Posts filed under “Bailout Nation”

FCIC: What Caused the Financial Crisis

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

I Am Delighted with the FCIC Report !

More to come after I digest this, but so far it looks spectacular . . . Highlights from the NYT: “The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a Congressional inquiry.” The government commission that…Read More

Category: Bailout Nation, Bailouts, Regulation

Blame the Accountants — and Deregulation

I never want to make excuses for the excesses of Wall Street or the horrific judgment exercised by iBank management — you cannot, its inexcusable — but it long past time we begin holding the Street’s grand enabler’s responsible for their actions. Which brings me to the accountants. The New York attorney general may be…Read More

Category: Bailout Nation, Legal, Really, really bad calls, Regulation

10 Questions for GOP Members of Financial Crisis Inquiry

I never wanted to write Bailout Nation. That only came about after Bear Stearns collapsed. McGraw Hill approached Bill Fleckenstein to do a follow up to his successful Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, about the end of Bear. Fleck turned them down. When the publisher asked him who else was…Read More

Category: Bailout Nation, Bailouts, Really, really bad calls

I really like the way Michale Hirsh, author of Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street, describes the causes of the crisis: A now infamous 1999 Time magazine cover featured Alan Greenspan (then chairman of the Federal Reserve), Robert E. Rubin (then Treasury Secretary) and Lawrence H. Summers (then…Read More

Category: Bailout Nation, Bailouts, Books, Regulation

Dear Uncle Sucker . . .

For many years, I’ve been a fan of Warren Buffett’s long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy. But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd…Read More

Category: Bailout Nation, Bailouts, Really, really bad calls

What is more important than survival? On planet Earth, nothing. The most basic rule of life is SURVIVE. The Biological imperative of living things is to perpetuate their existence — survive, procreate, further the species. It is hardwired in the DNA of every living organism. Those that do not succeed in satisfying these imperatives are…Read More

Category: Bailout Nation, Bailouts, Corporate Management, Really, really bad calls

Banks (like Airlines) Have NEVER Made Money…

Fascinating discussion in Alan Abelson’s column in Barron’s today (Courting Trouble) about the Banking Sector. It is, perhaps, only slightly exaggerated. The main focus is on misaligned exec compensation, but the subtext is quite astonishing: According to Dennis Butler of Centre Street Cambridge Corp, the Banking sector, on aggregate over time, is a big money…Read More

Category: Bailout Nation, Credit, Earnings

Bailout Nation: What the Press is Saying

The latest promo materials from Wiley: > click for larger graphic

Category: Bailout Nation, Books

Lehman’s Bankruptcy: 2 Year Anniversary

I’ve spilled so many pixels on Lehman Brothers, I have almost nothing new left to add. For those of you newer to the site, however, here are a few of the Big Picture’s “Greatest Hits” regarding Lehman: • 2 years ago today, we wrote: The Terrible Lessons of Bear Stearns (as applied to LEH) • …Read More

Category: Bailout Nation, Bailouts