Archive for Thursday, March 20, 2008

Regulators also share blame

March 20, 2008


There are uncountable culprits and dupes in the extraordinary chain of events that finished Bear Stearns, Wall Street's fifth-largest investment bank.

But at its heart the crisis is a failure of regulation. If not for the Federal Reserve's and the Bush administration's refusal to stop crazy mortgage lending, former Bear boss James Cayne still would be chewing cigars in his Manhattan office, counting his money and complaining about regulators.

And the country wouldn't be headed toward what might be the worst recession in decades.

Mortgage fraud had gotten so bad in 2004 that people at the Federal Bureau of Investigation wanted Washington to intervene and start regulating mortgage brokers, FBI analyst Jeffrey Nun told Origination News late that year.

The administration, as part of its wider promotion of light regulation and freer markets, pooh-poohed the idea.

"It's not clear there's a federal role" when brokers were already regulated in many states, Treasury assistant secretary Wayne Abernathy told the housing trade publication. This even though states were obviously botching the job.

Abernathy was a frequent and reliable critic of proposals to stop the kind of mortgages that have brought the financial system to the brink. It was perfect training for his present job as executive director of regulatory affairs for the American Bankers Association - representing institutions that issued many of the stupid loans and sold them to hapless investors.

Consumer advocates pleaded with banking regulators to take action in 2005. They worried deeply about interest-only mortgages, "option ARMs" and other complex loans. They were concerned that banks were ignoring borrowers' ability to repay "stated income" and "liar" loans that didn't require documentation.

Don't worry, said Washington.

"We don't want to stifle financial innovation," Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation, told The New York Times. "Normally, we think that if consumers have a lot of choice, that's a good thing."

Federal Reserve chief Alan Greenspan fretted about subprime and exotic mortgages, too, and he did a great job of describing the danger.

"In the event of a widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses," he said in a 2005 speech.

But Greenspan did little to stop the poison loans, even though Congress had told the Fed to do just that. The 1994 Home Ownership and Equity Protection Act directed the Fed to write rules banning "unfair and deceptive practices" across a variety of mortgage lenders, says Allen Fishbein, director of credit and housing policy for the Consumer Federation of America.

But the Fed didn't do anything until December, when under Chairman Ben Bernanke it moved to ban liar loans and require other reforms.

Pressure on Washington to do something became so great that in 2006 banking regulators issued "guidance" on what were cutely described as "nontraditional" mortgages.

Among other things the rules urged lenders to make sure borrowers could repay the money, a radical concept at the time. But they said next to nothing about the worst loans of all - subprime mortgages for people with terrible credit histories. Only a few subprime loans fell under the rules, says Fishbein.

Regulators didn't get around to issuing guidance on subprime mortgages until the middle of 2007 - after several subprime lenders already had sought protection in bankruptcy court. Even then, the guidance pertained only to institutions directly supervised by a given regulator - leaving many companies between the cracks.

Bear Stearns was at the heart of the subprime swamp, although it was hardly the only player. It and its partners invested billions in low-grade mortgages as well as better-rated notes that lost value as the market deteriorated.

The end came when financial partners called its obligations all at once and the company couldn't comply. Mortgages and numskull regulation, however, were the ultimate cause.

Sure, blame Bear for thinking it could manage the risk of junk mortgages. Blame moron consumers for taking loans they couldn't afford. Blame greedy originators who wrote bad loans for big fees. But don't forget the government officials who stood by and watched while these folks ushered the country down the garden path.


just_another_bozo_on_this_bus 9 years, 11 months ago

Surprise, surprise-- BushCo, drunk with the ideology of greed, serves up yet another helping of incompetence.

avoice 9 years, 11 months ago

What is amazing to me is the dearth of comparisons to the one event in history that the current debacle so closely resembles: the stock market crash of 1929 that ushered in the Great Depression. There is a reason why writers who (dare to) mention this period in history give it a proper name. It was global and unprecedented. And, like the World Wars it was sandwiched between, it was an event that major countries worldwide planned to avoid in the future. A number of regulations were put into place to tamp down the greed and insanity in the stock market that led to the crisis. Too bad we didn't even make it one century before we forgot those lessons and allowed profiteering to overtake sanity to such a foul extent once again.

Richard Heckler 9 years, 11 months ago

People should be publically outraged that this was allowed to happen. It should also paint a vivid picture of why deregulation should never have taken place. The bogus free market is not free to taxpayers. The bogus free market does not possess self discipline just like the Bush family of politicians.

It would be best to bring back regulation throughout corporate america because private industry cannot regulate itself and steals from taxpayers by way of elected officials.

It happens in Lawrence,Kansas almost like clockwork each time the city and county commissions meet.

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