Even on Wall Street, cluelessness isn't a crime
E. Thomas McClanahanThe author Michael Lewis (“Moneyball”) popped up on CNBC last week and the hosts asked him about an earlier book, “The Big Short.” It was about the few individuals who foresaw the housing bubble’s collapse and became rich after making big bets to profit from it.
Lewis was asked about the common notion that the panic of ’08 should be laid at the feet of greedy Wall Street executives — and the corollary that some of them should be sitting in jail. Was the crash the result of criminal behavior or cluelessness about the degree of risk being run?
Lewis replied that while he was no expert on securities law, in all his reporting after the crash he never encountered anything that made him think somebody ought to go to jail for that, and maybe that was one problem — that the excess and recklessness was legal.
At any rate, most Americans still carry the sour feeling that those responsible for the debacle are still walking free. Yet that feeling is a bit misplaced, like trying to analyze an iceberg while omitting what’s below the waterline; it leaves out the much more significant government role. After all, the phrase “Wall Street greed” is almost redundant.
Cluelessness isn’t a crime, at least not yet. Let’s remember that most of the securities that blew up had triple-A ratings, which tells you Wall Street execs didn’t have a monopoly on cluelessness. Rating agencies like Moody’s and S&P were infected, too.
Politicians of a certain stripe, including President Barack Obama, are ever-eager to supply a simple explanation to those hungering for one. So they refer vaguely to the “policies that caused the problem,” without saying what those policies might be.
Or they blame the whole thing on “deregulation,” without mentioning a specific deregulatory effort. The repeal of a Depression-era banking law that separated commercial and investment banking is sometimes mentioned, and here there’s a measure of plausibility. Repeal of that law helped make big banks bigger — and more likely to threaten other banks in a crash. But even this seems insufficient.
In 2008, it was the failure of Bear Stearns, followed by Lehman Brothers, that triggered the cascade. Yet both were investment banks. They had no commercial deposits, so were unaffected by repeal of a law separating commercial and investment banking.
Of the books I’ve read dealing with aspects of the crash, the one that got closest to the heart of the rot was “Reckless Endangerment,” by Gretchen Morgenson and Joshua Rosner. The debacle originated, they wrote, in the widespread belief in Washington — not on Wall Street — that “every living breathing citizen should own a home.”
In the effort to extend “affordable housing” further and further down the income scale, credit standards became so debased that people who should not have been buying homes at all were signing up for manipulative, unaffordable mortgages.
Why did mortgage originators make those loans to begin with? To a great extent, it was because they could get the bad paper off their books by selling it to the government-affiliated mortgage giants, Fannie Mae and Freddie Mac. To make matters worse, Fannie and Freddie then put taxpayers on the hook by guaranteeing payment.
This wasn’t the first time government efforts to boost homeownership among low-income families resulted in unforeseen consequences. The infamous Section 235 program of the late 1960s decreed that housing credit should be made available to poor renters with little regard to creditworthiness or financial capacity to maintain a home.
The law created many new homeowners, but only briefly. Faced with the need to replace a roof or furnace, many simply abandoned their homes. Section 235 decimated much of urban America’s housing stock, not to mention the credit of the people it was intended to help. It was especially destructive in Kansas City.
There are many lessons here, but one of them is the risk of excessively subsidizing things held to be beneficial, like home ownership. Washington can’t know the “correct” degree of home ownership any more than it can know the “correct” proportion of students who should go to college — which is perhaps why so many people are now worrying that the next bubble to pop will be in higher education.
To reach E. Thomas McClanahan, call 816-234-4480 or send email to mcclanahan@kcstar.com.
Tom Ryan
Crossroads, Kansas City
1 year agoI think an important business-as-usual narrative, possible lesson unlearned, is the continued marriage of banking+investing. Summers suggested reforms and public executions in bank lobbies, while Geithner recommended “stress tests” in accordance with bank lobby groups. And while we narrate this as an American Tale, we should remember that “banking central” is in London, not New York. But many are in that NewYork-centric state-of-mind. England may be in a recession but the “banking business”, such as it is, is alive and bonused very well :-) The next bubble - EuroZone - has burst… the tsunami will reach our shores soon, I believe. The “higher education” bubble to which E. Thomas refers will be a footnote in the larger picture while millions of young American and parents scramble to try to foot the bill for “credit hours” that will receive no bail-out. We no longer have a bilge pump on the USS United States of America. In the meantime, let’s enjoy the Summer Games.
Phil Cardarella
1 year agoClueless is NOT a crime. Wire fraud IS. When you are making recommendations to your clients that they buy securities that you know are worthless — that you call s#!t in your corporate e-mails? When you are dumping those same securities from your own corporate portfolio? Either side of which makes you money?
It is called WIRE FRAUD — and a first-year law student should be able to put half the Wall Street Bonus Babies in orange junp suits, or he should not bother to go back for a second year.
If the Feds put half the effort into prosecuting the guys who brought down the world economy as it did to prosecuting John Edwards or baseball players who used steroids or just average guys who bet on baseball? Well, let’s just say that both political parties would be missing a few high-roller donors.
Mark Hastert
1 year agoThe real problem wasn’t the goal of home ownership, it was allowing borrowers to buy more home than they could afford. Had income/debt ratios (a traditional barometer)been adhered to folks would have had payments that were within their means. But the widespread use of low-doc/no-doc aka “liars” loans helped to build the house of cards. Yes Fannie & Freddie could have refused to accept them but Wall Street was already accepting. packaging and selling them off.
Curious that E, Thomas’ piece omitted the lack of effective regulation of the derivatives market which is the real product that laid us low. Oh the sin of omission….