Posts filed under “Really, really bad calls”
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 covering this subject, he said “That’s easy, Ritholtz has been all over this story.” (so I was told).
I turned McGraw Hill down — repeatedly — but they cajoled and flattered and wheedled and promised, and eventually I relented.
I approached the subject with a blank slate, pragmatically, with no agenda. It was a problem solving exercise, and I began by looking for and at the data that led me where ever it would. Following the money is always a good tactical approach for anyone researching these sorts of events.
The data led me to numerous conclusions: I blamed Republicans, I blamed Democrats, I blamed the Federal Reserve, Congress, the ratings agencies, mortgage originators and lending banks, the biggest Wall Street firms, the SEC. I blamed US borrowers and home buyers, the RE agents, the mortgage brokers, and appraiser. I blamed the other end of the sausage factory, the collateralized debt obligation (CDO) underwriters, managers and the funds that bought them. I blamed Greenspan & Gramm, Bush & Clinton, Paulson & Bernanke & Rubin & Summers. Even mutual funds, compensation consultants and crony corporate board members come in for criticism. (This is only a partial list).
Which leads to today’s exercise in willful ignorance.
The 4 GOP members of the FCIC have a document which purports to have questions and answers on the causes of the financial crisis have abandoned their charge. They released a silly analysis that could have been written by wingnut think tanks like the AEI or Cato or others BEFORE the crisis even occurred (and indeed, there are many examples of this findable via the wayback machines of the intertubes).
The Gang-o-four absolves Wall Street and the banks, blames the government — for everything — and ignores the data that conclusively demonstrate otherwise.
To these Reality Challenged people, I pose the following questions:
1. From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?
2. How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?
3. The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?
4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?
5. For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?
6. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?
7. These firms abdicated traditional lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?
8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders. How did this cause a worldwide boom and bust — even bigger than that in the US ?
9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?
10. Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?
I can go on and on — but the concept is rather simple: If you cannot answer these questions, or adequately explain these facts, then how on earth can you explain the credit crisis?
Back in October, I mentioned the website that gone viral: “Where’s the Note.com.” It allowed homeowners to easily request to see a copy of their mortgage note. Yesterday, I noted that at least one Homeowner had made a “wheresthenote.com” Mortgage Note request, only to see Bank of America report the request as a dispute to…Read More
Here is the latest oddity out of Florida: Homestead-exemption tax break, intended for resident homeowners who actually live in their Florida homes, is instead accruing to the banks that are repossessing homes via foreclosure. The Orlando Sentinel has the details: Local governments across the state are losing revenue because banks are getting the homestead-exemption tax…Read More
Sometimes, the best defense is a good offense. That seems to be the approach that notorious robo-signing firm Nationwide Title Clearing has taken in responding to some of its critics. If you are unfamiliar with their name, you might recall earlier this Fall when depositions of several Nationwide robo-signers employees went viral on YouTube (We…Read More
We were waiting for the end of the world, waiting for the end of the world, waiting for the end of the world. Dear Lord I sincerely hope you’re coming ’cause you really started something. -Elvis Costello, Waiting For The End Of The World > In today’s LA Times, Tom Petruno looks at the Zombie…Read More
by James Bianco Bianco Research November 18, 2010 > The Wall Street Journal – Burton G. Malkiel: ‘Buy and Hold’ Is Still a Winner An investor who used index funds and stayed the course could have earned satisfactory returns even during the first decade of the 21st century. “Many obituaries have been written for the…Read More
The Economist asks: “Fifty years after the dawn of empirical financial economics, is anyone the wiser?” My short answer: “Only the people who understand both the data and its limitations, and not get lost in the illusion of precision.” Markets are driven by myriad factors, most of which are readily quantifiable. But the small number…Read More
GM history in the second half of the 20th century is a story of executive arrogance, missed opportunities, poor decision-making and reckless finance. After WW2, everyone was making money hand-over-fist, and GM became known as “Generous Motors.” Starting in the mid-1950s, rather than risk a strike that could slow production and sales, GM chose to…Read More
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
“When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation?”
-Dave Rosenberg, chief economist and strategist at Gluskin, Sheff
It is taken for granted that a rising stock market stimulates the animal spirits, sending consumers off shopping.
The basic premise of the wealth effect is well known: As the value of stock portfolios rise during bull markets, investors enjoy a feeling of euphoria. This psychological state makes them feel more comfortable — about their wealth, about debt, and most of all, about spending and indulgences. The net result, goes the argument, is that consumers spend more, stimulate the economy, thus leading to more jobs and tax revenues. A virtuous cycle is created.
The rule of thumb has been that for every one dollar increase in a household’s net equity wealth, spending increased 2-4 cents. For residential RE, the increase is even greater: Consumer spending increases 9-15 cents (depending upon the study you use) for every dollar of capital gain.
The problem is, the theory is mostly nonsense.
I make this statement for two reasons: 1) the distribution of equities in the United States; and b) the classic causation/correlation issue.
Let’s start with equity ownership. The vast majority of Americans have a rather modest sum of cash tied up in equities. 401ks, IRAs, investment accounts — these are primarily the province of the well off. Ownership of equities is heavily concentrated in the hands of the wealthiest Americans. Start with the top 1%: They own about 38% of the stocks (by value) in the US. The next 19% owns almost 53%. That leaves the remaining 80% of American families with less than 10% stake in the stock market (See Federal Reserve’s Z.1 Flow of Funds report for the most recent info).
How is THAT going to cause a wealth effect? Especially when you consider the median family’s stock portfolio is worth well under $50k. These are the millions of families who are the principle consumers of cars, food, clothing, electronics, energy, health care, etc. To them, a rising stock market is nearly meaningless.
The biggest investment for the typical American household remains their home, with a median value of ~$200k. Put 20% down, and you see a 10 to 1 leverage. The impact of Real Estate on any wealth effect is much greater than the stock market. Unfortunately, homes remain somewhat overvalued — 10-15% by our measures — and are in a downtrend. They are not contributing to improvements in consumer spending in any meaningful way.
Our second factor is quite simple: The causation/correlation problem. In the 1990s, the Fed under Alan Greenspan look backwards, focusing on the stock market gains. But I suggest they would have been better off looking at the myriad factors impacting consumer’s psyches: Plentiful jobs, wage increases, economic expansion, labor mobility, modest inflation, and bountiful credit availability. These are sufficient to explain the behavior of consumers. Its not a secular bull market in stocks that causes the consumer spending — its all the other contemporaneous elements that are the prime drivers. [Update 06.26.12: In other words, the same factors that drive a healthy economy and make consumers feel positive also drives equities higher]
Regardless of your views of QE2 — if the Fed is doing it create a wealth effect, they are wasting their time and money.