The Ongoing Impact of the Housing Sector
John Mauldin is away this week, and so I contributed to his Outside The Box series in a post called "The Ongoing Impact of the Housing Sector."
The fun part of writing that was assigning blame for all of the problems in the credit market. As it turns out, only a few people are actually responsible:
* Federal Reserve (FOMC)
* Borrowers
* Mortgage brokers
* Appraisers
* Federal Government
* Fannie Mae
* Lending banks
* Wall Street firms
* CDO Managers
* Credit agencies
* Hedge funds
* Institutional Investors (pensions, insurance firms, banks, etc.)
* And back to regulatory role of the Federal Reserve
Other than those few groups, I don't know who else desrves the blame . . . ; )
Tuesday, August 28, 2007 | 11:45 AM | Permalink
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Comments
I saw Barbara Corcoran who used to run a realty company and she was blaming the media. It seems there wouldnt be a real estate problem if the media wasnt reporting it.
Posted by: GerryL | Aug 28, 2007 12:04:19 PM
How about the media that applauded all of these entities?
Posted by: Owner Earnings | Aug 28, 2007 12:07:04 PM
Yes, well said, Barry. But I bet you would agree that there are different degrees of blame.
If I'm a seamstress and one day you come along and tell me you'll buy all the dresses I can sew, even if they have holes in the fabric and broken zippers, well who's more respsonsible for the poor workmanship that results?
I would argue that YOU should get more of the blame than me.
I, the seamstress, have two things going for me -- 1) an honest incentive to make crappy dresses and 2) NO DISINCENTIVE to make them. If people walk around in crappy clothes, it causes no great harm that I can see.
YOU on the other hand have a larger role in the economy. You do more than manufacture -- you buy and sell with parties across the financial landscape, and you are in a position to see the widespread effects that shoddy goods can create.
You are, in fact, the first buyer of these goods, and you buy vast amounts of them and then re-package them for sale. No one knows as much about these products as you do.
I think that means you shoulder more of the responsibility for them having been created in the first place.
You, in this example, are the Wall Street underwriters, of course.
In a perfect world, all those other parties you list would have spoken up and done something to prevent all these torn, ugly dresses from having been made.
But that's a re-active response. Any one of them could have *stopped* this.
There was, however, only one party that could have *created* this situation - the bond underwriters.
Posted by: Graffiti Grammarian | Aug 28, 2007 12:22:43 PM
I don't see Osama Bin Laden or any of the other evil doers on that list.
Posted by: KP | Aug 28, 2007 12:40:14 PM
Well, the Asset Backed Commercial Paper (ABCP) toxic waste has managed to infect one of my investments. I have free shares (recovered my initial investment plus a couple of bags of profit some time ago). HSBC is on my poop list. The reasons lie at the end of the link below. Sheesh, banker scum!
http://www.marketwire.com/mw/release.do?id=764017
Posted by: sanjosie | Aug 28, 2007 12:40:52 PM
The insurance industry has a hard time pricing liability ('casualty') business over the years/cycles. Losses come in over a long period and there is a tendency to let down on discipline and to be overly optimistic on interest income on the cash generated in the liability business. Executives collect their bonuses while it appears that everything is going just peachy. When losses come in high and the company over and over must boost loss reserves, none of the bonuses are pulled back to the insurance company.
A modern, sort of similar sounding dynamic but on steroids, is all the tools (e.g. options) that allow execs to get rich before the complete reality of a company's real performance is actually known. We have loosened the tie between company and exec. This is a moral hazard. It promotes short-term thinking/decisions.
Posted by: Richard Hanley | Aug 28, 2007 12:40:57 PM
Do you really blame the borrowers? Do you really? That's blaming the victim, IMHO. This crisis was made possible by the investment professionals and (bad) risk managers at the banks that bought the debts from the mortgage originators.
~~~
BR: In the instances where people recklessly borrowed more than they could reasonably pay back -- yes, I do.
I know how much I can afford to pay. So do you.
Posted by: David Fiske | Aug 28, 2007 12:48:54 PM
Richard Hanley has it exactly right. Many individuals have gotten fabulously wealthy through this, and undermined the economy as a result. That is no way to run a railroad.
Wunsacon had a comment the other day talking about "Public Risk, Private Profits". Again, spot on.
I blame the regulators in this case. And in many/all of the previous cases (S&L crisis ring any bells?)
The perverse genius of the shift to the right in this country over the last 25 years is that the idea of regulatory, and other types of failure relating to the functions of an effective government, doesn't seem to hit people's radar very hard.
Mine collapse? Surely couldn't have anything to do with unsound mining practices. Bridge falls down in MN? Who knew? Katrina? Go figure. Global warming? It is either a hoax or there is nothing we can do about it anyway.
What is happening right now in subprime is completely consistent with the idea that government can't do anything effective to stop or intervene in matters that we used to believe were a legitimate function of government.
We need to start paying attention again. As P.J. O'Rourke said, roughly, "Republicans run on a platform that says government is ineffective, then they get elected and prove it."
Posted by: Whammer | Aug 28, 2007 12:56:03 PM
haha, don't forget to add HGTV for making everyone think that flipping a house was riskless profit.
on second thought, maybe HGTV was more a symptom....the manifestation of the human desire for easy money.
I want those retro Smith Barney commercials back with John houseman. Make money the old-fashioned way, earn it!
Posted by: johntron | Aug 28, 2007 1:01:05 PM
The borrowers are victims? Puh-leeze. People got greedy and tried living well beyond their means. Now its time to pay the price.
Posted by: LAWMAN | Aug 28, 2007 1:20:00 PM
It takes two parties to make a liar loan work. The one who provides the means to lie and the liar.
Posted by: Ralph | Aug 28, 2007 1:26:46 PM
Forgive my ignorance, and thanks in advance to anyone who helps me straighten this out.
Who is responsible for the AAA ratings that were attributed to this paper? I always thought that by rating a security AAA, the firm ascribing the 'seal of confidence' was responsible for backing it.
Posted by: Braden | Aug 28, 2007 1:57:14 PM
Let's be honest... the upcoming Fed minutes (in about 6 minutes) will be perfect discourse on this topic... not much differently than if they actually decided to enter their comments on TBP.
I can't remember an event of greater potential volatility regarding these minutes.
I would not be surprised with a move of 1,500 points, or more, up or down on the Dow between the minutes and the close.
Posted by: Eclectic | Aug 28, 2007 1:57:47 PM
Well, look, don't blame me. I'm innocent in this whole deal. I didn't enable anybody or dupe anybody and I didn't do anything stupid myself. Just a bystander, I am.
Lavábo inter innocéntes manus meas...
Posted by: wally | Aug 28, 2007 2:04:19 PM
If we get another V bottom.......I quit-LOL
well not really but hell......I feel like it
Ciao
MS
Posted by: michael schumacher | Aug 28, 2007 2:05:35 PM
You could have summed up the entire article in just four words: Greed is to blame...
Posted by: The Financial Philosopher | Aug 28, 2007 2:11:20 PM
Wow...
So, the fed was essentially blindsided by the credit crunch???
http://www.reuters.com/article/businessNews/idUSWBT00747620070828
Posted by: Pool Shark | Aug 28, 2007 2:19:32 PM
Hear, hear, to Bradon! Who affixes the triple-A rating, indeed.
Barry, you left out the rating agencies on your list of shame!!!
But since the agencies are just the paid employees of the financial houses, again, I say, it was the Wall Street underwriters who should get the biggest piece of the blame pie.
Posted by: Graffiti Grammarian | Aug 28, 2007 2:31:03 PM
I'm not sure I agree with the wide dispersal of blame, here. It makes it too easy to carry the load. I want BLOOD, goddamnit!
If someone gets taken to task, other responsible parties will get named in subsequent lawsuits.
I repeat that nobody should be able to ascribe a AAA rating to anything without being required to support it with money.
Posted by: Braden | Aug 28, 2007 2:56:05 PM
No blame for the MSM? Or David Lereah?
Posted by: rex | Aug 28, 2007 3:06:46 PM
OR Mr. Greenspan for encouraging credit scoring, subprime loans in particular and risk taking in general?
Posted by: zao | Aug 28, 2007 3:17:56 PM
nothing wrong with taking risk...it was the premise that these things were repackaged and the risk was somehow offloaded to the next shill, I mean entity, is what has the most deceptive factor to it.
It was a chain link and up until the last link there was complicity, only when one of the last links asked for actual collateral was it then exposed. The first link in the chain having already booked the profit but keeping up the appearance of it continuing for time to come (and they still give off that perception even now) that it is really all "contained".
Ciao
MS
Posted by: michael schumacher | Aug 28, 2007 3:31:58 PM
Barry,
Oops, I think you forgot one: Pres Bush. I mean everything else is his fault... perhaps we won't have to wait too long before that one hits the headlines. ;)
Posted by: Strasser | Aug 28, 2007 3:40:08 PM
all Bush's fault
Posted by: tt | Aug 28, 2007 4:02:45 PM
Strasser,
Bush didn't veto any of the budgets produced by the Republican-controlled congress, which added 4 trillion dollars to the national debt. That debt went to wars and tax breaks for the wealthy, neither of which will add to future productivity and our ability to pay off that debt in the future. Past leaders are to blame too...Reagan/Bush ran up our debt/GDP ratio, and Clinton set us up for future bubbles (while the debt/GDP ratio dropped under his presidency). Presidents have the power to veto and so do have impact on budgets and ultimately financial markets.
Posted by: Camille | Aug 28, 2007 4:16:15 PM
