Meltdown redux

By David Cay Johnston
November 15, 2011

The author is a Reuters columnist. The opinions expressed are his own.

KANSAS CITY, Mo. –  The U.S. politician-businessman that Congress put in charge of determining the reasons for the 2008 financial crisis has a sobering message for us: “It’s going to happen again.”

Phil Angelides, the real estate developer and former California state treasurer who chaired the Financial Crisis Inquiry Commission, said on Friday that “all across the marketplace the warning signs were there” of a coming disaster but the mechanisms and political will to stop it were not.

He and I both spoke at a University of Missouri-Kansas City Law School symposium on the financial crisis and the commission set up to examine it.

Angelides warned of a recurring economic nightmare unless Congress and the next president start paying attention to the facts and stop listening to the people who caused, profited from or failed to detect the crisis.

While Wall Street and laissez faire Republicans have attacked the commission’s final report — all 22 footnoted chapters of it — Angelides boasted that not one fact had been proven wrong.

Statements from the leading Republican presidential candidates, as well as the tepid actions of President Barack Obama, show an active interest not in fixing the problems, but rather in enabling Wall Street to go on doing business pretty much as it chooses.

SQUELCHED OR IGNORED

For months now, a canard has gained popular currency through mere repetition: no one could have seen the meltdown coming.

The commission’s report shows that a number of people did see what was coming but they were squelched or ignored. Clear back in 1998, four months before the Long-Term Capital Management collapse, Brooksley Born, then chairwoman of the Commodity Futures Trading Commission, wrote a paper predicting that disaster would flow from the unregulated sale of derivatives. Congress responded by making sure derivatives were not regulated.

Then there were the internal reports at failed mortgage banker Countrywide Financial, which warned there was little-to-no hope that many borrowers would ever repay. Freddie Mac and Fannie Mae tried to resist these shaky mortgages, but they had to keep taking them after Countrywide founder Angelo Mozilo applied political pressure.

In early 2004, after detecting a mortgage bubble in the data, I wrote two pieces for the New York Times warning of the problems. If a mere journalist who was not even reporting on real estate could discern the problem, what excuse was there for those whose job it was to monitor the situation?

Wendy Edelberg, who was the commission’s executive director, said on Friday that “while you can never predict all panics, the flip side is this crisis was caused by human actions and was avoidable.”

She showed with hard numbers that, contrary to the nonsense being peddled by Wall Street and the politicians it finances, the meltdown was a Wall Street creation.

Edelberg presented charts showing that loan delinquencies “were lower by an order of magnitude” for government-sponsored Fannie and Freddie than for Wall Street’s mortgage-backed securities. Delinquencies at one point were 15 percent for Fannie and Freddie versus 40 percent for Wall Street.

Edelberg also outlined who bought the obviously bad loans. No one did.

She compared the bad loans to soup with so much fat no one wants it, so it is put in the refrigerator. Once the mixture chills the fat rises to the top and is skimmed off.

EXCESS FAT

By 2006 more than 80 percent of the sure-to-fail loans were inside collateralized debt obligations that were being repackaged and resold like so much excess fat. “No one was actually buying the risk,” she said. “It was just being recycled.”

This is exactly what Washington politicians in both political parties, with their eye on donations from Wall Street, do not want to hear.

One of the best proofs of official lack of interest in learning the facts is the size of the commission budget Congress authorized: $9.8 million.

That is a tiny fraction of the $175 million spent investigating the Space Shuttle Challenger disaster in 1986, and that was in 1980s dollars. It is less than a quarter of what Kenneth Starr spent investigating President Bill Clinton‘s dalliance with an intern.

And then there is the official hostility to the commission. When the report was issued in January, Representative Darrell Issa, a California Republican and one of the richest self-made men in Congress, mounted an investigation.

Angelides characterized the move as a search for just one email showing the inquiry was motivated by ideology rather than truth-seeking. Issa came up dry, but his message was loud and clear: don’t mess with Wall Street.

What the commission’s report has shown is that leaving Wall Street alone will ensure a future of continuing panics, to the detriment of everyone who is not part of Wall Street.

20 comments

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This is an excellent article. Of course many saw the melt down coming, as avid news readers know. And the reluctance of conservatives to accept the truth when it comes knocking is so very clear in this instance. Part of it is normal selfishness, but it has been shown in several studies that conservatives have great difficulty changing their minds. When presented with the actual facts, they tend to dig in even deeper.

Posted by justine184 | Report as abusive

Further proof, as if we needed any, that the OWS protesters are 100% correct that unchecked corporate greed is what destroyed and is continuing to destroy the economy and Washington is completely unwilling to do anything to stop it. But what do they know. They’re just a bunch of dirty lazy commie freeloaders who should just shut up and go get a job.

Posted by 4ngry4merican | Report as abusive

Not surprised. People usually do what appears to be in their own best interests… And money is not democratic.

Posted by matthewslyman | Report as abusive

[I just wonder when the U.S. Supreme Court will admit their mistake on judgements w.r.t. political campaign finance... Do they ever clearly reverse a previous Supreme Court decision?]

Posted by matthewslyman | Report as abusive

In short, the protestors are right, but the message is drowning in their image. That image is currently being hijacked by the violent few who are thugs (not anarchists: No self-respecting anarchist turns to vandalism first) and agents provocateurs.

My take on the message: 1) Corporations aren’t people…unless you count sociopaths as people; 2) It’s OK to rich as Croesus, but not through the misery of any other man. 3) Invest in all of America: It pays.

Posted by AwakeInDanville | Report as abusive

This article is contrary to most of the known facts, primarily because its main source, Mr. Angelides, is a long time political hack who had to retire from California politics and take up shady business practices because his corruption while in office was so outstanding even the Democratic party which runs our fair state could no longer sweep it under the rug.
Read any of Peter Wallison’s descriptions of Angelides’ manipulations of the commission he chaired and which Wallison was a member of to find out how reliable this article is.

Posted by mudpuppy | Report as abusive

The financial crisis happened because President Clinton forced banks to make mortgages that could not be repaid. If those loans had not been there, the “fat” would not have been in the soup and could not have been “skimmed off”. Once again a policy was based on “feel good” ideology rather than sound actions. The same sort of nonsense is going on today. If the US makes plans based on feelings, nothing is ever going to work in the process of getting the country back into fiscal reality.

Posted by stevedebi | Report as abusive

A specific point and a more general point.

When you look at mortgages you have to know when they were made. A terrible morgtgage written in 2003 would not have gone delinquent, because the house would simply have been sold for a profit. Since more GSE mortgages were written early on and more private label mortgages later on, that presumably accounts for a lot of the difference. That doesn’t mean that the latter were not extremely reckless, but it does not mean that it’s not an apples to apples comparison.

More generally, it’s not helpful to cast this in a partisan light, which is the subtext of a lot of these kinds of articles. There were maybe a dozen reasons for the housing crisis. A few were Democrat in the sense that Democrats like the government to get involved the private sector more than Republicans. And housing is a pure private good. But lots were neither, like untested technology or the pressure put on Wall Street from European banks that were ratcheting up leverage, moving to principles based regulation. And as for the belief that banks would self-regulate, that really was the Chicago School, and though it’s true that we usually associate them with Republicans, in the event, it was Summers and Rubin, who really pushed that view, when it mattered. They were the ones who whacked Brooksley Born, for example. (And weren’t most of those AIG derivatives written out of England?)

What we should all agree is that government should not try to distort prices in the private goods sector of the market. And that finance is and always has been both a market failure and inherently unstable. Which we already knew, but somehow forgot.

Posted by CobbleHill | Report as abusive

Once again David Cay Johnson “gets it” when few do and makes a solid case. Those who see and speak truth are rare, and America shall ever more be relying on them as our present economic convulsions sort themselves out.

America is an out of control car speeding downhill with no one at the wheel. At the same time I do NOT believe the OWC protesters have any unique knowledge or ANY genuine remedies to offer. I DO agree that a majority of those elected to “represent us” do NOT, in fact, do so.

That’s no one’s fault but our own, and no one can “fix it” but us.

Posted by OneOfTheSheep | Report as abusive

I think the leadership in Government, and most of the commentors here do not get it. We have a system that is unstable and does not work. We have a Government that is part of the system and corporations and banks that do not know how to operate in a fair above board manner. This will not end until the Congress and the President are wheeled out sitting in their chairs by men with refrigerator movers. They will then be moved into a warehouse where they will continue to blather while sane men and women intitute a governmental system that works.

Posted by fred5407 | Report as abusive

@fred5407,

I agree completely. Now, how do we bring this to pass?

Posted by OneOfTheSheep | Report as abusive

Great Op-ed piece… too bad nothing will ever come of it.

Get ready for third-world status America, because that’s where we are headed…

Posted by edgyinchina | Report as abusive

The crisis from 2008 was just a warm-up.

Posted by KyuuAL | Report as abusive

The crisis from 2008 was just a warm-up.

Posted by KyuuAL | Report as abusive

It may already be too late to do anything about Wall Street’s stranglehold on the US Government. They have a lot of power and are able to manipulate the economy to their advantage. How can you ask the politicians not to take money from Wall Street, when they need the money to get elected? I would like to see an immediate ban on television commercials for political campaigns. That would be a good start.

Good article, thanks for speaking up. If the media won’t give voice to the people’s concerns, as opposed to the 1%’s concerns, we are doomed as well.

Posted by lhathaway | Report as abusive

This is a good article. Glad to have discovered your work. Will get your book to see how things have been and may be headed. I was sure there was a lot of balogna 8 yrs back. I make 72K and my mortgage of 165K was enough to choke me at 5.1/4. I would see people I knew that I thought they could not possibly afford the mansion they were in. Well several of them “walked away” and now my home value stinks! What’s next?

Posted by rcd1160 | Report as abusive

My understanding is that primarily the politicians are to blame, both republican and democrat. It started with Jimmy Carter, who, in a fit of bon ami, directed banks to loan some of your money to people who could not afford to pay it back. Politicians since then have embellished this policy and the banks just loved the new business, sorry bonuses. The rest is history, which I have no doubt will be revisited.

Posted by seaking | Report as abusive

@OneOfTheSheep

You ask, “how do we bring this to pass?”

Can’t do it with the established two-party system. Only a movement to elect leaders and representatives that run outside that system and are not dependent on it for support.

Before the internet connected us all that wouldn’t be worth even thinking about. Impossible. Now it is just extremely difficult, no longer inconceivable.

2+ million of us are already involved here: http://www.americanselect.org/

Posted by TerryOtt | Report as abusive

MarketForce: Here is a paragraph from an article on the Clinton Administration forcing the banks to make loans to people who could not afford them.

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

Read the whole article.

http://www.city-journal.org/html/10_1_th e_trillion_dollar.html

Posted by Buzz4 | Report as abusive

This article is well written but leaves out the fact that Dr Ron Paul saw this coming and warned congress about it and even introduced legislation that would’ve prevented the crisis but was ignored by congress. It also fails to mention the Community Reinvestment Act and the pressure put on banks by the Clinton administration to ease their mortgage loan restrictions and loan money to more and more people who were marginally able to pay the loans back. Fannie and Freddie then stepped in to buy up the sub-prime loans which gave the banks more money to loan in the same manner and we are now living in the result of that policy.

Posted by snake0311 | Report as abusive