I’ve noticed something intriguing about the debate regarding the Greek default/restructuring/bailout: There is a familiar odor to the “Blame the profligate Greeks” meme now circulating. It is little more than a brilliant marketing ploy. This distraction ignores the simple reality that lending to insolvent people, institutions and countries is first and foremost the fault of the lenders.

Let us start first with the Greeks, who lied their way into the EU (with the help Goldman Sach’s financial engineers). The ridiculous pay and vacation structure, the absurdly generous pension plan, the excessive spending by Athens. They are a nation that can honestly be described as tax scofflaws. Yes, Greece is a mess.

Which begs the question: WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?

None of these factors were well-hidden. Everything about Greece is well known to any casual visitor, from its Welfare state to its deficits. Even the shenanigans Greece went through to join the Union European were not unknown. Rather than confront their obvious lack of qualifications, the EU turned a blind eye to it, in order to form their more perfect union.

Which brings us back to the lenders. What is their role, if not to exercise expert judgment? If they cannot independently determine who is credit worthy and who is not, than why do they even exist at all? We might as well leave piles of money around and ask borrowers to self-regulate their appropriate credit limits.

Back to that “familiar odor.” There was a meme attempted during the US housing collapse to place the blame upon the home buyers and borrowers who exercised poor judgment and got in over their heads. It manifested itself in numerous ways. It was an intellectual failure, for the simple reason that it is the lenders job to assign credit, to determine who has the ability to service the debt and who is a bad risk. Indeed, lenders have legal and fiduciary duties to their shareholders, capital sources and regulators. Eejit home buyers who went wild during the era of free money have no such obligations.

Michael White, formerly of CountryWide’s Subprime Unit, had complained bitterly about the increased probability of defaults to his bosses when they decided to drop income verification in mortgage lending. “Eliminate the verification of income for a mortgage borrower, and you eliminate your ability to predict the likelihood of repayment or default” he told them, and was roundly ignored.

We need to better understand the term “Loan Origination Fraud,” when lenders willingly make bad loans, consequences be damned.

As we noted yesterday, bailouts go to the incompetent bankers. Whether bankers are foolishly giving credit to home buyers (and ignoring their lack of incomes), or making loans to Greece (and ignoring their broken financial structures), it is the LENDERS who are making these awful decisions. The LENDERS should be forced to suffer the consequences of their own incompetence and not the taxpayers.

And that means defaults, rather than bailouts . . .

Category: Bailouts, Credit, Really, really bad calls

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.

77 Responses to “First, Blame the Lenders”

  1. beaufou says:

    The Greek bonds have higher rates and if the shit hits the fan they get bailed out, no responsibilities, no consequences…nada.
    I can’t wait for the austerity plan and the barricades in France.

  2. rktbrkr says:

    A lot of my friends like to blame the mortgage meltdown on the subprime borrowers in Detroit, Cleveland etc, “Clinton forced the banks to lend them money” -when in fact it was the banks that failed to exercise EXPERT JUDGEMENT. Many of these people were first time homebuyers ever in their family history and were really conned by brokers, appraisers, banks, these first time home buyers didn’t have a chance, then when the industrial jobs in these areas plummeted their fate was sealed. Also the Clinton forced the banks to lend to poor blacks meme doesn’t hold water explaining Vegas, SoFL, AZ etc.

    We need to bust up the biggest banks just on antitrust alone and then restore some form of Glass Steagall. Thruout this whole mess only community banks and bankers have maintained any shred of reputation. Bigger is badder

  3. MacroEconomist says:

    Brilliant Post, Barry.

    It’s all about the $$$$. Very few of the people who made or approved these loans still work at the banks. Instead, they are now running their own “consulting” firms or have gone to boutiques. They made their tens of millions.

    The problem is in the compensation structure, lack of board oversight, golden parachutes, lack of criminal prosecution.

    The problem has not been solved, otherwise Greece would have been let go. If anything, the bankers have a bigger stranglehold on the system today than they did a few years ago.

    I know there is a turf war going on between them and those who are trying to do the right thing. History sides with the reformers, because at some point the bankers get taken out and guillotined, but nobody said the fight would be easy.

  4. KidDynamite says:

    the problem is that everyone seems confused about who “the lenders” are. Countrywide wasn’t the lender. the guy who bought Countrywide’s MBS was THE LENDER – he was the one who didn’t do the work he was supposed to, which has been my point all along – and thus it’s mind boggling that people still want to “protect” these lenders (oh, but when you call them “investors” the whole story changes, right?)

  5. duagtow says:

    no one objects to the wisdom of “follow the fed” so why look back with perfect liberal hindsight and criticize those good old fashioned human intellects that said “follow the government” when it said that everyone should own a home and you must loan to them or you will be punished. then the fed assured us that the housing market was safe, i.e., we will support the market, so the lending went on. As always the big problems are caused by government, human greed has always been there, and always will be, but only governments would ever give the green light to risky lending and block all attempts to rein in Fannie and Freddie. That goes against the liberal narrative, so it can’t be the reason for our problems. to a liberal all problems are due to greedy or irresponsible people, and the government is there to save the day. of course, government is people, but that doesn’t enter their thoughts.

  6. KidDynamite says:

    more importantly, Barry, when you say something like “when lenders willingly make bad loans” you need to delve deeper and ask: “WHY?” I think the answer is that they positively don’t know that they’re making bad loans (After all, lending money to people who can’t pay it back is NOT a viable business model) – but that’s also because of my previous comment about the definition of “lender.”

    ie, it’s not really the “lender” who willingly makes bad loans, it’s the ORIGINATOR who underwrites the bad loan, because, and this is the important part: he knows it’s not HIS capital at risk (it’s the lender’s capital). It’s another version of sold-to-you-sucka. “You want to buy these crappy loans? Ok – go for it.”

  7. Petey Wheatstraw says:

    “It is little more than a brilliant marketing ploy.”

    BR, it’s ALL a marketing ploy.

    From stampeding us into multiple, bankrupting wars (one of which was supposed to pay for itself), to our fiat currency/FRL/credit-based/central banking economy, to promoting the idea that the government is absolutely feckless, incompetent and wasteful (in every case and forever), to the idea that the folks who loot our treasury are put-upon and should not be taxed fairly, to xenophobia, to media-driven political mudslinging, to shouting that the banks, and thus the world, would fail if the banks were not immediately bailed out, to labeling whistle blowers as terrorists — it’s all marketing, and all easily seen through by anyone taking a moment to compare the hype to the reality.

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?”

    Someone who is paid to push free money to them, at steep interest. Why TF would anyone do that? Because it’s not about the money (who would care about money at all, if it did grow on trees?). When you monopolize the creation and distribution of money, you can buy anything. When credit is the only path to growth for individuals and nations, you can create debt slaves of individuals and nations.

    What is the role of lenders, if not to exercise expert judgment?
    Their role is to market debt as salvation. Their goal is hegemony.
    Isn’t it interesting that banks are TBTF, but countries are not?

  8. Greg0658 says:

    “in order to form their more perfect union” … “is well known to any casual visitor, from its Welfare state to its deficits”
    to form a more perfect union .. alas .. sloth-ness & gluttony .. ya just can’t get over that hump .. I guess FMCitBPtP* is still it .. bring on war to right it .. and when we come out – try again at that perfectly fair FMCitBPtP meme again

    anti-Dystopianism I’m loosing faith it’ll ever work too

    (* Kudlow creed “FreeMarketCapital….”)

    ps – I wonder just wonder what king forces of remodeling are going on these days

  9. constantnormal says:

    Silly, the lenders are invariably the rich and wealthy, and they NEVER pay for their mistakes … how do you think they got to be rich and wealthy?

  10. wally says:

    “There was a meme attempted during the US housing collapse to place the blame upon the home buyers and borrowers who exercised poor judgment and got in over their heads.”

    While I understand your point, it is also true that some people were irresponsible and others were not… so you cannot simply excuse people for following the crowd. Yes, lenders are to blame for lender’s mistakes…. but, by the same standard, people are also responsible for their choices.

  11. Rick Caird says:

    There is no lending risk when a bank is convinced they will be bailed out if the loan goes bad. In that case, there is merely an outsized profit.

  12. beaufou says:

    “Someone who is paid to push free money to them, at steep interest.”

    That’s the thing though, the interests are steep because of the risk of default but the risk of default no longer exists, so why do interests still exist?

  13. mgkurilla says:

    Barry, you’re right of course, but I believe you are missing a broader theme that has slowly energed in our society and that is risk reduction all the way to zero for any and all activities in life. We see this in the conduct of war where war is only permissible if every single civilian is not inconvienced. So now, we only conduct war for the express purpose of protecting civilians. We bailout banks and other lenders because their “failure” might inconvenience or even hurt someone else. All actions are predicated on the basis preventing “sins of comission” while “sins of omissions” are acceptable not because we didn’t do it, but rather that we did not directly cause it to happen by our own hands.

    In this manner, hundreds of thousands of North Koreans starving to death annually for decades is permissible because “we” didn’t do that, but trying to stop that could cause the death of a smaller number of people, but then the blood is on our hands. By the same token, bailing out our banks or Greece allows everyone to believe we are helping without causing direct pain.

    We have becomea society that slowly and cautiously removes a bandaid rather than ripping it off.

  14. b_thunder says:

    But what are you going to do? Goldman made it possible for the Greeks to hide at least some of the debts, and now ex-Goldmanite will run the ECB.
    The same bank oligarchy that lent Other People’s Money to Greece control ECB, US Treasury, European Commission, IMF, etc. Same crew runs both private banks and the institutions charged with managing public money. It’s as if left hand bails out the right hand.
    Per Taleb, Greece is “peanuts”, USA is a “time bomb.”

    I simply do not know how it can end well, how can it end without numerous countries and/or worldwide institutions going into *real* default

  15. 873450 says:

    Is there any possible way to blame Greece on Barney Frank? If not, then it can only be the fault of those greedy teachers in New Jersey.

    More seriously, it will be interesting to see how differently, when compared to the SEC, european financial authorities prosecute Goldman if post mortum discovery establishes a repeat pattern wherein the investment bank breached its fiduciary obligations by earning huge fees advising uncreditworthy sovereign government clients to take on complex toxic debt while simultaneously gambling against repayment, and then rumor mongering impending default to speed up and goose up betting profits.

  16. philipat says:

    I have been in this debate since the outset and my views on this, as with most subjects, are entirely aligned with yours.

    1. This is NOT about bailing out Greece but about bailing out German and French banks. There could be fallout to the US/UK through CDS markets.
    2.These lenders are mainly part of the TBTF brigade with no moral hazaed provisions. I agree that they should be screwed for bad lending practises/poor risk assessment. It would be very satisfying if GS were to get screwed also by a general default?
    3. Why would German/French/UK taxpayers want to pay for Greeks to pay no taxes and retire on inflated pensions from the Greek public sector at age 50?
    4. Conversely, why would Greeks agree to accept these savage cuts? Demonstate and default is easier and, actually, quite reasonable.
    5. You need to blame extended socialism for these excesses. It;s easy for the politicians to give away, but much more difficult to take back again.
    6. And it;s coming to the US. Almost 50% of Americans don’t pay Federal Income taxes. These folks are NEVER going to vote for increases in taxes for other than the folks who are already paying most taxes. These folks are also known as Democrats. This is called Socialism, just like in Europe.
    7. The Greek demonstrations could very well be headed to the Town squares of the US, perhaps with pitchforks and powder. You Americans do also seem to have rather a lot of firearms?

  17. MayorQuimby says:

    Who would lend to Greece? Who would lend to the USA?!!!

    Our debt to gdp ratio isn’t far behind and in order to placate the moronic sheeple, the rich people and the corporations, the gvmt is going to have to print, beg, borrow and steal to keep the ponzi going.

    I doubt that they will fail in the short term to do so.

    I also doubt that the USA will survive any further debt issuance and printing.

  18. louis says:

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE”

    People who know they will be bailed out will do anything to move to the Hamptons.

  19. Lukey says:

    I agree to an extent but I would suggest that is ultimately the fault of the idiot/corrupt politicians who eagerly provide taxpayer financed bailouts to the banks that get themselves in trouble (which is exactly what is happening again with the Greece situation). Without that backstop, the bankers wouldn’t make these ridiculous loans. I don’t know what the exact fix is, but I don’t think it’s more banking regulation or bigger government (and I suspect it might just be the opposite).

    ~~~

    BR: The bad loans are the fault of the bankers; the bailouts are the fault of the politicians

  20. Petey Wheatstraw says:

    beaufou Says:

    “That’s the thing though, the interests are steep because of the risk of default but the risk of default no longer exists, so why do interests still exist?”

    Because it’s not about money (they already have a monopoly on creating and distributing money). It’s about perpetuating debt slavery.

  21. Jim67545 says:

    Some have been trying, in posts, to separate the role of originator from that of lender. KidDynamite, above, tries again. Until we get this clear in our minds these discussions about “banksters” is hopelessly confused.
    Why would an originator originate a bad mortgage? First of all, there was customer demand. Homeownership was unquestioned as a way for everyone, newlyweds, low income, investors, etc. to buy an asset that would grow in value and was an essential piece of one’s financial plan. Rates were dropping and there was an incentive to refinance (read: churn.) The economy seemed strong and home improvements were a good investment, fueled by HELOCs that were easy and cheap to get.
    Secondly, originators were satisfying customer demand, making fees, acquiring customers, and, thanks to the secondary market, made loans that usually met underwriting standards and then could sell off the risk (the loan risk and often the servicing risk) into a market that, thanks to the temporary perfume of a AAA bond rating, seemed willing to buy anything originated. Sometimes underwriting standards promulgated by the conduits permitted things (such as NINA, no-doc, Alt-A) which the originator would never do for their own portfolio. Does this make the originators “bad?”
    What about lenders (like Greece or MBS?) They make loans knowing they will hold the risk because they anticipate to make income (income & fees) commensurate with the risk and effort and because they expect to be repaid (or, in a workout, better their current circumstances.)
    What most borrowers do not realize is that, although normally repayment is expected to come from periodic payments, that is not always the case. Lenders might rely on the collateral, or on a guarantee (such as the implied guarantee in the GSEs), or a strategic belief that others (such as the EU) will repay or insure repayment (such as Greece.)
    The most dangerous loan for the borrower is one where the originator, or the lender, believe they have no risk in the deal. The borrower will mistake the loan approval as confirmation that the lender has also concluded that they have ability to repay, or in a commercial loan, endorsement of the business plan. It ain’t necessarily so. We’ve had literally millions of these = big problem.

  22. carleric says:

    great commentary Barry…..save the banks?
    For what….if you make stupid decsions you should pay the price….. jail in the case of obvious fraud or bankruptcy if just plain old stupidity

  23. Milo Minderbinder says:

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?”

    Great line. Need to keep that one handy in the event O’bama is reelected and the Dems retake the House.

  24. FS says:

    “If they cannot independently determine who is credit worthy and who is not, than why do they even exist at all?”

    The job of lenders is to make money off lending money. The idea that they are responsible for the outcome is ridiculous unless there are criminal actions involved. There are always going to be stupid people, counties, countries-it is not the job of the lenders to make sure their decisions are smart.

    Second, there are varying degrees of credit worthiness, you provide no facts that the lenders gave them unfair rates.

    There have been bad decisions made by bankers but the decision to borrow money is not theirs, it is their job to lend it. There is something called personal responsibility whether it be for yourself, your family, your job, or your country.
    Quit making excuses for those who did not exercise the correct judgement that Greece or anyone else should be able to live beyond their means by borrowing. It’s not the lenders job to persuade people to be responsible, their job is to lend.

  25. DrungoHazewood says:

    The media even got lefties pissed off at the Greeks while giving the sleaze bankers a pass. Hint-the corporations own the media. These people give the lowest of the low sympathy and shower them with OPM, but when their bacon is on the line, THEN its time to get rough. Now all of the sudden a country of 10 million are outlaws who deserve to be economically gutted and any means of getting out of their situation confiscated and in some cases carried off. Its called pillaging!

  26. DMR says:

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE”

    Short answer: Germans.

    Longer answer: The same Germans who turned the other way when high yielding PIIGS loans window dressed the all out deflation that was happening to Germany in the 90s and 00s post reunification.

  27. beaufou says:

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE”

    FS

  28. willid3 says:

    we must have had a bad disease running through the bankers world wide. none of them seem to know how to lend any more. they lend money to those who can’t pay back. and the beat up on their paying customers. and i have seem this meme about 50% not paying taxes in the US? guess what, that 50% include a large number of millionaires and even a few billionaires. its not all just the poor. and while we can certainly blame the bankers for this mess, they have a loaded gun at the politicians heads cause if they go under they can and will take the country down. now we could lay blame at the feet of the politicians who let the banks get so large that they could become a threat to the country if they failed. and we could blame them for not taking the other option (nationalization), but with those who helped create these huge banks still around and still having power, it would be really hard to do (i can hear now, its socialism that we had to nationalize the banks, to protect the country from collapse). always wondered if we allowed the collapse what would we get in the place of capitalism. that almost happened after the great depression. it was a near thing. the mini depression had the possibility of being much worse. and today’s populace has a lot less patience to see things work out.

  29. 873450 says:

    FS Says:

    “The job of lenders is to make money off lending money. … It’s not the lenders job to persuade people to be responsible, their job is to lend.”

    That’s it – the fantastical TBTF escapist alibi – and incredibly, so far, the alibi has succeeded spectacularly for TBTF lenders.

    The lender’s job is to be “responsible” lending money, whether the loaned money belongs initially to someone else, the lender or ultimately to someone else. Otherwise the lender is just a transient, thoughtless ATM disconnected to the transaction and shouldn’t make any money for spitting out someone else’s money to to anyone, stupid or not, who happens to step up accepting gobs of money the thoughtless ATM irresponsibly keeps spitting out to them so long as they keep pressing a button.

  30. b.tom.darga says:

    I say it a little more bluntly: “Its not the fault of the crack-head that he can’t pay you back. It’s your fault for being stupid enough to lend money to a crack-head”.

    But, seriously, if I went around complaining that I had lent money to known drug fiends and they weren’t paying me back, I would be roundly laughed at and I would be blamed for being stupid enough to “lend” money to people who could be predicted to default.

    Why the pity party for these fools now?

  31. socaljoe says:

    The really big picture question is:

    “Why the fuck would China lend to the United states?”

    ~~~

    BR: That’s an easy one: To keep our rates low so we keep buying their cheap ass shit . . .

  32. FS says:

    beaufou-absolutely if I thought could make money doing so.

    I’m not responsible for the “broken financial structures” or the lefty avoid all personal responsibility mantra that
    led to said structures. Same as here, there were politicians who thought they could use other people’s hard work
    and efforts to create great amounts of people who were dependent and/or willing to take the fruit’s of other people’s work.

    There are always politicians and classes willing to create programs or circumstances that benefit only themselves, capitalists should wait for their circumstances to get worse, and skewer them. Since both Europe and the American left have proclaimed the era of “everything goes and we will find a way to pay for it”, we should be ready to take advantage when it proves to not work.

    Are there bad or socially irresponsible capitalists, absolutely. But the lefty attack on success, hard work and personal ethics is doomed to fail.

  33. riley says:

    “Which begs the question: WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE”

    BR you answered your question in the next paragraph “the EU turned a blind eye to it, in order to form their more perfect union.”

    The relationship between the banks and those who govern has gotten very friendly as each uses the other to support its objective. For the bankers, personal wealth, for those who govern, the power to create their “perfect union”. The banks for very fat profits with limited risk, made loans to known bad credits to help make the “perfect union” work. When the loans could not be paid the government needed to bailout the banks. If the loans failed and the banks were allowed to fail the “perfect union” would fail and neither party would accomplish its objective.

  34. b.tom.darga says:

    OMG.

    I think FS is on to something:

    “The job of lenders is to make money off lending money. The idea that they are responsible for the outcome is ridiculous unless there are criminal actions involved. There are always going to be stupid people, counties, countries-it is not the job of the lenders to make sure their decisions are smart.”

    Why stop with lenders FS? This is universally applicable.

    “It’s the job of quarterbacks to throw the football. It is not the job of the QB to check if there is a teammate in position to catch it. It is the job of the receiver to be where the quarterback throws it! ”

    The job of strikers is to kick the ball. Its someone else’ responsibility to make sure the goal is where it needs to be.

    Its the job of divers to dive. It’s someone else’s job to make sure there is water beneath him.

    Amazing.

  35. postmodernprimate says:

    FS Says:

    “The job of lenders is to make money off lending money. The idea that they are responsible for the outcome is ridiculous”

    FS, I still have some contacts at the small bank I worked for as a loan officer and would do just about anything to help you get hired if you promised to deliver this line verbatim at your first monthly meeting with the CEO.

  36. austextrader says:

    Barry, you cannot let homeowners or borrowers off the hook. They don’t have a fiduciary responsibility to someone else but they do have an obligation to pay back what they borrowed. Just because borrowers are not somone’s fiduciary agent doesn’t mean they relegate the basic human decency to borrow only what they can pay back.

  37. b.tom.darga says:

    It’s not my fault I have AIDS!! My job as a man is to have sex. It’s was her job to make sure she didn’t have HIV!

    I didn’t cause the crash. My job was to push the gas pedal. It was the job of the guy in front of me to make sure he went fast enough to avoid getting rear-ended!

    Its not my fault I shot that guy. I’m a hunter – My job is shoot animals. It was his job to make sure he wasn’t in the way! (aka. The Dick Cheney Philosophy).

    Ok .. I’ll stop now.

  38. Dow says:

    Blame is easy as there is lots to go round – can anyone name some concrete actions to take?

  39. willid3 says:

    FS, you seem to be absolving banks from their error. just because some one (country, bank, business, individual) applies to borrow money, the lender is not required to lend. their entire job is determine whether they should or not. and that is their business. so if they do a bad job of that. they should fail as a business. but its hard to let them do that if they have a gun to your head. which is what the to big to fail banks are

  40. beaufou says:

    “Are there bad or socially irresponsible capitalists, absolutely. But the lefty attack on success, hard work and personal ethics is doomed to fail.”

    I understand your point, but ethics are not respected while lending to Greece or sub prime borrowers.
    So there should be no recourse for dead-beat lenders just as they are none for dead-beat borrowers, don’t you agree?

  41. Greg0658 says:

    phil@9:21a #6 “These folks are NEVER going to vote for increases in taxes for other than the folks who are already paying most taxes”

    ok I pay some various taxes – but can’t dream-up/scratch-out TBP capital paycheck … send a MIC plant startup this way and I’ll gladly pay my alloted share for the work

    I’ll work with other peoples money .. why not .. and I’ll pay my share in kickback for the opportunity to provide muscle power .. but my brain says in my sleep “just what can I dream up on my own that doesn’t already exist – and provided by the firmly engrained”

    All the ‘ism’s float cash around the globe – each ‘ism plan focuses reward into a different worker type is the difference

    ps – I saw “churn” up there by someone .. B.I.N.G.O. and bingo was his nameo

    pss – “thoughtless ATMs” hail hail the thoughtless ATM – till we eat up everything in site &or have no trust to go to work

  42. arrian says:

    I’ve noticed something intriguing about the debate regarding the Greek default/restructuring/bailout: There is a familiar odor to the “Blame the profligate Greeks” meme now circulating. It is little more than a brilliant marketing ploy. This distraction ignores the simple reality that lending to insolvent people, institutions and countries is first and foremost the fault of the lenders.

    One wonders . . . if it was known at the time that Greece and its people and institutions were insolvent, who was screaming bloody murder? We had voices in this country regarding our mess . . . who were the voices in that mess if this was a clear and looming issue . . . ?

  43. readerOfTeaLeaves says:

    WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?

    Thank you, BR, for having the cajones to state the bloody obvious.

    It’s not rocket science, but the way the information flows these days, you’d think this was so obtuse that only in Outer Mongolian – and then only when speaking about quantum physics* – could anyone state something this simple and true.

    *Ratigan being the only guy in the media worth my time, but he shouldn’t be such a rare exception (!).

  44. b.tom.darga says:

    austextrader,

    ” Just because borrowers are not somone’s fiduciary agent doesn’t mean they relegate the basic human decency to borrow only what they can pay back.”

    Anyone who feels a moral obligation to abide by “basic human decency” at the same time that his counterparties are openly eschewing morality and claiming their only obligation is to pursue a profit by any and all legal (and, often, illegal) means, is a total sucker.

    Anyone who demands that some, other, people abide by “basic human decency” while simultaneously proclaiming the right of some other people (including themselves) to pursue a profit by any and all means, is just a self-interested grandstander who should be ignored by anyone who isn’t a total sucker.

  45. ToNYC says:

    ~~~

    BR: The bad loans are the fault of the bankers; the bailouts are the fault of the politicians

    The big short is liquidity in the absence of confidence = the shadow banking market.
    John Adams said that this US Constitution is not useful without morality and religion in the public square.
    Until players are socially recognized for how they make their money and how they perform in giving back; whether they be extractive or replenishing, the game will be crumbling. Humpty Dumpty was pushed.

  46. [...] Barry Ritholtz, “Lending to insolvent people, institutions and countries is first and foremost the fault of the lenders.”  (Big Picture) [...]

  47. JohnnyVee says:

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?” I couldn’t have said it better myself.

  48. dfstone32 says:

    “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE? ”

    The same question might have been asked in regards to those homebuyers that failed to meet any reasonable level of credit worthiness. But that was never really the goal. The goal was to generate money in the short term in the form of fees (churning). That is really what Goldman Sachs and the big banks are all about. The millions and billions of dollars generated by restructuring and securitizing debt. On a smaller scale the same is true in the subprime mortgage arena, for the individual mortgage brokers and dealers.

    The absolute scale of the sovereign debt crisis in which Greece is just a fraction is hilarious. But this is the system that we live in now. Is there an alternative. When talking about the US national debt what really happens if the US defaults. The entire worldwide economic paradigm is structured around sovereign debt. It would be nice if there was some other model to work from but there just isn’t.

    And isn’t concept of making people less credit worthy pay more for financing ridiculous. If they can’t qualify for a low interest rate how can they afford to pay back a larger interest rate. Am I the only one that finds this counter intuitive.

    So I’m with you Barry, let the lenders who made these awful decisions pay the price for those awful decisions. Unfortunately the lenders are the ones with the politicians in their pockets. And that means bailouts rather than defaults.

  49. 873450 says:

    To Dow

    - can anyone name some concrete actions to take?

    It’s simple. A few countries took the following action and will recover years ahead of the rest of us.

    Fix a broken, defective ATM when it causes harm. Don’t rescue it with a very expensive socialist diaper and don’t allow its owners, operators and maintenance workers pretend their hard working, successful capitalists just doing their job and functioning properly when they aren’t. Don’t let them keep the tons of money they improperly rewarded themselves with and absolutely don’t reward them with more. That money should be used to repair the damage they caused.

    When too many broken, defective ATM’s become malicious and cause too much harm, fire the owners, operators and maintenance workers. Seize the ATM’s and fix them or replace them. Make examples out of negligent, reckless, lawbreaking ATM owners, operators and maintenance workers by punishing them and clawing back money they did not earn and are not entitled to keep.

  50. reedsch says:

    I asked the same question about sub-prime housing lending. The question of who is lending is fairly easy to answer. The real question is why. Theories based on the intellectual and/or moral deficiencies of bankers, politicians, rich people, etc. are great fun but fail to deliver. One theory that held some traction was that there was an excess of liquidity, the over-supply driving down the standard criteria for lending it out. How much the lenders could count on the bailout safety net as a driver for their risk-taking is problematic, in that there is no guarantee past the FDIC limit and you lose your bank besides. The disconnect between the people making the home loans and the eventual lender (MBS buyer) was a clear issue in the housing debacle but has no bearing on Greece. The theoretical front runner now is that Govts are scared shitless and just trying to keep the system propped up any way they can (see: Egypt). The dark horse relates back to the origin of the word “bond”: you may not be willing to sell your a$$ but if I lend you big bucks and you can’t pay it back then I end up owning your hide anyway, a favorite tool of drug pushers, mafia loan sharks, and those who benefit from indentured servitude.

  51. dfstone32 says:

    @FS

    This argument makes no sense whatsoever and is just wrong. The banks job to generate revenue through the lending process. Why any bank would lend to someone and not verify their ability to pay back is beyond my comprehension. You say that the decision to borrow money is not theirs. But the decision to lend money IS theirs. The Bank has primary control in the arrangement assuming the borrower is not pointing a gun. No one is making excuses it’s just bad business to make a loan that you will not get paid back on. The problem is that they could offload that loan through securitization as quickly as they make it. Therefore the chain of responsibility is broken. Because of this securitization the bank’s revenue is no longer generated from the interest on the loan but on the fees generated by making the loan. The system went bad when bankers became salesman.

    The personal responsibility argument is only relevant in the case of strategic default. I think that people that have the ability to make good on their mortgages and fail to simply because the market value is less than their mortgage should be dragged through the streets and pilloried.

    I’m sorry but your logic is just fuzzy.

  52. reedsch says:

    What if it’s not really a loan?
    Start with the assertion that debt default is the new income redistribution means. The wealth created by machines (and now by computer-controlled machines) has to find its way back into the system somehow, otherwise who will buy the products that the machine creates? This is the problem faced by the guy who owns the machines, to whom the vast majority of this machine-created wealth has so far accrued. The owners can’t just give you money directly to buy their stuff, our primate brains can’t handle that yet, so they have to find a back-door way to keep funds circulating. So I borrowed money from GM to buy a GM car and worked at GM to pay back the loan. I bought my airline ticket online, checked in at the computer, the computers can even fly the plane, but they can’t buy tickets and sit in the seats.

    It is fundamentally a moral issue, but not the old morals (hard work, thrift, pay back debts, etc.)

  53. Francois says:

    (Warning: This rant will be very caustic, with a pH <2)

    Barry,

    This familiar odor you alluded to is the one of slothfulness and corruption of the US media. This sorry cluster of rear echelon MFers is 1) totally dependent upon big corporations for advertising dollars and 2) dependent on the oh! so prized "access” (excuse me while I fetch the airbaaaaaaaaaag) to the “powerful”, the lazy assholes that pass for “journalists” need, to stay in good standing among the Very Serious People, a.k.a. Beltway punditofuckology.

    Note the incredible extent to which said media goes in parroting the talking points of their true masters (Korporation & the State) while spraying their unbearable bromide of false equivalence: The doctrine of “if I criticize a Republican, I MUST find something harsh to say ['ANYTHING BUT I MUST SAY IT!!] about a Democrat”, that, of course, applies to the private sector too. Hence, if a “journalist” hint at a coming criticism of a bank, just sit back and hear the onslaught of abusive bullshit heaped upon the Average Joe for being, at the same time, so devious as to defraud gigantic financial institutions, yet, so stupid as to get in over his/her head.

    It goes without saying that no “journalist” will be so courageous as to utter the F-word (Fraud) when it comes to the banks, facts be damned. Bloggers and academics with kahunas will not be so shy, but everyone KNOWS they’re not REAL journalists. (Thank God !!!)

    As for the “Loan Origination Fraud”, I know of no better use of 58 minutes than listening to the interview Professor Bill Black gave to Le Show with Harry Schearer (1st of May 2011).

    http://harryshearer.com/news/le_show/player/?id=816

    It is an eye opener like few others.

  54. Francois says:

    @Kid Dynamite,

    I think the answer is that they positively don’t know that they’re making bad loans (After all, lending money to people who can’t pay it back is NOT a viable business model)

    Not a viable business model for who KD? For the lending institution? Or the CEO?

    ALWAYS ask yourself the question: Cui bono? and then follow the money.

    It’s all here http://harryshearer.com/news/le_show/player/?id=816 and that’s from a guy who does that kind of forensic accounting for a living. Just don’t expect ABC News or CNBS to air this kind of stuff.

    – but that’s also because of my previous comment about the definition of “lender.”

    When there is control fraud, who the lender is does not matter. What matters is who pocket the dough.

  55. Joe Friday says:

    philipat,

    “Almost 50% of Americans don’t pay Federal Income taxes.”

    So what ?

    When the federal income tax was originally enacted, it only applied to incomes above $500,000.

    ~

    “These folks are NEVER going to vote for increases in taxes for other than the folks who are already paying most taxes.”

    Good.

    That’s who SHOULD be paying most of the taxes. Unfortunately, just between 2002 and 2007, 65% of all income growth in this country went to the already richest 1% of the population. That lopsided distribution means that currently, half of our national income goes to the just richest 10%. Not to mention that over the past decade, the top 1% of Americans saw their share of the nation’s income DOUBLE, from 11.3% to 22.1%, but their tax burden shrank by about ONE-THIRD.

    ~

    “These folks are also known as Democrats.”

    Who only want the Rich & Corporate to pay their fair share of the tax burden,

    ~

    “This is called Socialism, just like in Europe.”

    No, it’s called how a successful economy works. The periods of greatest economic prosperity in this country occurred when the top federal personal income tax rates were at 81%, 85%, and even 91%, while the top corporate federal income tax rate was 50%.

  56. socaljoe says:

    “BR: That’s an easy one: To keep our rates low so we keep buying their cheap ass shit . . .”

    Agreed… and to keep USD/CNY high for the same purpose…

    which raises the following questions…

    Isn’t that the purpose of the euro also? It has certainly been the effect. (the difference being German exports are of high quality)

    Is our relationship to China that much different from Greece’s relationship to Germany?

    Why limit our analysis to Europe. If we think globally, do we need to start thinking in terms of PIIGUS?

    Are the events in Greece a glimpse into our future?

  57. Joe Friday says:

    Jim67545,

    “Secondly, originators were satisfying customer demand, making fees, acquiring customers, and, thanks to the secondary market, made loans that usually met underwriting standards and then could sell off the risk (the loan risk and often the servicing risk) into a market that, thanks to the temporary perfume of a AAA bond rating, seemed willing to buy anything originated. Sometimes underwriting standards promulgated by the conduits permitted things (such as NINA, no-doc, Alt-A) which the originator would never do for their own portfolio. Does this make the originators ‘bad?’ ”

    Yep.

    According to the state’s Attorney Generals association, as much as 50% of the sub-prime foreclosures were as a direct result of fraud involving mortgages sold by UNREGULATED predatory lenders:

    ‘Predatory mortgage lenders who presented homeowners with false appraisals of their property, loaned them 100% or more than 100% of that value, wrote them ARMs that reset in 2 or 3 years, but told them they could easily refinance to avoid the HUGE increase in monthly payments, raked in HUGE amounts in fees, the ratings agencies falsely rated these mortgages as AAA in exchange for CASH, and then they were sold to Wall Street at a sizable profit, who then securitized them and resold them to investors, resulting in more fees and profit.’

    There was evidence of predatory lending practices, fraudulent appraisals, fraudulent ratings from rating agencies, misrepresentation, and securities fraud, that were perpetrated by unregulated predatory mortgage lenders and brokers, as well as realtors.

    The wide-spread fraud ranged from deceptive practices, including falsifying an applicant’s income, misrepresentation to applicants about mortgage rates, and failing to disclose expensive prepayment penalties to applicants attempting to refinance, to fraudulent property appraisals, fraudulent securities ratings by ratings agencies, and misrepresentation of securitized investments.

  58. OK Avenger says:

    I don’t have a problem with a loan originator making a stupid loan to a bad credit.

    I don’t have a problem with a loan originator selling said bad loan upstream to a loan bundler.

    I don’t have a problem with the loan bundler using his investment banker buddy to carve up a loan portfolio and sell it to schmuck investors, granted that there is no fraud involved, just bad credit judgement.

    I DO have a problem with said Investment Bank being able to tap bank deposits for his funding in any way. If he’s using the partners’ money, like in the old days , fine.

    One of the many reasons that repeal of Glass-Steagall was a mistake.

  59. b.tom.darga says:

    @Kid Dynamite,

    “I think the answer is that they positively don’t know that they’re making bad loans (After all, lending money to people who can’t pay it back is NOT a viable business model)”

    Imagine that you are the manager of a bar where the owner pays you on an incentive system based not solely by the cash you actually take in every night, but by the total of both the cash taken in AND the value of the still-outstanding tabs generated that night.

    Can you deny that there would be a powerful shot-term incentive to try to fill the place with the largest number of big-drinkers regardless of their ability to pay? Can you deny that there would be a real temptation to specifically go after the most raging alcoholics who can be counted on to rack up massive bills, even if it means a drastic reduction in cash inflow and a corresponding increase in the value of outstanding tabs? Remember, your compensation is the same whether a customer pays his tab at the end of the night or keeps the credit line open. Every drink you serve makes you money even if it doesn’t make the bar money.

    Obviously such a strategy would inevitably bankrupt the bar and cost you your job, but if you know you can make a huge pile of money before then, this might not be a major deterrent. There are plenty of people in this world who would gladly accept a 100% guarantee of being laid off in a year if it meant they could make $500K, $1 Mil. etc. before that year is up. Furthermore, such a strategy will allow you to truthfully claim on your resume that, under YOUR management, the bar rapidly became one of the most popular bars in the entire city (with such an easy-credit policy, it predictably will) and this will make it VERY easy to get a new job at almost any bar that isn’t owned by someone who knows the inside story of how you did it.

    ——-

    Well, the situation described above really isn’t a far-off analogy for the cowboy lending sphere. They
    1 – lend out money that isn’t theirs
    2 – are allowed to book the entire “expected” repayment value of the loan as soon as the borrower signs the agreement.. thus generating large accounting “profits”
    3 – collect compensation based on that book value long before the actual performance, and hence real value, of the loan is ever determined, much less written down to reflect reality.

    Consequently, they have an real financial incentive to lend out as much money as possible to the riskiest borrowers possible (because higher risk means higher interest rates which means higher “booked” value to the loan) in order to secure maximum personal compensation. Furthermore, since those actions will always cause a short-term surge in accounting profits (ie. “growth”), if & when their company tanks they can often easily get another job by taking credit for the incredible “growth” and profits that happened under their watch (before the crash .. which was really an unforseeable tragedy that other people were responsible for anyways…..)

    FS is right about one thing – these guy don’t get paid for making their company long-term profits. They get paid for “making loans” (and making the coresponding fictional “profits” on paper) without regard to the effect on the health of the company.

    Not a viable business model? Perhaps not for the owner, but it can be a GREAT one for the manager.

  60. KidDynamite says:

    @Francois (and others) – you guys continue to confuse and confound ORIGINATOR and LENDER. The originator is the one who writes the loan – the lender is the one who loses the money if/when the loan isn’t repaid.

    Barry’s post even says “we need to better understand the term loan origination fraud,” Unfortunately, his next few words are “when lenders willingly make bad loans, consequences be damned.” which is NOT what loan origination fraud is. Change “when lenders willingly make bad loans” to “when originators willingly make bad loans.”

    Loan origination fraud is NOT when a small Norwegian Pension fund makes a stupid investment in RMBS. It’s when the originator of the loans that are packed into the MBS lies about the qualities of the underlying loans in order to deceive/trick/manipulate/whatever the small Norwegian Pension fund into becoming the lender.

    The problem is ORIGINATORS, not LENDERS. (hint: if you hold the paper, you’re the lender)

  61. KidDynamite says:

    ps – it should be quite clear that I agree completely with Barry’s conclusion:

    “it is the LENDERS who are making these awful decisions. The LENDERS should be forced to suffer the consequences of their own incompetence and not the taxpayers.”

    Lenders who make idiotic loans should take losses on those loans.

  62. b.tom.darga says:

    philipat,

    “Almost 50% of Americans don’t pay Federal Income taxes. These folks are NEVER going to vote for increases in taxes for other than the folks who are already paying most taxes. These folks are also known as Democrats. This is called Socialism, just like in Europe.”

    Do you know how to get blood from a stone?

    There is a reason poor people don’t pay as much in taxes as rich people and it isn’t because of “socialism”….. its because they don’t have any freaking money! There was a time when the lion share of the tax burden fell on the poor – it was called the Medieval Period and it was NOT a time of raging economic prosperity. It was a time of poverty where gov’ts couldn’t collect enough revenue to do basic things like build roads, maintain a police force, or any of the other things you take for granted today.

    In fact, the was an economic surge in every case where a powerful king was able to dismiss the old tax-exemptions that had been traditionally enjoyed by the Nobility. In every single case, when a king secured enough power to re-impose taxes on the wealthy nobility it yielded an economic boom. The simple fact is that it was far more efficient for everyone to collect taxes from those who had plenty of money that could be easily found and measured than to waste the time and effort required to squeeze every available cent from the peasanty – more money was collected more regularly and reliably and you didn’t have to waste time and money paying people to kick down doors and ransacking hovels just for the off chance of finding the trifiling couple of coppers the peasant had hidden so he could buy food.

  63. gman says:

    Anyone as brilliant and well compensated (must pay for talent you know!), could never have anticipated Greek profligacy. To point out that the Greek have been in default almost half of the last century is in poor taste…it is just a “envious war on the success” of said bankers.

  64. gman says:

    Anyone as brilliant and well compensated (must pay for talent you know!), could never have anticipated Greek profligacy. To point out that the Greek have been in default almost half of the last century is in poor taste…it is just a “envious war on the success” of said bankers.

  65. partimer1 says:

    Bravo!!!! Haven’t seen a great post like this for long time in anywhere. This is the key issue of Capitalism, which we brag for centuries in this country. I don’t know what the f we have now after all the nonsense.

  66. b.tom.darga says:

    I dont expect bankers to be “moral” or refrain on making every dollar they can under the rules. I am NOT crying out for bankers to think of “society” or otherwise be altruistic. I expect them to look out for their own self-interest and I think morality-based appeals for them to ignore their own interests in favor of others are largely pointless.

    On the other hand, I intend to look out for my own self-interest and I have no use the pathetic morality-based appeals that we ignore our own self-interest and altruistically allow them to make a fortune while causing us to suffer.

    I understand why some bankers/businessmen will defend the amoral pursuit of profit by bankers/businessmen while resorting to morality-based appeals for the rest of us to ignore our own profit and allow them to do whatever they want to us. It is in their self-interest to talk us into dropping our pants and bending over. I do not understand why so many regular people, who are in line the get screwed, pathetically agree to ignore their own self-interest and go along with it. *

    We have NOTHING to gain by agreeing to it. We have NOTHING to gain by agreeing to bear all the burdens while allowing them to enjoy all the gain.

    * Notice how often do you hear variants of this exchange:

    A: ” I have no moral obligation to pay other people or pursue anyone’s interests other than my own. Pursuit of my own self-interest is the highest morality.”
    B: “Well, It is in my self-interest to either MAKE you pay and I intend to pursue it”
    A: “OMG! You are horribly immoral! ”

    Sadly, there is no shortage of fools who fall for the guilt-trip

  67. b.tom.darga says:

    If the above rant seemed random, it is in response to the common phenomena, seen here and in most discussions on this topic, of people asserting that we should meekly allow bankers/businessmen/whomever to do whatever is in their best interest without ever trying to explain why it is our best interests to do so.

    This is probably because they have no arguments other than tired and phony appeals to the kind of moral consideration they think the subjects of the discussion should be exempt from.

    If a banker has no obligation to put my interests above his own profit, then we also have no obligation to put his interests above our profit. He profits by getting us into an onerous loan. We profit by using our numbers (political muscle) to support reforms that keep him from doing this and, if it’s already been done, sticking him with the loss.

  68. Dr. Goose says:

    Said an analyst: “Risk, from where I sit,
    Is consistent, despite how you slice it,
    And our colleagues in banking,
    For profit or ranking,
    Consistently still underprice it.”

  69. lalaland says:

    Basically they sold a hamburger to a guy who told them he would pay them Tuesday

  70. [...] It is a lender’s job to determine whether a party – be it a country or a person – is debt-wort… There was a meme attempted during the US housing collapse to place the blame upon the home buyers and borrowers who exercised poor judgment and got in over their heads. It manifested itself in numerous ways. It was an intellectual failure, for the simple reason that it is the lenders job to assign credit, to determine who has the ability to service the debt and who is a bad risk. Indeed, lenders have legal and fiduciary duties to their shareholders, capital sources and regulators. Eejit home buyers who went wild during the era of free money have no such obligations. [...]

  71. 873450 says:

    The banker was paid to sell Wimpy someone else’s overpriced hamburger. He knew Wimpy couldn’t afford it and didn’t care. He went to the casino at AIG placing highly leveraged bets against Wimpy and won big time. When the casino went bankrupt, sleeping politicians woke up asking the banker what happened. The banker informed them he was a victim. Wimpy was a deadbeat, the unpaid hamburger owner was a loser and the casino was a failed business. The banker fed politicians an expensive meal and convinced them that if they didn’t force deadbeat Wimpy and the unlucky hamburger owner to pay the bankrupt casino’s gambling losses he wouldn’t let them fly on his private jet anymore. … So they did.

  72. [...] …Asking the most obvious question in the debacle that is Greece: “WHO THE FUCK WOULD LEND A DIME TO THESE PEOPLE?”.  The short answer is simply: Greed, meet Stupid.  Stupid, meet Greed.  [...]

  73. The funny thing is, the world never ends when the IMF or World Bank dole out even larger amounts of money to destabelize 3rd world governments. An awful lot of money goes to Africa with no real accountability, yet the world still turns. Greece has it’s problems that require socialist reforms, however the fascists of the banking community helped by their own corrupt politicians, and the EU are circuling like vultures to destroy Greeces soverignty and create a vassel state.

  74. Interesting perspectives. It seems more constructive to focus on the fact that transactions take two willing parties. I don’t share the government / Wall Street view that the populous is an ignorant vessel that can only just accept whatever is poured in. If you are a borrower, it doesn’t seem wise to assume that it is the lender’s responsibility to act in your interest. The lender’s “legal and fiduciary duties” are no more important than one’s obligation to manage one’s own affair. Yes, one can rationally say “take your credit and shove it.”

    It is not lender’s responsibility to “determine who is credit worthy.” That’s the epitome of conceit if they think they determine it. They can’t even guess it.

  75. [...] We Don’t Need to Cut Corporate Taxes, We Need to Raise Them (this is on Fox News. Really) First, Blame the Lenders In U.S. Monetary Policy, a Boon to Banks Martori Farms: Abusive Conditions at a Key Wal-Mart [...]

  76. krow10 says:

    @The Hedged Economist: “It seems more constructive to focus on the fact that transactions take two willing parties”

    In the housing bubble, it seems more constructive to focus on the middleman. At root, there are two transactions involved. (1) The initial loan and (2) the selling off of the loan. Only one party is involved in both transactions, and it’s the party with the least risk because they take their profit up front in fees at (1) and offload the risk as soon as they can at (2). That middleman is the loan originator. As the OP implied, we should focus on “Loan Origination Fraud.”

    @The Hedged Economist: “It is not lender’s responsibility to ‘determine who is credit worthy’”

    Yes it is. That’s why we have companies like TransUnion, Experian and Equifax — to try to quantify risk to the lender. It is the borrowers responsibility to present their situation honestly and it is the lenders responsibility to make a profitable loan, or make no loan at all, given their best estimate of the risk involved.

    But if there is a middle man who can bleed fees off the transaction with little risk — encouraging borrowers to borrow beyond their means (by putting off costs and downplaying long term risks to the borrower of exotic loan instruments,) and who then can offload the debt to investors by hiding that same risk (perhaps through complex collateralized debt-based derivatives) — well that smells like “loan origination fraud” to me.

    In the end, many of the unwise investors got something of a bailout. Most of the unwise borrowers are pretty much on their own. And the loan originators — well, they took their profits up front, so they’re sitting pretty. That’s where I place the lion’s share of the blame.

  77. know10, Regarding your first point, all that is accurate, but my point is that borrowers can put a stop to it when it’s not in their interest to borrow. There is no reason a person has to take every loan offered. Further, it makes no sense to be surprised to discover that organizations don’t lend because the loan is in the borrower’s interest. They lend because it is in their interest. A borrower shouldn’t rely on lender to act in his or her interest as a borrower.
    I would be and have been quick to point out there are “agent” problems throughout. The only place where they don’t exist is at the borrower level when the borrower retains the obligation to pay.
    Regarding your second point, we could get into a lengthy discussion of credit rating agencies and what they do, but that would be a distraction. Your final paragraph makes a point I’ve stated differently: “The borrower is betting his or her future. The lender is just betting someone else’s money.” In the case of Greece, which was what Barry was addressing, there are agent problems on both sides of the transaction.