Bush and the Financial Crisis
As things have settled a bit in this new post-meltdown, perpetual-bailout reality we live in, it's become much clearer what caused it all. Owners demand high returns and low risk. Well that can't be done. Unless you make up your returns (like Madoff) or hide your risk (like everyone else). You can't say 'no' - that's not an acceptable response. Oh, sure, it is at first, but once someone figures out how to hide the risk, then the pressure builds, and there's no staying out of it.
I'm sure there are lots of ways to hide risks - off-balance sheet and all that. If you're a regulated institution, you've got Tier 1 capital and reserves to worry about. You need a rating agency's imprimatur to show to regulators and shareholders that you've got your risk under control. Or you can "insure" your assets.
As a Sailerite, I've read GWB's horribly irresponsible call for jettisoning the old-fashioned notion of "downpayments" in favor of an "ownership society" many times and despaired at his catastrophic naivety. I'm all for the free market, but to think that these "market-based solutions" can get blood from a stone is just stupidity. But what's gone through my mind lately - what if this wasn't free-market naivete at all?
Isn't it likely that this idea - of pushing no-down-payment mortgages - for poor Hispanic immigrants in particular - was concocted by someone in the mortgage business rather than being some well-intentioned though hair-brained scheme of some neocon ideologue? The hunger for new investment instruments that could be packaged up as AAA-rated securities and insured via CDS was very deep, and so someone figured out that mortgages could sate this appetite, and somehow managed to secure for their sordid plan the endorsement of none other than the President of the United States.
This was a long time ago, too - back in 2002. So who was it - who was the blood-sucker that managed to get Bush's ear - and who was his go-between?
Of course it could well have more simply been Angelo Mozilo pushing for CRA credits in his efforts to expand Countrywide. But he could have been more a pawn in this game as well, being used by those pushing for more securitization opportunities.
I'm sure there are lots of ways to hide risks - off-balance sheet and all that. If you're a regulated institution, you've got Tier 1 capital and reserves to worry about. You need a rating agency's imprimatur to show to regulators and shareholders that you've got your risk under control. Or you can "insure" your assets.
As a Sailerite, I've read GWB's horribly irresponsible call for jettisoning the old-fashioned notion of "downpayments" in favor of an "ownership society" many times and despaired at his catastrophic naivety. I'm all for the free market, but to think that these "market-based solutions" can get blood from a stone is just stupidity. But what's gone through my mind lately - what if this wasn't free-market naivete at all?
Isn't it likely that this idea - of pushing no-down-payment mortgages - for poor Hispanic immigrants in particular - was concocted by someone in the mortgage business rather than being some well-intentioned though hair-brained scheme of some neocon ideologue? The hunger for new investment instruments that could be packaged up as AAA-rated securities and insured via CDS was very deep, and so someone figured out that mortgages could sate this appetite, and somehow managed to secure for their sordid plan the endorsement of none other than the President of the United States.
This was a long time ago, too - back in 2002. So who was it - who was the blood-sucker that managed to get Bush's ear - and who was his go-between?
Of course it could well have more simply been Angelo Mozilo pushing for CRA credits in his efforts to expand Countrywide. But he could have been more a pawn in this game as well, being used by those pushing for more securitization opportunities.
posted by ziel | 5/27/2010 11:12:00 PM
4 Comments:
That's a distinct possibility. It would be hard to tease out the causal chain, though. Bush and most of his handlers probably more or less believed that "ownership society" stuff and thus would not have this kind of narrative in mind, even if it were true.
Yeah, they were certainly amenable to such beliefs, and I recall the germs of such beliefs - that owning a home magically turns one into a responsible citizen - well before Bush. But would such an ideology actually push someone to draw up and initiate a policy? It takes a lot to get the attention of White House policy makers to the point of it leading to a presidential initiative - so that's why I suspect this had more nefarious than altruistic motives. But I agree it's a toss-up at this point.
Alyssa Katz of Mother Jones magazine has a book "Our Lot" on the liberal roots of the mortgage meltdown.
The Clinton Administration and their boys at Fannie Mae were pushing hard in the 1990s to get more people in debt on the twin rationalizations of the American Dream and I Have a Dream! But, they had to be a little cautious about it for fear of GOP criticism.
There was a subprime bubble and bust in the 1990s, but it was pretty small scale, with most of the players having pretty dicey reputations. So, there were always businessmen out there ready to get into the subprime racket if the climate was right.
Once the GOP takes over the White House, however, and decides to run with what the Democrats had laid down, there's no more political restraints on this tendency from the opposition. Why worry? It's our boys in there, and surely they wouldn't betray us? (This dynamic happens a lot, by the way.)
Another thing that developed was the growing rapprochement between leftist community redevelopment pressure groups and lenders. ACORN gets talked about a lot, but they were usually too lowbrow and chaotic to have a systematic influence. In contrast, the smart boys at, say, the Greenlining Institute figured out there was a real business model in putting the Leftist Stamp of Approval on aggressive lenders: they're not engaged in predatory lending, they are fighting redlining!
And, I'd point to the shifting balance of power in financial regulation from the states to the feds. State attorney generals were more cynical about subprime than Washington. For example, 49 state attorney generals nailed Ameriquest with a quarter of a billion dollar fine just as Congress was approving Ameriquest's CEO as Bush's new ambassador to the Netherlands. But state laws (e.g., usury) were considered terribly out of fashion.
I would hypothesize that a minority mortgage meltdown was inevitable at some point given the reigning cultural taboos and legal doctrines.
I would guess that the single biggest force on the business side was Angelo Mozilo's decision to grow Countrywide's share from 10% to 30% to 40%. This dovetailed nicely with Mozilo's apparently sincere belief that minorities were underserved with loans due to prejudice, which he repeatedly propagandized for. He believed he was going to do well by doing good.
On occasions, Mozilo would wake up and send out internal emails warning his underlings to stop making so many risky loans, but he seemed incapable of drawing a systematic realization that his most cherished beliefs in diversity were disastrous.
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