Your Lying Eyes

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17 December 2011

Illegal? There was Nothing Illegal!

Obama has received characteristically little grief for his claim that the fraud that drove the Wall St. debacle wasn't illegal. For Obama and the left, such quaint, common-law legal concepts like "fraud" are irrelevant in a modern state. Regulations are the way to go - the government establishes detailed regulations and legions of regulators micro-manage firms actions. Fraud - a charge that requires detective work, witnesses, forensic accounting, etc. - is just too messy, too unpredictable to bother work.

Regulations, on the other hand, could prevent these bad actions before they occur, plus direct commercial activity towards achieving policy goals, such as financing for favored projects. Of course that was all tried before - the S&L crisis, the Enron scandal (which begat Sarbanes Oxley, arguably the most burdensome regulatory regime ever) - and it happened anyway.

Fraud prosecutions in this scandal might not have been all that difficult. You start with the borrowers who lied on their applications, and then go right up the chain to the brokers, their managers, the financiers who put together the CDO's and on up to the top. Sarbanes-Oxley itself, which effectively criminalizes incorrect earnings statements, should have been able to bag a few CEO's all by itself. But apparently no one in the Justice Department has found this massive web of fraud anything but an impenetrable morass.

I must confess, though, to having some sympathy for the banksters. Though I have no doubt they engaged in out-and-out fraud, I'm also convinced they're behavior was essentially foisted upon them by the government's minority-lending mandates. Starting early in the Clinton administration and then amped up by W. himself, banks faced the choice of stagnating or aggressively pursuing minority lending. But of course at the same time they are being pressured by the government to take on less profitable business (less profitable because the loans are riskier), the banks are under tremendous pressure by shareholders to be more-and-more profitable.

Well the only way to avoid losses on riskier assets is to increase leverage. So they appealed to the authorities for relaxed leverage rules, requests which the authorities all too willingly accommodated since it was towards a noble cause. But as we all know now, pumping up leverage is like being a mule-skinner transporting nitroglycerine - the pay's good but one bump and it's all over. The CDO's were an effort to share the risk - like paying the other wagons to each take a bottle or two of nitro - but then what happens of course is that when one blows, all the other wagons go up with it.

On the other hand, the banks could have showed some courage and fought back, insisting that no business model could withstand this kind of debasement of best practices. They could have insisted that bank lending is too fundamentally critical to the nation's economic health to be subject to politically correct mandates. But such courage is nowhere to be found in the business world. Indeed, the Diversity Doctrine is so deeply entrenched in corporate culture that almost certainly those in charge actually believe it.

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4 Comments:

Anonymous robert61 said...

I'm sure lots of bankers thought that thought when the Clinton/Bush lending frenzies were respectively getting started. There was no upside to expressing it in print, though.

December 17, 2011 3:41 PM  
Blogger ziel said...

Well, they might have saved themselves a good deal of hell had they fought back - but as it turned out they were right not to fight it since they ended up not going to jail and even getting profitably bailed out.

December 17, 2011 11:11 PM  
Anonymous Dano said...

All the homes built in sacramento, phoenix and las vegas hardly qualify as minority lending. It was pure greed run amok when there are no regualtors. I would have said adults instead of reulatiors but as I get older I meet fewer and fewer.

December 19, 2011 8:07 AM  
Blogger ziel said...

All the homes built insacramento, phoenix and las vegas...

Yes, they were to Hispanic borrowers - the very target of Bush's policy. They were also to white borrowers, and the same "no down payment" policy was applied to them, as well. But the Latino market was the prime target.

From a Wikipedia article on BofA and Angelo Mozillo: Economist Stan Liebowitz writes that the Fannie Mae Foundation singled out Countrywide Financial as a "paragon" of a nondiscriminatory lender who works with community activists, following "the most flexible underwriting criteria permitted." The chief executive of Countrywide is said to have bragged that in order to approve minority applications, "lenders have had to stretch the rules a bit." Countrywide's commitment to low-income loans had grown to $600 billion by early 2003.

Obviously there were plenty of white Americans participating in The Bubble, but Latinos were highly over-represented.

It's debatable, certainly, but I don't think the Bubble happens without the minority-lending drive.

Here is the classic PR Release from Countrywide on its We House America Challenge.

December 19, 2011 8:22 AM  

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