Felix Salmon

A Carney-Ritholtz CRA debate?

Felix Salmon
Jun 29, 2009 13:39 UTC

Has John Carney found a backer for a public debate with Barry Ritholtz over whether the Community Reinvestment Act was significantly to blame for the credit crisis? Barry wants the loser to pay the winner “any dollar amount between $10,000 up to $100,000″, which could make it very interesting. (And I think it’s only fair to ask that Carney put up at least some of his own money.)

The tough thing, of course, will be finding “a fair jury”, but I don’t think that will be insurmountable. I will be happy to help out in any way I can, although of course I make no claims to impartiality.

Update: Carney’s serious about taking Ritholtz’s bet, and is asking for backers.

Update 2: Barry has updated his post to say that Carney’s plea for backers isn’t kosher, but he’s leaving the door open if Carney can come up with “something of comparable (non-monetary) value”.


barry says if cra was the problem, then cra banks should be first and most in the bad loan dept.
this requires one to believe that mortgage brokers don’t know what’s going on in the market and aren’t interested in getting a piece of the no doc loan action until the cra banks have had a nice long non-competitive crack at it.
only idiots that don’t know how markets work believe that.

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Deceased icon datapoint of the day

Felix Salmon
Jun 29, 2009 11:52 UTC

From the WSJ:

After the deaths of other major stars, including Elvis Presley, in 1977, and Kurt Cobain in 1994, around half of outstanding concert tickets were never returned for refund, according to people in the concert business, because fans preferred to keep them as souvenirs.

Is it possible that AEG will end up making more money now the shows have been cancelled than it would have had they gone ahead?


I would guess that most of the tickets to the upcoming shows havent been printed/mailed yet. Also, many tickets these days are electronic or will call. Thus, while the souvenir factor will undoubtedly influence some physical ticket holders I would think that this is not the majority of the people who actually paid for seats.

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Friday links reinvest in the community

Felix Salmon
Jun 26, 2009 21:52 UTC

Ryan Chittum buries Carney on CRA

Yes, you can raise tariffs on countries which don’t have carbon caps or taxes

Did the WSJ’s Robert Thomson really say that “readers are losers in a world of content verticals… society is content horizontal”?

Nemo tries valiantly to translate John Jansen into English, with mixed success

Krugman refuted Carney’s points about the CRA before Carney even made them

Jack Welch’s reputation takes another downward lurch as he pushes denialist nonsense from the WSJ editorial page

Ritholtz weighs in on the CRA debate


The other problem with the CRA is bad argument is when you flesh it out. The CRA caused the housing bubble, which when popped caused the crisis. So if the CRA contributed to inflated home prices, no one was complaining when home prices were going up. This is the same as the tech bubble when people were not concerned about millions funneling to worthless dot-coms as long as their stocks went up.

Take an original $100k home, bad subprime loan pushes price for buyer A, to $150k, the seller of that home (B) pumps a $200k home to $400k with an interest only no-down loan. That seller (C) pumps a $400k home to $800k, and on. B & C were not complaining about the quality of the loan to A because they got ‘rich’ off it.

A defaults first, then B and most likely last C. A, B, and C all did the same thing and poor underwriting was on all three loans. It is hypocritical for B & C to benefit off the initial loan and then to call foul when things turn. This applies even to the toxic non-CRA related loans. People who were in it thick need to accept their responsibility and take their losses and not try to shift blame.

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On this we agree: CRA loans weren’t the bad loans

Felix Salmon
Jun 26, 2009 21:29 UTC

John Carney and I, not content with blogging the CRA, ended up IMing about it as well this afternoon. Here’s one of the more interesting bits of the conversation, in which Carney concedes that CRA loans performed rather well, and that it was banks’ move into non-CRA subprime loans which was the real problem. Which really makes his recent crusade against the CRA all the more puzzling.

Felix Salmon: You have no evidence at all for a causal relationship between lending to lmi [low and middle-income] borrowers and inflating the subprime/housing bubble

John Carney: Oh, I’m not at that claim yet.
I’m only at loose lending standards.

FS: but only for lmi, which was not the locus of the problem

JC: I don’t think you get the bubble without the Fed holding down interest rates and a global savings glut
You would have had loose lending standards but not a huge demand for mortgage products.
It was when the investor demand combined with loose lending standards that you got the bubble.
So I’ve been explaining how we had loose standards all set up when the money started pouring in to mortgages.

FS: but how do you explain how the loose lending standards jumped the wall over to non-CRA loans?

JC: Because the CRA loans were performing so well!


JC: So, ironically, the poor were paying off their loans so well that bankers made similar loans to the relatively wealthy.
And that blew up the world.

FS: So really the CRA worked — it got banks to make good loans to people who would pay them back
and then the banks, fools that they were, started extrapolating

JC: I don’t have data on that.
But, yes.
Bankers believed they were working.
There’s also another angle: CRA meant banks who believed in loose lending standards grew, while the stingy types didn’t.

FS: Or maybe it was the banks which were making good loans who grew…

JC: Well, those who didn’t do big LMI lending were barred from growing.

FS: Um, I am vaguely familiar with CRA requirements. “Big” is putting it a bit strongly I think.

JC: Bigger?
Anyway, there was a lot of pressure to acheive an O rating

FS: CRA is actually pretty weak, any halfways-decent bank should be in compliance anyway

JC: That’s an entertaining argument that was strenously denied by CRA supporters until recently. They stressed its effectivensss.
search “CRA” on the Brookings Institute website

FS: It was effective precisely because it acted in banks’ self-interest

JC: Again, I agree that banks agree with you. I still haven’t seen the data to know (a) if it was in their self-interest and (b) whether that was just a function of rising prices.

FS: But you’ll agree that there’s a very strong possibility that the consequences of CRA were positive for banks, and for lmi borrowers,
and that it was non-CRA lending which caused substantially all of the problems

JC: Oh, sure. As long as they confined their loosey lending standards to CRA loans, they’d probably have been okay. Even if those were loss making, it wouldn’t have been catastrophic.
The broad application of CRA standards was a disaster.

FS: well, no. If banks had underwritten their subprime loans with the same assiduousness they applied to their lmi borrowers, there wouldn’t have been a problem. There was never any such things as a NINJA CRA loan

JC: Well, there’s also the problem that to make CRA loans you had to market them, which brought in borrowers who wanted No Money Down but weren’t CRA candidates.

FS: that’s a real stretch
I don’t think there was ever any lack of demand for CRA loans which had to be countered by lots of marketing for these things
if you wanted to make more CRA loans, you could always just call up your local CDFI
much easier

JC: I think you over-estimate the ease of making CRA loans.
It was hard!

FS: the underwriting is hard. Finding the borrowers in the first place is easy
as someone who sits on the board of a cdcu with effectively zero marketing budget, I can assure you of that


Is there any data on what percentage of non-CRA originated loans ended up in CRA-Eligible and/or CRA-Investments Funds purchased by the GSEs and CRA-regulated institutions to bolster CRA targets?

Dow Jones Newswire (05/20/03) ; Kopecki, Dawn
Freddie Mac has embarked on a plan to aggressively purchase and repackage mortgages originated by small lenders. The government-sponsored enterprise is reselling them at a premium to banks that are looking to bolster their low-income investment scores with federal regulators.

Pitch from Freddie Mac, Mortgage-backed Securities &
Collateralized Mortgage Obligations:
Prudent CRA INVESTMENT Opportunities

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Annals of regulatory incompetence, FSA edition

Felix Salmon
Jun 26, 2009 20:26 UTC

Remember Paul Wilmott’s question to an audience of quants?

You are in the audience at a small, intimate theatre, watching a magic show. The magician hands a pack of cards to a random member of the audience, asks him to check that it’s an ordinary pack, and would he please give it a shuffle. The magician turns to another member of the audience and asks her to name a card at random. “Ace of Hearts,” she says. The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card. The question to you is what is the probability of the card being the Ace of Hearts?

As Wilmott says, there is no correct answer to this question, but there is an incorrect answer, which is one in 52. Magicians are in control of what’s going on, and there’s no way that any magician would leave this kind of thing entirely to chance.

Wilmott just talked about this to an audience of about 100 people: 97 actuaries, and 3 employees of the FSA, the UK’s top financial regulator. All but one of the actuaries understood pretty quickly why the 1-in-52 answer was wrong. But two of the three FSA employees remained adamant that 1-in-52 was the right answer, even given the magic-show context:

One of them explained his reasoning. I cannot remember the details, it was quite lengthy, but the essence was that “The answer should have been one in 52 except that the magician was tricking us and so really we should ignore this factor…” (I apologise if I have got this wrong, but from the reaction of the audience I don’t think I have!)

Now forgive me but isn’t the FSA supposed to be operating in the real world in which things are just not about pure mathematics? A world in which risk managers hide risk, moral hazard is rife and magicians do, er, magic. Isn’t that sort of the entire point? If it was all about the maths then we wouldn’t have the FSA, we’d use someone like the EdExcel examiners to give banks marks out of a hundred at the end of term.

The FSA, famously, is a principles-based regulator — the kind of entity which is meant to be able to look at the totality of what’s going on rather than at unhelpfully narrow questions. But a principles-based regulator is only as good at its employees, and if the FSA’s employees are going to be so rule-bound as to insist that 1-in-52 is the only correct answer to Wilmott’s question (as opposed to the only incorrect answer to Wilmott’s question), then you haven’t really achieved anything at all.

As ever, the important thing, when it comes to regulators, is that they’re smart and powerful and unlikely to be snowed by bankers who make orders of magnitude more money than the people regulating them. Such regulators can and do exist — but there aren’t very many of them. And if you set up a system with lots of regulators — the Fed, the National Bank Supervisor, the FDIC, the SEC, the CFTC, the FHFA, Treasury, etc etc — you pretty much guarantee that you won’t be able to staff them all with quality employees. Which is one reason why the Obama administration’s regulatory-reform proposals don’t go nearly far enough.


Go on then… the tension is killing me,

was it the Ace of Spades?

Paying for failure, TCI edition

Felix Salmon
Jun 26, 2009 19:35 UTC

Tom Cahill, June 24:

Christopher Cooper-Hohn’s $9.5 billion hedge fund proposed cutting fees and easing withdrawal limits to retain clients after top executives quit and it lost 43 percent last year, according to three investors…

TCI earmarks a portion of its fees for the Children’s Investment Fund Foundation, a charity run by Cooper-Hohn’s wife, Jamie. The effective fees, split between the fund and the charity, had been 2 percent until losses in 2008, said the TCI investors.

Matthew Bishop, June 26:

As The Economist went to press the Children’s Investment Fund Foundation, a charity based in London, was due to announce that it had received a whopping £495m ($812m) in the 2008 fiscal year from TCI, a hedge fund, under covenants built into the fund when it was founded by Christopher Cooper-Hohn in 2003.

$812 million is 8.5% of $9.5 billion. Just sayin’.


Maybe it was being paid on 2/20 as well?

(Who gets the tax deduction?)

Housing datapoint of the day, Sheila Bair edition

Felix Salmon
Jun 26, 2009 15:54 UTC

Have you ever wondered who actually buys those weird swim-without-moving treadmilly swimming pool things which seem to have insatiable demand from New Yorker readers? The answer, it turns out, is Sheila Bair:

Last week, Ms. Bair removed her 14-room colonial in Amherst, Mass., from the market after cutting its sale price by $100,000 from an initial $795,000 in April…

Ms. Bair, and her husband, Scott P. Cooper, paid $355,000 for the house in 2002. In ’02 and ’03 they received building permits valued at $89,500 to renovate the 1860s house., including new roofing and a counter-current basement pool…

An FDIC spokesman said Ms. Bair decided to remove the listing and wait for the market to improve on the advice of her real-estate agent.

If you think of the housing boom as basically running from 1997 to 2007, Bair bought her house halfway through, and put in a total of $444,500 between purchase price and renovations. She then tried to sell it after the housing bubble had burst for $795,000 — and finally withdrew the house from the market last week in the hope that the market would improve; she was clearly willing to accept no less than $695,000 for the property.

What this tells me is that the market is still in denial: there’s no way this house is more likely to go up in value than down. Even if it does have a counter-current basement pool.


“but with real shopping on the fringes – Walmart, Target, etc.”

ROTFL! Let’s go have some real manly shopping at Target…

Both Smith and Amherst’s endowments are down (like everyone else’s) and the cuts are just beginning. Pricing pressure in this area will continue.

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Goldman Sachs responds to Taibbi

Felix Salmon
Jun 26, 2009 15:15 UTC

I just got off the phone with Lucas van Praag, the top flack at Goldman Sachs, who called Matt Taibbi’s piece on the bank “hysterical”. He also sent me an email, which makes some specific responses to Taibbi’s points:

Having read your piece about Matt Taibbi’s article in Rolling Stone, I wanted to set the record straight, particularly about “regulatory capture”.

Background: Under the Commodity Exchange Act, the CFTC (for agricultural futures) or exchanges (for energy/metals futures) established speculative position limits. As much as anything else, the limits are intended to prevent market imbalances that would result in failures of the ultimate settlement of the futures contracts.

The CFTC rules exempt “bona fide hedging” transactions from these spec limits. A bona fide hedging transaction was originally understood to be an actual producer/consumer who was selling or buying the underlying commodity and wanted to hedge risk of the price moving up or down. In 1991, J. Aron wanted to enter into one of its first commodity index swap transactions with a pension fund. In order to hedge our exposure on the swap, we wanted to buy futures on the commodities in the index. We applied to the CFTC for exemption from position limits on the theory that even if we weren’t buying the commodity, we had offsetting exposure (in our swap) that put us in a balanced/price neutral position. The CFTC agreed with our argument and granted exemption. By the way, each of the then Commissioners signed off, so it was hardly a secret…

The CFTC published a report in August 2008, indicating that there were few instances when entities would have exceeded spec limits, had they applied to OTC positions.

Yesterday, as you probably know, the Senate Permanent Sub-Committee on Investigations issued a report on wheat futures in which they concluded that divergence between prices for actual wheat v. wheat futures is being caused solely by index investment. The Committee’s recommendation is that hedge exemptions which support indices should be phased out.

Not quite so recently, the elimination of Glass Steagall doesn’t exactly provide a robust argument for regulatory capture. And Taibbi’s bubble case doesn’t stand up to serious scrutiny either. To give just two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.

Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?

We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.

Van Praag is right that if the Senate is recommending that Goldman’s exemptions in the futures market be phased out, then the Senate, at least, has not been captured by Goldman. And he’s also right that Goldman can’t really be blamed for creating either the tech-stock bubble or the housing bubble — it was a relatively minor player in both.

But you don’t read a Taibbi rant for an evenhanded look at both sides of a complex story. It’s more a forcefully-put case for the prosecution: some of his charges might not stick, but he’ll throw a few chancers in as well for good measure. (Interestingly, though, even Taibbi didn’t try to include Ben Stein’s ridiculous conspiracy theory about Goldman’s chief economist trying to drive down the prices of mortgage bonds in order that Goldman could profit from its short positions.)

I disagree with van Praag that the CFTC exemption given to J Aron “was hardly a secret” — as far as I know, there was no contemporaneous reporting of it at all, either in the press or in Goldman’s own filings. And although there’s a strong case to be made that Goldman has failed to capture the legislative branch (see for instance Chris Dodd jumping on the Ben Stein bandwagon), I think there’s a pretty compelling case that both the executive branch (home to countless Goldman alumni) and the regulators, like the CFTC, have a pretty strong track record of doing whatever was in the best interests of Goldman Sachs.

Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service. Maybe that’s for the best. They are generally smart and talented and knowledgeable people, and I daresay that many of them have done a lot of good after leaving the firm and joining government. At the same time, however, we’re supposed to have a government of the people, not a government of multimillionaire Goldman Sachs technocrats. And when you have the latter, you’re inevitably going to end up with a lot of mistrust and conspiracy theories sooner or later, whether they’re well-founded or not.


Here is what I think of Goldman’s absurd bonuses, enjoy!

http://www.youtube.com/watch?v=ONDZr840n kg

Adventures in naming, misguided tip-sheet edition

Felix Salmon
Jun 26, 2009 14:03 UTC

Why oh why did Ron Insana have to call his horrible new product Market Movers? I never liked that name when I was at Portfolio — in fact I hated it — but I did live it for two years, and so now I feel there’s some kind of connection between me and Insana. Which makes me feel rather icky, to say the least.


Worse yet, Jim Cramer is associated with Isana’s blog.

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