More Ignored Warnings About Bad Mortgages (circa 2003)
Looking for a fall guy for the housing crisis? Businessweek looks into the idea of "Federal preemption" as a yet another candidate.
BW defines Preemption as a "legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail—even if it means little or no regulation."
This is why numerous state attempts to reign in bad loans, only to have federal authorities undercut them, occurred over the past decade.
There were numerous examples, from both red & blue states, including North Carolina, Iowa, Michigan, Georgia, Ohio.
"More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation's top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism.
Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of "predatory" lending. They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. "People out there are struggling with oppressive loans," Cooper recalls saying.
Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn't budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC "took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West," Cooper says.
This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the heart of the current financial crisis. Federal officials brushed aside their concerns. The OCC and its sister agency, the Office of Thrift Supervision (OTS), instead sided with lenders. The beneficiaries ranged from now-defunct subprime factories, such as First Franklin Financial, to a savings and loan owned by Lehman Brothers, the collapsed investment bank."
Go figure. Yet another faulty idealogy underlying it all. I still cannot figure out why centrist pragmatism isn't the dominant thought process in government . . .
>
Source:
They Warned Us About the Mortgage Crisis
Robert Berner and Brian Grow
BusinessWeek, October 9, 2008, 5:00PM
http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm
See Also:
Politicians, lobbyists shielded financiers; Lack of liability laws fueled firms' avarice
ERIC NALDER
Seattle Post-Intelligencer, October 10, 2008
http://seattlepi.nwsource.com/business/382707_mortgagecrisis09.html
Mortgage system crumbled while regulators jousted
ERIC NALDER
Seattle Post-Intelligencer, October 10, 2008
http://seattlepi.nwsource.com/business/382860_mortgagecrisis11.html
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Comments
Prior to commenting, please read the entire BusinessWeek piece.
Kindly stay on topic. Source your comments with URLs. Stay relevant. Be intelligent.
Silly, wingnut, and talking points (both left and right) will be deleted and their poster banned.
Thank you for keeping this forum intelligent and value added.
Posted by: Barry Ritholtz | Oct 11, 2008 9:48:06 AM
What I don't get, is why you and others are not shouting out about the CDS, Credit Default Swaps, scandal Lehman's CDS inventory sold at .08 on the dollar and there are 15.5+ Trillion of this toxic waste in the system as compared with only about $500 billion of bad mortgage paper, most of which would yield better than .08 on the dollar....and it was CDS that brought AIG down not mortgage paper.
~~~
BR: Tom, I have been "screaming" about the ratings agencies for 2 years:
See this:
The Ongoing Impact of the Housing Sector
Investor Insight, Aug 27 2007, 11:50 AM
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/08/27/the-ongoing-impact-of-the-housing-sector.aspx
Posted by: Tom Brander | Oct 11, 2008 10:02:15 AM
Another legacy of the Clinton Administration! Ha!
Really, between Rubin, Greenspan and Gramm, and their minions and flunkies (Clinton and Bush), this was inevitable. I'm just surprised that the bubble lasted as long as it did, and that prices inflated to such an extent.
Posted by: Don | Oct 11, 2008 10:03:22 AM
If you cracked down on predatory lending, you might have to look into other credit issues, like easy money to corporate execs. Two denizens (possibly former denizens now) of the Forbes 500 were devestated by margin calls this week; namnely Aubrey Mcclendon of Cheasepeake Energy and Marvin Herb of coca-Cola enterprises. Herb lost 18.6 million shares to J P MOrgan, but he at least sold his company to CCE to get the shares. He certainly had enough money that one would wonder how he let himself get into this pickle. McClendon on the other hand was always ballyhooing his "insider purchase". It turns out he lost his entire stake in the company $1.86 billion due to the margin call. I've worked w/Herb and McClendon was a funder of the Swift Boat attacks. Maybe this is a strong signal to the world that there is a God.
Posted by: larster | Oct 11, 2008 10:32:57 AM
I still cannot figure out why centrist pragmatism isn't the dominant thought process in government . . .--BR
BR, as you know, when your conclusions are, seemingly, at odds with *Reality, one has to go upstream and check their premises.
http://plato.stanford.edu/entries/aristotle-logic/
past that, instead of all this 'looking-back', I think it may be more helpful to try to bring into focus the coming Socio-Political events and their portents...
(e.g. "The IMF is a secretive institution with no accountability
The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy. Members of affected communities do not participate in designing loan packages. The IMF works with a select group of central bankers and finance ministers to make polices without input from other government agencies such as health, education and environment departments. The institution has resisted calls for public scrutiny and independent evaluation."
http://www.globalexchange.org/campaigns/wbimf/TopTenIMF.html
In an October 10 speech at the Peterson Institute for International Economics (PIIE), he proposed a four-point action plan to help stem the downward spiral in world markets and begin to rebuild confidence. The plan would include a temporary government guarantee of liabilities, government action to take out troubled assets and force the recognition of losses, government provision of capital to the financial system, and a high degree of international cooperation.
He was speaking at a conference titled "The Euro at 10: the Next Global Currency." But while there was some talk of the euro's role, speakers and the audience were more preoccupied with the financial crisis raging in all corners of the world, not least Europe.
In his remarks, Strauss-Kahn said that "world leaders have some hard decisions to make, and must start making them soon." He said he hoped the G-7 meeting of advanced-economy finance ministers later on October 10 and the October 11 meeting of the IMF's steering committee, the International Financial and Monetary Committee, would "result in a shared approach to address the crisis of confidence." ...
http://www.imf.org/external/pubs/ft/survey/so/2008/NEW101008A.htm
Posted by: Mark E Hoffer | Oct 11, 2008 10:37:08 AM
Over the last five years or so, the city of Cleveland and others have made numerous attempts to somehow rein in payday lenders, but each time they did so the Republicans in the state legislature and the courts have shot them down. In addition the Cuyagoa County Auditor Jim Rokakis has repeatedly argued that there were problems in the housing markets and has repeatedly been ignored. The argument that nobody could have foreseen this is a straight-up fraud. Many people foresaw this.
Posted by: AndrewBW | Oct 11, 2008 10:51:34 AM
Most of these comments are right on, especially about CDSs and other derivatives being the real and almost complete cause of the problem, not bad mortgages.
I'd only add that government is business and business is government. Don't obfuscate the matter. Whenever someone refers to politicians or the government doing this or that, what I read is that retainers of business have done this or that. Put another way, politicians have been implementing the wishes of big business. . . well, not even big business so much, which implies productive activity, but big finance (aka "The International Bankers"). Just look at who Obama's largest financer is (Goldman Sachs), not to mention McCain's. Point being, no one's representing the average Joe and/or implementing reasonable, objective regulations. The question is, though, has anyone ever done that ? Maybe the libertarians are on to something.
Posted by: Moore | Oct 11, 2008 11:04:19 AM
Thanks very much for the information. Check out the wikipedia biography of Hawke, in particular the last paragraphs ---
"During his term as Comptroller, Hawke has stressed the importance of the safety and soundness of national banks through such supervisory initiatives as Project Canary (an “early warning” system) and the “Supervision in the Future,” which makes extensive use of technology....
"Also innovative was the (Comptroller's) Office's use, in 2003, of the 1863 National Bank Act to prevent the attorneys general of all 50 states from investigating and prosecuting predatory lending practices by banks and mortgage companies. Even in the face of a federal lawsuit filed by all 50 Attorneys General, the Office claimed the right to prevent the enforcement of any banking law in any state as applied to any national bank. This may have allowed the later financial collapse of the world's economies to occur."
Nothing quite like near-realtime history writing. I wonder what happened to the canary. By the way, the wikipedia bio provides a link to a Washington Post op-ed by Eliot Spitzer, published on Valentines Day 2008, further describing the actions of the Bush administration to block states from investigating the lending practices of national banks. Might want to check back on wiki in a week to see whether history gets revised (or removed).
Posted by: shameandscandal | Oct 11, 2008 11:14:51 AM
Here's a little short video on finding a new job on Wall Street:
http://www.youtube.com/watch?v=3XGJq8wrw5I
--mf
Posted by: Monkeyfister | Oct 11, 2008 11:22:01 AM
Because centrist pragmatists tend to be more fair and less power hungry.
Power hungry people want it all for themselves and make it to the top.
Posted by: D. | Oct 11, 2008 11:27:00 AM
Mark E Hoffer you could start researching things at what most would consider one of the sources of "globalist" thought; the David Rockefeller nexus of organizations like the Trilateral Commission:
http://www.trilateral.org/projwork/tfrsums/tfr57.htm
More information about THE MAN:
http://en.wikipedia.org/wiki/David_Rockefeller
It's pretty much a given that the banking system is controlling the political system and all the "we the people" stuff is an illusion.
Posted by: Smelly Tuna | Oct 11, 2008 11:33:58 AM
...the New World Order that George Bush I spoke of was delayed a little by the Clinton administration, but it seems it's finally here.
Posted by: Bob A | Oct 11, 2008 11:53:23 AM
"I still cannot figure out why centrist pragmatism isn't the dominant thought process in government . . ."
Because pragmatism, basically by definition, requires that you understand the facts (data, history, processes, etc). That is much more difficult to do - especially for politicians who usually don't know much about anything. Also, and more sadly, it's not what wins elections.
Posted by: JoJo | Oct 11, 2008 11:56:44 AM
BTW, sounds to me that it would be appropriate that Mr. John D. Hawke Jr is made to answer some questions in from of congress.
(of course this won't happen since it would require the Dem leadership to put a Clinton appointee on the hot seat)
Posted by: JoJo | Oct 11, 2008 12:01:34 PM
This is just one manifestation of the tactics of big business to render powerless the States and average citizens. There's nothing like a couple of good ass whippings from a state court or jury to keep them in line.
For the past couple of decades, big business has tried to circumvent state laws by trying to make every rule promulgated by some agency in Washington govern the entire country by using the preemption argument. The has occurred in finance, environmental regulation, product safety and even cable tv regulation.
The excuse given by those who used to scream "states rights" before they got control of the Federal Government is uniformity, but the real reason is that it's easier for them to take control of a small group of appointed officials in Washington than of the officials back home who actually have to answer to voters.
The capture of the SEC by Wall Street and its subsequent inaction's contribution to the current fiasco is a good example, e.g.,
Cox's SEC Censors Report on Bear Stearns Collapse
Report: SEC Gave "Preferential Treatment" to Wall Street CEO
Surprised the article didn't mention Eliot Spitzer who ran into the same problems when he went after Wall Street in the post dotcom era and after banks during the beginning of the real estate bubble:
STATEMENT BY ATTORNEY GENERAL ELIOT SPITZER REGARDING PREEMPTION OF STATE CONSUMER PROTECTION LAWS (link is to google cache because the original link doesn't seem to work)
Or, see the presciently and ironically titled Free Eliot Spitzer! which comes from the American Enterprise Institute. (I don't agree with the article as the AEI is just shill for Big Business, but it gives some idea of what was going on. And, I liked the title :)
It's a shame Spitzer couldn't keep his pants on; he might have been the new attorney general and just the kind of SOB we need in the office to clean up Wall Street regardless of the lobbyists' efforts in Congress.
Posted by: Mike in NOLa | Oct 11, 2008 12:07:39 PM
Some would think that the OCC has been asleep at the wheel, when in reality (and as the article suggests) they have been an active partner with the banking industry in preventing any oversight or proscecution by the states' attorney generals. Here is a link to the FrontLine piece on the credit card industry, wherein they detail the role that the OCC has had in making sure that the banking industry can do whatever they want without repercussions:
http://www.pbs.org/wgbh/pages/frontline/shows/credit/
The consumer credit industry has a lot of the same issues that were seen in the mortage lending industry.
Posted by: OhNoNotAgain | Oct 11, 2008 12:12:28 PM
For those inclined to "connect the dots" there's a couple of neat little sites that can help:
http://www.theyrule.net
http://www.namebase.org
Namebase is actually useful in finding connections going back quite a few years. Theyrule is eye opening to just how "stratified" leadership is in the corporate world.
Posted by: Smelly Tuna | Oct 11, 2008 12:22:59 PM
Because centrist pragmatism doesn't allow people to rape, pillage, and steal.
When you understand the motivations of the power seeker, you realize that these people are dangerous from the outset.
Posted by: Paul Jones | Oct 11, 2008 12:28:58 PM
I agree fully with Tom Brander above.
The Swaps are the elephant in the room. They are the most toxic waste in our system right now. When short trading reform is discussed there is no consideration of how to stop unregulated synthetic shorting via swaps.
The only context people talk about swaps and their brethren in now is to say that going forward we will open an exchange for them and trade them in the open.
Beside the suggestion of canceling the swaps outright I see no realistic discussion of how the existing swaps problem can be managed going forward. With a series of credit events waiting in the wings I am surprised so little seems to be getting done on the subject.
I have seen Buffet, Soros, Volcker, Roubini, Paulson and others breeze over the subject.
Barry I think you should take the lead on the issue here. It is clear that all of the business news anchors read your site daily. I recommend you have one post per day on how to manage the swaps problem. Keep doing this until discussion of solutions gains traction in the mainstream media. You can start with an open thread asking the commenters at the Big Picture for ideas and see what we come up with.
Nobody wants to be asked or ask about this on the business news networks now because they don't want to reveal that the emperor has no clothes. We need to come up with a solution for this fast.
Posted by: zgveritas | Oct 11, 2008 12:30:05 PM
Void all CDS paper. Invoke the "tough titty" rule!
Posted by: Alan Wilensky | Oct 11, 2008 12:46:36 PM
"I still cannot figure out why centrist pragmatism isn't the dominant thought process in government . . ."
It's simple really. Washington attracts the type of people who cling to an ideology and use its underlying premises to inform all their decisions. Those portions of the bureaucracy that fail to maintain "the party line" are either forced out of their positions or locked away in some obscure part of the bureaucracy where they have no real power to influence decisions. This cuts across party lines. This leads me to believe the structure of our government is flawed.
Posted by: Paul Seda | Oct 11, 2008 12:52:51 PM
From today’s Bloomberg.com:
“Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan. Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program”
So it looks like the taxpayers are being forced to by subprime-backed toxic waste, with or without the “TARP”.
Posted by: D.L. | Oct 11, 2008 12:58:20 PM
Pragmatism only keeps critical thinkers happy.
Politicians routinely exchange hope creating promises for votes, shoving pragmatism to the side.
Politicians revel in the realm of the possible not the probable.
P.S. Regarding market valuation, I see multiple compression as the main driver of the markets decline up to this point. Looking towards the next 18-24 months, I see index earnings falling at least 10-15% due to our deleveraging scenario. Am I wrong to assume earinings will crater??
Aloha
Posted by: John Wellman | Oct 11, 2008 1:18:15 PM
At best, the Business Week article is weak. At worst, it's just pandering political B.S.
First off,Preemption is a VERY broad issue, affecting all matters commerce that might happen to affect both the state and feds at the same time. If Premption is a "candidate" for this mess, then so are mortgages...or better yet--how about just saying money is a culprit?
Have you considered the implications and complications if there was no Preemption Doctrine? Talk about unintended consequences.
Next, if you lament the the failure to pass Assignee Liability provisions, then blame 40 years of a wildly dysfunctional tort system. No lender or investor would open themselves up to that kind of liability. Regulation is one thing, strangulation is another. Assignee Liability coupled with this nation's tort system would have turned states like Georgia into "forum shopping" nightmares, where the likes of Dickie Scruggs would have set up shop in search of the nearest "aggrieved" plaintiff.
The federal government didn't kill the legislation, as much as state governments did as they realized that it's passage would mean that state's citizens would only be able to get mtg loans from the nearest Community Bank. No, the states themselves killed this legislation as the officials shit themselves upon learning that the passage of this legislation would have ensured the fact that they would not be re-elected. The citizens of these states HATED this legislation.
Change Preemption around to:
"Preemption...asserts that when federal and state authority over business conflict, the STATES prevail...."
Do you really think this would have mattered? There is no way that citizens in Georgia---in the height of the real estate frenzy---while observing the hyper appreciation of homes in FLA, would have said, "I'm sure glad our state leaders are looking out for us and banished all those bad mortgage companies that would allow me to a home with zero down aren't allowed in our state. I'm sure glad we have 5% appreiciaiton and
I'm not not jealous of their 20% appreciaiton."
There's no way. This article addresses nothing.
Posted by: Dan Duncan | Oct 11, 2008 1:20:33 PM
There's a reason that we honor people like Benjamin Franklin, Alexander Hamilton and George Washington in this country, and the reason is that they organized a Constitution that put the Federal Government in a position to regulate (among other things) interstate commerce so that we lived in a United States of America instead of a congerie of independent states.
BW's absurd suggestion that each state have its own mortgage laws should have no further time wasted upon it, especially in the current circumstances.
Posted by: john haskell | Oct 11, 2008 1:27:37 PM
