Monday, February 23, 2009

Okay, NOW I'm Angry

I've been reading a series of articles in the Washington Post about the financial crisis, called What Went Wrong. Among all the usual details of greed and insane right-wing anti-regulation ideology, one small fact really jumped out at me: one regulatory board, the Office of Thrift Supervision (OTS) was so lax in its oversight that financial institutions found ways to switch their business so they could be regulated by it.

The OTS is the agency that regulates Savings & Loans.

For those who don't remember, the American Savings & Loan crisis of 1986-1991 was so severe that it cost the US over $160B in bailouts and other costs. It was a cause of years of US budget deficits and was a factor in the 1990-1991 recession. Millions of Americans lost their investments and/or their jobs. At the time it was just about the worst financial disaster imaginable.

We were told that the situation had been corrected so nothing like this could ever happen again. In the "Financial Institutions Reform, Recovery and Enforcement Act of 1989" several reforms were put in place. One was the creation of the OTS.

According to an article in the WaPo series (Banking Regulator Played Advocate Over Enforcer: Agency let lenders grow out of control, then fail):
* The OTS referred to the banks it regulated as "customers."
* It referred to subprime mortagages as "innovations."
* After a major bank failed in 2001 the OTS director admitted to congress that its regulation was too lax, but deregulation continued at an enhanced pace.
* Many of the OTS-regulated banks, such as Countrywide and Washington Mutual, are among the biggest bank failures in history.

The reason for the insanity at OTS? OTS is essentially partly privatized: it is funded by assessments on the banks it regulates, with the most of its budget coming directly from the banks. The banks were its customers. The entire problem was systemic, preventable, and foreseeable. And it wasn't like screwing up O-rings on the space shuttle: the Republican-dominated congress that forced all this deregulation on the country did it to enrich their donors.

They could have paid for regulation by increasing taxes and it could have been exactly the same cost to the banks as lower taxes plus regulatory fees, but the ideology dictates that taxes be low and services be paid by user fees. It's one of those subtle differences that spells the difference between a system that works and a system that fails, in this case spectacularly.



roblaw said...

Ok.. I'll throw my $.02 in.. it is not suprising that neither the Democrats nor the Republicans made a big deal of the massive financial meltdown and its causes during the recent Presidential election - the reason being that there's enough blame to go around..

- Republicans, as you suggest, were only too happy to look the other way, and ignore he need to regulate the grossly excessive loan commitments made to those who could not possibly afford to repay them.. as they were, as long as real estate continued to thrive, making great gobs of money, and when money is being made, who cares about "tomorrow's" risk..

- Democrats - because, the flip side of this unregulated stupidity was that people who had no business buying a home, or buying a bigger home, suddenly had access to a housing market - and gee whiz,isn't that a part of the American dream that everyone deserves, whether they can afford it or not..

As I've posted elsewhere, the fundamental truism in all of this is the complete lack of willingness to delay or reduce gratification. It wasn't enough for savings and loans bozos, and greedy financial firms, to make good profit - they had to make MASSIVE profits.. to hell with the tab down the road. If there is a single financial advisor at Lehman Brothers or AIG who COULDN'T foresee a drop in real estate, well they are either severely mentally disabled or dishonest - I'm guessing mostly the latter..

On the flip-side, no one put a gun to the heads of those people who walked into loan obligations they couldn't satisfy.. no, they also couldn't differentiate their "wants" from "needs".. and bought into homes they knew they couldn't afford..

Net result - those who were prudent, who did the right thing, got screwed.. and those who did the stupid thing - AIG, the Banks, the over-leveraged idiot home-buyers.. they are getting bailed out.

Now I'M angry.

Yappa said...

Hi Rob,

Thanks for the comment. I'm not sure that focusing on the greed aspect is productive though. If we addressed crime by getting angry about human tendency to greed we wouldn't get very far. In any case, the greed has always been there, but an environment was created in which particular people could get incredibly rich (some hedge fund managers were making over $1B a year on bonuses). Why did that happen? It was actually George Bush and the Republicans who were gung-ho for every American owning a home. For much of the years of deregulation, congress was so dominated by Republicans that Democrats didn't have a lot to do with it... but you had the sense that they gave in too much all the same. Starting with Newt Ningrich's "Republican Revolution" in 1994, deregulation was a deliberate part of Repub strategy.

I wouldn't put so much blame on people who can't afford their mortgage. They were perhaps the spark of the crisis, but not the main cause. Also, they were often victims of unscrupulous bankers who were trying to move as many mortgages as possible. Poor people were targeted because they often didn't know their rights or read the fine print. There have already been a ton of class action law suits launched.

And as for the banks... well they knew they'd be bailed out.

Anonymous said...

A contextual point, relevant to the talk about greed. Deductibility of mortgage interest creates a strong incentive for many people to maintain a high mortgage. It seems excessive to say of everyone trying to keep their tax bill down that he or she is 'greedy'. Moreover, if because of this high mortgage and falling house prices the value of the house is less than the mortgage, is it 'greed' to look for ways to get out from under? Yes, 'greed' is one factor, along with lack of regulation of the sort Yappa mentions. But at this juncture it is simply not productive to make a big deal about people's greed. It distracts from the pressing need to get the regulatory system right. Roblaw, ideological disputes are a luxury we don't have time for now.

Anonymous said...

Here's an example of "ideological disputes getting in the way":
In the NY Times report on the government's latest investment in Citigroup we learn that "The announcement comes as the bank said its 2008 loss had spiraled to $27.7 billion, among the largest in corporate history. " Then farther down in the piece we learn that "Investors are also worried that Citigroup’s performance will suffer" [in case the government gets involved in running the bank].

Hello? Without government "interference" the company managed to lose more than any corporation has ever lost, but free market ideologues fear that if the government gets involved "performance will suffer".
Should we laugh or cry?