regulators from reining in lending abuses;

• The report documents “questionable practices by mortgage lenders and careless betting by banks;”

• The report portrays the “bumbling incompetence among corporate chieftains” as to the risk and operations of their own firms:
-Citigroup executives admitting that they paid little attention to the risks associated with mortgage securities.
-AIG executives were blind to its $79 billion exposure to credit default swaps;
-Merrill Lynch top managers were surprised when mortgage investments suddenly resulted in billions of dollars in losses;
• Fannie Mae and Freddie Mac “contributed to the crisis but were not a primary cause.” (Or as I called them, they were just two more crappy banks) The various home ownership goals set by the government were not culprits either.

I feel terrifically vindicated by what I have seen so far. About 90% of Bailout Nation is in accordance with the commission’s findings. The 10% difference being the impact of Ultra low rates as the spark that lit the fire, sending managers scrambling to buy all of this junk paper.

Source:
Financial Crisis Was ‘Avoidable,’ Inquiry Concludes
SEWELL CHAN
NYT January 25, 2011

http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html

Category: Bailout Nation, Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

60 Responses to “FCIC: What Caused the Financial Crisis”

  1. louis says:

    Your Founding Fathers are awaiting your response.

  2. JohnDoe says:

    It’s the other way around. The commission are the ones who should feel vindicated for being in accordance with Bailout Nation. We all knew you had it right, it was only a question of whether the commission would see it as well.

  3. b_thunder says:

    I don’t think anyone with an honest viewpoint is surprised with the findings. And no one is really surprised that BR has got it absolutely correct many months ago.

    But what will change? Will Dr. Bernanke be forced to answer tough questions? Will Paulson be called “on the carpet?” Will Geithner be thrown out? Is SEC really doing its job? They’ve just fined BAC/ML – are you ready for this?? – with a 10 million dollar fine! That’s about what their CEO spent on office redecoration, adjusting for inflation….

    The key is, of course, ROI: “The financial sector spent $2.7 billion on lobbying from 1999 to 2008″ and got back at least 1000 times as much. As long as this system exists, nothing will change. The system will rot until the riots start… There’s 100 million people with guns, a lot more than in Egypt or Tunisia.

  4. Invictus says:

    Chan’s article is a fascinating read, as the report itself will no doubt be when released on Thursday. I look forward to picking up a copy. Hopefully, at some point — please dear God — we may actually see a perp walk or two and, dare I even think it, some clawbacks.

  5. dsawy says:

    I think you should feel more vindicated by the events and trends you predicted back in ’06 and ’07 in the real estate, lending and financial markets which came to pass.

    It is (relatively) easy to look rearward and say “By golly, we’ve found the problem(s)!” Even Captain Obvious can do that, which is what the FCIC did here. It takes a lot more to be a Debbie Downer when everyone is partying hearty on cheap liquidity and easy lending and say “This is going to end badly.” Back when you were laying out the facts and connecting the dots, the Powers That Be were all telling us that this would be “contained,” that the “gloom and doom crowd” (which would have fit in an elevator – some crowd) was exaggerating things, etc. You stuck to your guns and were vindicated by the facts and developments. That takes some competence and, more to the point, it took balls.

    That the FCIC arrived at many of your conclusions as to where the fault lies means that the government is (yet again) a day late and a few dollars short. A whole bunch more taxpayer money has been spent to arrive at these conclusions, and by the time we all read the full report, I’m guessing that the FCIC could have published a cover page with their names on it and then basically slipped in a second page that said “Go buy Ritholtz’s book” and called it done and saved us a bunch of time and taxpayer money.

  6. Sechel says:

    That the support of the findings is so partisan is a concern. Are the parties members so driven by ideology or are they getting instructions from party heads. It just boggles the mind. Equally of concern is that so much time has gone by, that combined with the sense of “normalcy” returning to Main St. & Wall St., that I’m concerned the lessons will be lost. Perhaps we can at least get a good “Frontline” video made of the findings.

  7. The make up of the panel was problematic at best —

    Can you expect objectivity when the GOP appoints a guy like Peter Wallison — the former AEI co-director of the Financial Deregulation Project ? That is someone destined from the start to ignore any fault of deregulation!

  8. jacobsk says:

    You can blame anyone for the crisis, but the ultimate reason is Human Greed.
    Greed of the bankers
    Greed of the investors
    Greed of the builders
    Greed of the flippers
    and Greed of the homeowners

    ~~~

    BR: Greed is the background condition for human beings. That is why we have laws against theft, extortion, etc. Its also why we have bank regulations.

    If you blame greed, you might as well blame oxygen

  9. dsawy says:

    I’m going to reserve judgement on the “partisan” stuff supposedly in the report until I read the actual report.

    This is, after all, the New York Times’ reporting here.

  10. bobmitchell says:

    Of the 10 commission members, the six appointed by Democrats endorsed the final report /edit , finally offering a punchline to the age old joke, how many democrats does it take to agree to screw in a light bulb? /edit. Three Republican members have /edit gone completely batshit insane, repeating over and over again “this can’t happen”, and huddling in the corner sucking their thumbs /edit; a fourth Republican, Peter J. Wallison, has his own dissent, /edit he is standing on top of the Washington monument, naked, holding only a copy of the constitution and a rifle/edit. The panel was hobbled repeatedly by internal divisions and staff turnover.

  11. call me ahab says:

    “FCIC: What Caused the Financial Crisis”

    what a joke-

    as if we didn’t know- the government- always wasting time with the obvious and coming out with conclusions that could have been written 2 or 3 or 4 years ago by any observant person . . .

    geniuses obviously . . .

  12. michael-D says:

    i’m so looking forward to the indignation and charades when turbo-tax timmy, the bernank, and the maestro step up to the podium to proclaim their innocence. even better will be when obushma tries to smooth things over and deny that he hired the perps instead of prosecuting them.

  13. Mannwich says:

    Pretty striking they’d be this honest but what exactly will come of it when most everyone running things had a hand in this mess? Answer: nothing until those people are forced out of positions of power. So we press onward. Dow 36,000 here we come.

  14. ZedLoch says:

    Yea, high five! Soooo now what?

  15. river says:

    Barry,

    It seems like you and Chris Whalen, who it seems like you guys generally agree and get along, disagree about one thing, and that is the government’s role in encouraging home ownership. Specifically, it seems like he has come out in defense of Peter Wallison:

    http://blogs.reuters.com/christopher-whalen/2011/01/03/it%e2%80%99s-a-wonderful-life-2011/

    “Today many of my friends on the left and right are engaged in a protracted rear-guard battle, arguing over whether government sponsored entities such as Fannie Mae and Freddie Mac were the cause of the mortgage bubble. Most recently we saw the clash between Peter Wallison of American Enterprise Institute and Joe Nocera at the New York Times, essentially disputing whether these government sponsored entities are the cause of the financial collapse that has been unfolding since 2007.

    Liberals like my friends Nocera and Johnson still cannot believe that the government was the moved-mover in the mortgage mess, the catalyst for Wall Street’s entirely rational exuberance that merely followed Washington’s bad example. But such distinctions are meaningless. The corrupt relationship between the large TBTF banks and the federal government is long-standing and should be the focus of people on all points of the political compass. Indeed, somebody should tell Nocera he owes Peter Wallison and AEI an apology.”

    Have you guys discussed this in the past, or is this one thing that you guys just disagree about? It seemed like you guys started to argue about this on Fast Money a month or two ago, but each backed off . . . any thoughts?

  16. I think Chris is wrong, as is our pal Josh Rosner

    We’ve discussed this, and they each take a very broad of causation — I look for narrow specifics, and I think they each would agree they cannot show direct causation — only a squishy, philosophical push.

  17. wildebeest says:

    Why is Greenspan mentioned? He never made a mistake when he was running the Fed.

  18. DG_Allen says:

    Hi Barry,
    Are you going to sue the FCIC for copyright infrigement?

  19. I grant them full Copyright to anything in Bailout Nation!

  20. packman says:

    Lots of good stuff in there, and as you mention it grossly understates the effect of the insanely-low interest rates. However IMO there were also lots of other glaring omissions (below mostly in sequential order, not order of importance):

    - Precedent of previous bailouts (e.g. LTCM, Chrysler, etc.) encouraging excessive risk-taking

    - Zero mentions of the CRA. While the orginal CRA itself certainly wasn’t a cause – the re-emphasis of it in the 1990′s by various means most definitely was; e.g. the GLBA requiring merging banks to have a satisfactory CRA rating, the FDIC giving several “needs to improve” ratings, creation and funding of Community Development Banks, and even some CRA fines – e.g. Chevy Chase bank in 1994 for non-compliance.

    – Removal of credit card interest as a deduction in 1986, leaving housing the only deductible interest for most people.

    – The GSE Act, mandating higher goals for subprime lending.

    – CDFI Act, provinding funding for subprime lending.

    – $250k/$500k capital gains exemption via the 1997 Taxpayer Relief Act. A HUGE OMISSION.

    – SEC push starting in the late 1990′s for the banks to lessen their loan loss reserves

    – Financial Services Modernization Act – HELLO (been beaten to death – any article that omits this is illegitimate IMO). Not only for the repeal of Glass Steagall though, but also allowing investment firms to get cheaper funding from the Fed.

    – Deregulation of CDS via the Commodity Futures Modernization Act

    – The Recourse Rule, allowing far more leverage for mortgage securities than other types, when calculating banks’ capital requirements. A HUGE OMISSION – AND IMO PERHAPS THE SINGLE BIGGEST UNDERSTATED CAUSE OF THE BUST. The article does mention leverage being “wildly excessive”, but let’s get specific here – why did they all of the sudden GET wildly excessive? A large reason (or perhaps excuse) is the Recourse Rule.

    – Bush’s various Ownership Society initiatives, especially the American Dream Downpayment Initiative.

    – Greenspans ARM push in 2004.

    – SEC 2004 rule change removing margin restrictions for investment banks (another specific cause of excessive margin)

    – Banks’ ability to hide loans from capital requirements via QSPE’s

    – “Cocooning” after 9/11 IMO was probably a significant factor.

    – The preponderance of TV shows that encouraged flipping was certainly a factor, in terms of feeding into the infamous “animals spirits” phase of the bubble.

    In general I don’t see it nearly so much as a “lack of regulation” problem as the article puts forth, but more an “incorrect regulation” problem.

  21. Packman

    Most of your list is spot on, except the (usual) CRA silliness

    The reason the CRA was not mentioned is it had exactly as much to do with the crisis as The Great Pumpkin

  22. packman says:

    P.S. obviously I’m focusing more on the causes of the bubble than the causes of the “crisis”, per se. However the crisis was really only a symptom of the bubble. By the time we got to 2006, the crisis was a foregone conclusion. As such, IMO Bernanke can’t really be blamed for it at all; only for just not seeing it coming. Even if he saw it coming, there’s no way in the world he could have prevented it. Same with Hank Paulson. If you’re going to point to a treasury secretary, point to Snow. Though really the people to blame in government are Bush, Clinton, Summers, Gramm, and most of all Barney Frank.

  23. muckdog says:

    “What caused the financial crisis?”

    I think the question should be “Who?”

    There’s a guy who lives down the street named Bob. He bought a house in 2005 and immediately turned around and did a cash-out refinance, and bought two new cars, a boat, and kept some cash out. All in a non-recourse loan.

    In 2008, Bob went and bought a house about 1/4 of a mile away with cash.

    He stopped making payments on the old house, and left the keys on the counter for the bank. He kept the boat and cars.

    So, I blame Bob for the financial crisis. It’s his fault. But he has a nice boat.

  24. machinehead says:

    From Obama’s speech tonight:

    We are poised for progress. Two years after the worst recession most of us have ever known, the stock market has come roaring back.

    Ugh … cheerleading for Wall Street; citing stocks as a barometer of national progress; touting an overbought 90% rally.

    Not only does this set the wrong tone, it leaves a bad taste after the bankster bailouts. We paid for that stinking rally, and will be for decades.

  25. Bob A says:

    didn’t need no commission to confirm what we already know.

  26. Lyle says:

    Actually I agree with JacobSk about greed and might add a part of our national problem the desire to get rich quick. (It is interesting that the epicenter of the housing crisis is the part of the country that was founded on get rich quick, Ca and the Gold Rush, NV and Comstock and AZ also had a big mineral input, all be it not so much gold and silver). Get rich quick dates back to Jamestown when folks came over thinking that there was gold just sort of laying around for the picking up.

  27. gordo365 says:

    What about ACORN? They must have been responsible in some way?

    ~~~

    BR: So says the batshit crazy Edward Pinto

  28. passepartout says:

    Plutocratic fraud and grand larceny on a huge scale.

  29. Fred Flintstone says:

    One plays with the national land market at one’s peril.

    Real Estate valuation peaked at $22T in 2H06, up from $13T in 1H02.

    Lower interest rates got that valuation train moving in 2002, but it was the changing lending underwriting — allowing borrowers to layer risk with lower down payments (and later, no down 80/20 loans), stated income/stated asset “liar loans”, and qualifying borrowers on the negative-amortization and teaser-rate payment and not the fully amortizing loan.

    By these increases in household buying power, we collectively were able to bid up the price of housing so much.

    The core failure of the system was the agency problem with loan issuance. This was a trillion dollar fraud and so far we’ve had damn near zero clawback. Mozilo’s $50M slap on the wrist notwithstanding.

    The other dynamic was much of that $22T asset bubble got monetized via HELOC and cash-out refis. This was a stimulus amounting to hundreds of billions of dollars a year of “helicopter money”, supporting millions of jobs in local economies with the bubble housing appreciation.

    That the economists of the day failed to see this second-order effect happening in real-time is most damning.

  30. Fred Flintstone says:

    > and as you mention it grossly understates the effect of the insanely-low interest rates.

    Interest rates didn’t get THAT low.

    http://research.stlouisfed.org/fred2/series/MORTG/

    Moving from 7.5% to 5.5% or so. This increased affordability and stoked the appreciation train (and thereby drawing specuvestors into the market), but by themselves they were not unsustainable, as borrower overextension came from other factors.

    >– Greenspans ARM push in 2004.

    Again, this was not necessarily a problem. Borrowers in ARMs have in fact not been hit with any nasty affordability surprises since their purchase.

    The core problem was lenders making loans to people who could not pay the money back, ie all the “suicide lending” that was allowed to go on 2003-2007.

    This was a systemic failure at various points — the ratings agencies, the GSEs for taking the 80% equity slice under the 20% syndicated mezzanine piece.

    CRA did not require banks to make these innovations in lending. The regulators went along for the ride since they were apparently of the Laissez faire, telle devrait être la devise de toute puissance publique, depuis que le monde est civilisé school.

    The alternative is that this was an intentional pump & dump at all levels, not just the customer-facing ones, though Hanlon’s razor applies here.

  31. Fred Flintstone says:

    Also, a very under-appreciated driver of the home appreciation trend was . . . drumroll . . . the 2001-2003 tax cuts.

    At the time, I did not appreciate that this money would soon be flowing into the housing market first and foremost.

    In retrospect, it should be obvious. You can’t give every family a $2000 tax credit and not have it end up in rents and land values in the end.

  32. Dow says:

    Is the CRA theme song doing an encore? I thought that got booed off stage.

  33. Expat says:

    Bernanke’s/Geithner’s/Obama’s response will be: “The banks have learned their lesson, are very sorry, and promise it will never happen again. Our capitalist system remains the best in the world. God bless Amerika.”

    Not one person going to jail. No one had to cough up their millions. No one fired in shame. No agencies gutted or re-organized. It’s all bullshit.

    God, I long for the old days when at least they gave you some free Vaseline…now they make you pay for it.

  34. Sechel says:

    B.R.
    Everything you and the report cite are correct, but not enough weight seems to be given to the role government policies played in being the great enabler in all this. I’ll list a few bullets.
    * There was no market mechanism for pricing the credit risk the GSE’s took on when guaranteeing or purchasing mortgage debt. One egregious example was Countrywide dumping seemingly benign first lien positions created from 80/20 mortgage onto Fannie & Freddie
    * The rating agencies granting of AAA status was perpetuated by regulators who baked the ratings into various regulations ranging from 2a7 to zero risk based weightings. Moodys, S&P and Fitch would not have had
    the ability to monetize their ratings power if it had not been due to the government granting the role in the
    first place.
    * Fed Funds and FDIC insured deposits gave banks access to funds that removed risk pricing from the
    equation and gave those with access unfair advantage.
    * There were regulators on site at Bear Stearns & Lehman which suggest that the regulatory process gives
    a false sense of confidence to others.

    I don’t disagree with FCIC findings, but I think they point to more direct/immediate causation rather than longer term issues.

    ~~~

    BR: See these from September 2008

    http://www.ritholtz.com/blog/2008/09/a-memo-found-in-the-street/
    http://online.barrons.com/article/SB122246742997580395.html

  35. EMichael says:

    “Though really the people to blame in government are Bush, Clinton, Summers, Gramm, and most of all Barney Frank.”-Packman-

    I need you to tell me how a Congressman in the minority party with a President from the majority party had any power to do anything. By the time Frank had any power whatsoever, Elvis had left the building.

    Most of the inputs in here are spot on. But largely ignored is the simple fact that the investment banks created demand. Without their ability to generate “AAA” rates for B paper, most of the borrowers would not have been able to make their purchases. Without their ability to generate “AAA” MBSs(with the ratings firms rubber stamps) there would have been no investors. Without the 2003 SEC’s leverage suicide, even the problems created by the investment bank fraud might have been contained.

    I would like to see someone come up with a study on the foreclosed properties and figure out what banks originated the problem loans. On the first and second mortgages(seconds being a key part often ignored).

    Then we can put away(even for the “housing buble deniers”) the CRA silliness and even the Fed rate silliness. Profits were too great for the overnight rate to even have a minimal effect on this whole thing.(For further proof, see Europe).

  36. mathman says:

    i had a mental image of a homeless family standing in the snow, watching a tv through a store window as Obama spoke his platitudes. What’s he going to DO about any of this (besides keep ignoring it and hope it all goes away by 2012): jobs, infrastructure and sustainable energy, the insolvent banks, and “our” corporate government? Leaving it to the private sector will result in Depression 2.0 by the next election.

    We’re in a bad way people, and voting ain’t gonna fix it (since the system is now “gamed” in favor of the powers that be).

  37. mathman says:

    Off topic. Has anyone else seen Terminator? Well, get ready for Skynet and the whole shebang:

    http://spectrum.ieee.org/automaton/robotics/humanoids/dlr-super-robust-robot-hand

  38. Moss says:

    One missing element that adds credence to the findings would be how it was international in nature rooted in Western style principles. Not only was it not limited to sub-prime it was not limited to the US.

  39. w/

    • The Office of the Comptroller of the Currency along with the Office of Thrift Supervision, “federally pre-empted” (blocked) state regulators from reining in lending abuses;

    I find it funny(sad)/telling that, in light of the ‘recent’ “Muni-Crisis”, there are “serious Constitutional Questions”–in regard to ‘State Sovereignty’..whether they ‘can’”go Bankrupt”/ if they need “FedGov”‘approval’–but, when the States were trying to exercise their Constitutional Rights–to tamp down on ‘lending abuses’–they get stuffed by the, saidsame, FedGov with, nary, a fare thee well..

    “If the federal government has the exclusive right to judge the extent of its own powers, warned the Kentucky and Virginia resolutions’ authors (Thomas Jefferson and James Madison, respectively), it will continue to grow – regardless of elections, the separation of powers, and other much-touted limits on government power.”
    –Thomas E. Woods
    http://www.tenthamendmentcenter.com/the-10th-amendment-movement/

    Antifederalist No. 1 GENERAL INTRODUCTION: A DANGEROUS PLAN OF BENEFIT ONLY TO THE “ARISTOCRATICK COMBINATION”
    http://www.wepin.com/articles/afp/afp01.html

  40. vasra says:

    How about the fact that:

    1. Middle Class real earnings had stagnated or turned negative for the past 30 or so years.

    2. Real productive economy had stagnated or even started to shrink

    3. Exports vs imports (esp. energy and cheap goods) had gone into imbalance

    Hence, there was very little elsewhere to hide, except:

    4. Consumer to go into debt in order to live and raise living standards

    5. Economy to financialize and start producing ponzi structured credit, instead of improving the productive real economy

    That was the real seed.

    Housing bubble was just the inevitable outcome, that enabled the financialization AND going into debt.

    Easy money via low rates was the lubricant.

  41. [...] is pleased as punch with what he's read so far from the FCIC.  (TBP) and [...]

  42. EMichael says:

    Delicious irony in the fact that the party that speaks about the 10th Admentment so often is the same party that made the OCC act early in Bush’s term.

  43. Greg0658 says:

    how disruptive would it be to your/our world to FREEZE stock certificates ..

    . no more IPOs
    . no more trades of stock certificates except for the corporation to buy them back at the freeze point
    . force corporations to pay interest at the primary bank lending rate untill they buy them back @ above

    .. corporations lose their primary funding with their Favored Status
    .. corporations pay interest until they can afford to purchase their companys back or borrow for fear of being priced out like the homeowners were
    .. savings interest rates WILL rise & a rising tide floats all boats
    .. go back to country specific single currency to watch like a hawk
    .. reduce the rules in the game by reducing the game field as to say
    .. from what I’ve learned in the 3 some years here @TBP seems the above would be easier to police and still leave the trading atmosphere
    .. present system seems an unstoppable march to supermonos

    psst – I think we are heading up Buffalo Rock to the cliff face where the corporations (and some of you) hope to get shares back cheap to resell them all over again .. I hope the stops and flash programs work right in the coming days

    pssst – what do the Appleonians think .. but what does Apple & Steve think ?

  44. EMichael says:

    I understand lower rates can increase purchases, but I am not sure this was a big part of the housing bubble and collapse.

    What caused the bubble was the increase in sub prime loans. To convince me that the Fed played a part in the increase of sub prime loans, you would have to convince me that those loans would not have been made if the Fed rate was higher.

    To me, as a non-economist businessman, the Fed rate question is what was I(the originating bank) was making on the deal. My cost on borrowing cash to make the deal combined with how long I was paying interest on the Fed loan until I paid it off.

    Take a $200,000 mortgage. If I borrowed from the Fed at 1%, my monthly interest charge would be $166. Triple it and I get $500 at 3% a month. Question then is how much I am making on originating the loan. If I am making two points(and I think tht is low) I have $4000. I net $3834 at 1% if I sell the loan in a month. I net $3500 at 3% if I sell the loan in one month.

    While I would certainly like to pay less interest, the profit is much too great for me to decline to do the deal at 3% or even 4%.

    The question is how long I have between borrowing from the Fed and selling the loan. I have seen in some of these foreclosure cases that there wer actually bonds sold before the mortgage was closed! But I do not know the average time, but I doubt it was very long at all. And the more points I make on origination, the less the effect of my interest rate.

    I am more than willing to concede my thoughts are naive. I would appreciate someone showing me how naive I am.

  45. hue says:

    right wing’s great pumpkin: CRA http://bit.ly/gcB8Qu

    Stockman: speech was state of illusion http://bit.ly/goEn0d

  46. EMichael says:

    BTW,

    Countrywide made 3.64% profit on subprime loans in 2004.

  47. EMichael says:

    Oops. Forgot the link on the CW profit.

    http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html?pagewanted=3

    On the afroementioned $200,000 loan, CW made $7,280 in 2004 before their interest payment.

    If they paid the Fed 1% interest for one month they would have made $7,114 . If they paid the Fed 3% interest for one month they would have made $6.780.

    Can’t see how the Fed rate would have stopped them from doing the deal.

  48. I’m not sure that technically speaking there ever was a financial crisis. According to the author of the FCIC, Greek mythology is a suitable metaphor for the meltdown. We’ve taken a scientific look at how a lack of personal accountability through the introduction of “Wecarus” rather than “Icarus” (inspired by the re-writing of Huck Finn) will help us all to avoid using hate speech relative to such discussions. Here’s the link: http://tradewithdave.com/?p=5104

  49. packman says:

    I have to say – I’m amazed at the CRA-wasn’t-a-cause dogma here on Big Picture. Many of you seem to have a man-crush on Carter, Clinton, and Frank or something. You can be bombarded with all kinds of facts and solid evidence, and still throw out the stupid “great pumpkin” silliness. Whatever.

  50. A says:

    Congratulations on seeing the truth without needing a major team huddle Barry.

    Now the next question: when will some of the wall street players start to appear in court ?

  51. philipat says:

    Barry, I agree that you deserve to take a bow. You had it right all along.

    Therefore, you are probably entitled to a final mention of a certain publisher not unrelated to S&P Ratings?

    I was concerned that “Uncle Warren” would “Ah Shucks” them again. But remaining is the question, why does anyone take the Ratings Agencies seriously anymore, before there is REAL reform?

  52. Long term says:

    BR, they probably USED Bailout Nation to write great portions of their report. (Yes, I am serious.)

  53. diogeron says:

    http://www.crispian.net/PTIR/Nonsense.html

    Given the thesis of BR’s post, all and sundry should enjoy the PTIR, or “Periodic Table of Nonsense” from the link above…

  54. Stuart says:

    “The report portrays the “bumbling incompetence among corporate chieftains” as to the risk and operations of their own firms:” Bullshit! Fraud, not incompetence! It was deliberate fraud. Sick of the sugar coating as process flaws and incompetence and deflecting attention away from the real culprit, gross executive compensation fuelled fraud and regulatory capture… Rating agencies, AIG, IndyMac, Lehman Bros were not incompetence. 10,000 other examples were not incompetence. Fraud. This report just proves something I wrote 2 years ago. Too big to jail. BOHICA.

  55. rfullem says:

    quick question for lawyers . were common laws broken here? Is there any such thing as systemic negligence?

  56. EMichael says:

    Packman,

    LEt me know when you present some sort of facts and numbers and “solid evidence” on how the CRA could possibly have had any effect at all(let alone caused) the housing bubble.

    You did know that CRA lending decreased on a steady basis from 1993 right on through the bubble, didn’t you?

    http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf

    And I would love to know exactly how Barney Frank as a minority member of the House had any power whatsoever to do anything. Especially considering that the opposiong party controlled the White house.

    By the time Frank got any power in January 2007, Elvis had left the building. And he really did not have much power then.

    Love people that blame poor people of color and gays for a problem caused by white guys on Wall Street.

    Especially when they neve seem to be able to provide anything but dogma as proof.

  57. RW says:

    It looks like the FCIC report may disappoint: The actual report is likely to be far too “balanced” and lacking in substantive evidence of criminality to provide the impetus necessary to rejuvenate stalled and deflected reform efforts. From naked capitalism at http://tinyurl.com/4sxvxe3

    Based on further discussions with individuals familiar with how the report was developed, the following shortcomings are evident:

    The Commission was able to do comparatively little in the way of forensic work; the bulk of its effort was devoted to the hearings, which delivered relatively little in the way of new insight

    As indicated above, the FCIC report is guilty of “drunk under the streetlight” behavior, of trying to fit its story to already known or easily found information. Even though the report makes extensive use of salacious extracts from e-mails, the insiders content that none of these information in these e-mails illuminates information critical to the crisis trajectory.

    As a result, the report underplays or completely misses the real drivers of the crisis. Specifically, it gives short shrift to the obvious epicenters:

    – How a previously benign securitization process allowed for the creation and sale of bad mortgages on a widespread basis

    – How inadequate disclosure as alleged in a number of recently filed big lawsuits allowed mortgage backed bonds that contained many loans that fell below the underwriters’ promised standards to be sold to investors

    – How a shadow banking system ballooned with products increasingly based on dubious financial instruments

    – How CDOs that were devised by subprime shorts, most importantly the hedge fund Magnetar, drove the demand for the worst sort of subprime loans, extended the toxic phase of the subprime bubble well past its sell-by date

    – How the dealer banks knowingly created toxic products, and via flawed risk management processes, allowed traders to retain significant portions of them via strategies that amounted to gaming of the banks’ bonus systems

  58. EMichael says:

    Wishful thinking perhaps, but maybe the ongoiong lawsuits against the mortgage banks for fraud, http://www.banking-business-review.com/news/investors-sue-bank-of-americas-countrywide-mortgage-unit-260111, may lead to ” substantive evidence of criminality to provide the impetus necessary to rejuvenate stalled and deflected reform efforts.”

  59. [...] Ritholtz (via NYT): Highlights from the FCIC Report The Big Picture – for those too lazy to read the actual report.  I’m a few pages in, [...]

  60. [...] Ritholtz recently discussed What Caused the Financial Crisis, enumerating the following items from the FCIC report: • Alan Greenspan’s malfeasance — his [...]