Banking spins destruction myth: Hoocoodanode?

By J Saft
December 5, 2008

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own —

Just as every society has a creation myth, banking is now busily writing a destruction myth that seeks to explain and soothe in a world torn to its foundations.

The myth, as expounded by regulators, bankers and their various service providers, is that we were hit by a perfect storm, a 1,000-year flood so unpredictable that we can’t possibly be held accountable for it. An act of god, rather than the folly of man.

Or as the excellent financial blog Calculated Risk puts it: “Hoocoodanode?”

The implication of course is that now banks know these sorts of things can happen, banks will behave sensibly because it is their best interests to do so. It’s just that the data we put into the models only covered the boom years. Now that we are getting good data on a downturn, well, problem solved. No need for overly heavy-handed regulation, that will only stifle growth and recovery.

No need for intrusive compensation controls; this will simply drive risk takers out of banking and into less regulated areas, or will prompt a brain drain in which the best minds might go into, god forbid, industry.

There is a pronounced unwillingness to take responsibility and to recognize that many of the factors that went into creating and sustaining the bubble weren’t so much unknowable but more likely, for those in a position to do something about it at the time, either unprofitable, unpleasant or politically inconvenient to know.

Take, for example, Robert Rubin, former U.S. Treasury Secretary and current board member at Citigroup.

“Nobody was prepared for this,” Rubin told the Wall Street Journal. He has been paid $115 million, excluding stock options, since 1999 and was advising Citigroup when it decided to mimic its peers and take on more risk.

“… What came together was not only a cyclical undervaluing of risk (but also) a housing bubble, and triple-A ratings were misguided,” said Rubin, who believes he along with Alan Greenspan has taken an unwarranted knock to his reputation. “There was virtually nobody who saw that low-probability event as a possibility.”

There is simply no doubt that a number of people were raising red flags about risk, about the use of ratings, about issues around securitization, and most certainly about an emerging real estate bubble. But it proved impossible for those risks to get a proper hearing within a system that was throwing off so much life-changing money.


Rubin, when queried on his pay, answered that he could have make more elsewhere. True enough, no doubt.

But while everyone is free to take money that is on offer, that is different from saying that you have earned it, or that, in a system in which pensioners and taxpayers are the ultimate bag-holders, it is appropriate and should not be subject to regulation.

There is a similar argument on pay making the rounds: that since so many senior managers lost so much of their fortunes in the failure of companies such as Lehman Brothers and Bear Stearns, this demonstrates that there was not a misalignment of risks between employees, shareholders and the governments that ultimately must pick up the pieces when things go wrong.

It is very sad that so many people lost so much, but this is not even close to being an argument for continued light touch regulation. The issue is not so much that people in banking and finance have skin in the game, but that they are far from alone in having it, and that their ultimate cost of capital is in part a function of the fact that it is and has been understood that the state will step in if things
come to grief.

That argues, in my view, for stricter regulation of bank capital and of bank compensation so as to decrease the risks. That means tying compensation more closely to risks, including the risk that things that look good today go bad in three years’ time. The UBS scheme, under which bankers can “lose” money they “earn” based on various performance factors in subsequent years, is not a bad start.

Those who argue against more stringent regulation have one thing right: it is going to cost, and requiring banks to hold more capital will impose a ceiling on the speed at which the economy can easily grow. Of course, we are always regulating the last war out of existence.

One idea worth consideration is proposed by Paul Miller of FBR Capital Markets and would involve regulating assets and how they are funded, rather than just the institutions.

That would help to guard against the next shadow banking system and another highly levered and ultimately government-insured bout of speculation.

—  At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click here. —


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Dear Sir,

2 years ago during summer holliday I made an error and left my bank account with HBOS in UK short of 2GBP£ which resulted 2 attempts for direct debit to be decliend and a penallty of 2 times 39 = 78GBP£ was charged to me.

I was away and on return I went to the bank and asked for explanation.

In shortest I was told, Mr Dimovski our bank has millions of clients and imagine if we allow unauthorised overdrfat for every second one even for 2 GBP£ it will add to our bank balanceshit negative ammounts.

In that respect we have implemented most sofisticated programs to monitor our balances. At the same time the bank regulators are monitoring our accounts and if we go in red for a 1Mil GBP£ we will be penalised and somebody at the bank will be fired.

Never the less we have witnessed that the very same bank with very same regulations and regulators in place was allowed to go billions in red and nobody was ever fired for their action.

Bankers have been infected with the most dangerous illnes of all time spread evenly arorund the politicians globally and that is the ignorance of the reallity .

Additionally they think that if they come on TV and read a text given to them by some speach wrighter that the people will listen and believe them.

People vote for government with believe that they are taking the oath to prevent such a colapses by monitoring what the so called big guys and blue chip companies are doing and to act quickly on even smallest of illegal action they take.

For them to come forward now with some sort of rescue packages making themself some sort of heroes is most pathetic situation ever occured in modern day life.

If a one dollar can go out uncontroled so it can 1 billion as same regulations apply.


Toni Dimovski

Posted by Toni Dimovski | Report as abusive

What a bunch of obsfucation. If you lie on a loan application you should go to jail. If you are so STUPID that you loan $500K to a person with a gross of $30K a year You should either lose that money if yours or you go to jail if it was given to you in trust for investment. If you package a number of these phony loans and sell them you should go to jail. Where is the problem in understanding or determining what to do in the current financial mess? John

Posted by ginsengjohn | Report as abusive

Mr. Saft does not seem to recognize the one true force behind the current monetary crises. This is the Federal Reserve Corporation, a private bank that has monopoly power over the manufacturing of the nation’s currency and entrusted with the regulation of its value. Without addressing the problems with the US Dollar and the owners of the Federal Reserve system strangling the US government and America’s citizenry with debt, it is hardly worth engaging in this discussion. Is this really as far as he can dig? If you want to talk about regulation then maybe we should audit the Federal Reserve System which is the only corporation in the United States that is not regulated by the US government!

Posted by Jay | Report as abusive

An ounce of sweat is worth an ocean of tears.

Posted by kelly p | Report as abusive

Well done.

Posted by Andrew McKay | Report as abusive

Absolutely, staggeringly, mind-numbingly unbelievable. This FIRE sector fiasco is a complete outrage. This kind of exploitation of the citizenry is exactly the reasons socialism and communism began. To see this kind of blatant Victorian Era thievery being floated on the public as if it was borrower’s fault and simply nature taking it’s course (i.e. piss down my back and tell me it’s raining!) should result in a Medieval response- line Wall Street with heads on pikes. I think no further regulation would be required…

Posted by J | Report as abusive

Common denominator to previous postings: short term self interest outweighs long term responsibility. The US is a democratic republic by brilliant design. Shame on businesses that skirt best business practices within legal boundaries and shame on the government overseers who do not in the minimum report to the citizens those very stupid business practices.

Posted by Andrew McKay | Report as abusive

meanwhile they will not bail out the automotive industry that did not cause this downfall of a world economy
we then give them 300 billion to start why are they not
grilled as they hunt for partridges-get upscale furniture and still go to the top steak houses

Posted by J Jones | Report as abusive

There’s plenty of blame to be spread, but it neither starts nor ends with the banking industry. The culture of this country has been one of excess far too long, resulting in an economy that is completely dependent upon consumers purchasing more than they can afford, most aptly exemplified by the $700B bailout intended to bolster investor confidence that Washington hoped would result in a resurgence of lending to an already over-indebted population. Where’s the logic? Corporate interests, including banks, have pilfered the citizen’s treasury, aided and abed by the prostitutes we refer to as politicians. I agree with “ginsengjohn(’s)” comment: its time to start rounding up these criminal bankers, their brokers and agents (including those they’ve successfully positioned in Congress and the Fed) and make them accountable for the damage that they’ve willfully caused. Certainly the writing was on the wall at least three years ago when already inflated and aggressively increasing housing prices almost instantly flat-lined and began to recede before our eyes. At the latest, that would have been the time to take action. At this point, economic stimulus can only serve to bandage the gapping wound, but does nothing for the infection that continues to spread.

Posted by Corey | Report as abusive

Evoking the image of a 1000-year flood represents an attempt to lessen the appearance of risk, the implication being that it will not reoccur for about 1000 years. Such an assertion is based almost purely on faith in cycles. We can extend the concept however, noting how civilizations collapse on a cyclical basis. I would say that there are some shades of truth to such comments from the banking industry.

Posted by Don | Report as abusive

I believe that the remedy must include regulation, but it also must include powerful disincentives, like confiscation of ill-gotten gains and prison time for the most egregious cases of self-serving corruption.

Although many of these institutions have gone down in flames so that the taxpayer is left holding the bag, many of the individuals involved in this piracy have been skimming vast sums for years and are extremely wealthy.

I have nothing against wealth, but I have something against wealth at the expense of society gained by “faulty intelligence” as our culpable leader and his henchmen are now trying to claim. If we don’t root out this kind of thing it will happen over and over again.

When the leaders are crooks, it destroys the nation. These are the true weapons of mass destruction that were hidden by the sleight of hand of a corrupt government serving its corporatist paymasters. On the other hand they say we get the government we deserve which does not speak well for our country.

Posted by Jonathan Cole | Report as abusive

Absolutely correct. First task is to do away with the Federal Reserve private corporation. It is an abomination not to be regulated by the government — and who exactly are the members who control our collective global destiny? Doesn’t seem to be the people we elected. Second, the comment by ginsengjohn is dead-on. Gross negligence, and reckless lending deserve jail terms for breach of trust. That goes for lender Boards of Directors and Executives, as well as politicians who now expect us blue collar stiffs to bail them out with our tax money. Is it just me, or is something wrong with this picture???

Posted by turismo | Report as abusive

I am a hedge fund manager. What is a bank?

Posted by John Blodbrett | Report as abusive

Dear Ginsengjohn,
The guy who loans that 500 K is not at all STUPID, because it is someone else’s money he is loaning. As for risk, the financial elite has been taking too little risk, not too much. If you pay me to gamble with your money at the casino, I am not taking any risk. You are!
As for jails, there are already 2 million Americans in them. It wouldn’t be a profitable way of using taxpayers’ money to put another million in new jails.

Posted by Ben | Report as abusive

Mr. Cole, For what it is worth, I agree with the your remedy except that I think public execution would set a better example. Also agree that as a whole, we probably deserve this, just not you and I. The only way to root it out is to let nature take its course, and it will. Those darned old cycles.

Posted by kelly p | Report as abusive

CalculatedRisk also noted this back in Mar 2008 – JPMorgan Chase memo titled “Zippy Cheats & Tricks” – The document recommends three “handy steps” to loan approval:

– Do not break out a borrower’s compensation by income, commissions, bonus and tips, as is typically done in a loan application. Instead, lump all compensation as the applicant’s base income.

– If your borrower is getting some or all of a down payment from someone else, don’t disclose anything about it. “Remove any mention of gift funds,” the document states, even though most mortgage applications specifically require borrowers to disclose such gifts.

– If all else fails, the document states, simply inflate the applicant’s income. “Inch it up $500 to see if you can get the findings you want,” the document says. “Do the same for assets.”

So basically Chase “intentionally engaged in fraudulent loan approval” and they ARE supposed to be Regulated by the Federal Reserve, FDIC, etc. So Why Isn’t Anyone from Chase in Jail Yet????

Posted by ap | Report as abusive

Bull s_ _ _! Blaming flawed computer models, you’ve gotta be kidding! The bankers and the regulators knew the dangers. Who relies on a computer model without profound knowledge of the subject matter and an understanding of the model itself. Bottom line is, the regulators didn’t regulate. They had the tools, they didn’t use them. And as everyone from bankers to buyers got greedy, those who should have and could have seen the problem in making loans predicated solely on an unsustainable rate of appreciation in housing prices, chose to ignore the problem rather than take on the Bush/Cheney administrations biggest financial supporters. We don’t necessarily need more regulation,to prevent a shadow banking system or unsafe practices but we most definitely need common sense enforcement of existing regulations. This economic disaster was both foreseeable and avoidable, but it would have required knowing the difference between a free market and a free-for-all. Phil C.

Posted by Phillip J. Cornacchia, Jr. | Report as abusive

According to John Ginseng, the US better start building many jails. The number of people whom took out loans knowing they couldn’t afford it and those giving it where in the millions. Many groups(ACORN) forced the banks to look the other way, John. This was done in the name of Fair and equal housing opportunities. Listen, when the loan officer made the loans that caused the problem, majority of them explained what had to be done. ITS THE CLIENTS(BORROWERS) FAULT FOR not changing their financial situation: Most all loan officers told their clients you are going to have to refinance within 2 years and in the meantime you need to improve your credit and secure a better income. I took out a loan but I had a plan, I refinanced in a year after paying off 20% of the balance and knocked off $500 a month, unlike most of the idiots, John I knew I could afford the home with the extra $500 payment or my current payment. The government needs to run classes as part of the $700 Billion program on “HOW TO MANAGE YOUR MONEY, NOT SPEND WASTEFULLY, USE CREDIT WISELY and LEARN TO PLAN FOR THE FUTURE.”

Posted by R Shah | Report as abusive

Greed, lies, deception, dishonesty. From the borrowers, to the banks, to the government. The underlying theme and lesson to be learned here is Biblical folks: “YOU REAP WHAT YOU SO”.

Posted by MJ | Report as abusive

Mr. Shah, you’re saying that most loan officers suggested to borrowers that “once you get this loan you need to refinance within 2 years and in the meantime you need to improve your credit and secure a better income” Doesnt that indicate that the loan officer was aware that the borrower couldnt afford the loan that they lending??

Posted by Jerri | Report as abusive

While your article might be very good, I was unable to get passed your inappropriate, argumentative opening statement, “Just as every society has a creation myth.” Additionally, statements like that weaken your position and narrows your audience.

Posted by Gary S. Hart | Report as abusive

President Bush spurred growth in the economy by lowering tax on the rich and eliminating capital gains on the sale of homes on up to $500,000.00 in profits. This spurred enormous growth in construction of homes. Suppliers or raw material, designers, builders, mortgage brokers, investment banks and insurance companies made huge profits and paid tax on a bubble, while the U.S. was borrowing to pay for two wars – so the other public would not be distressed. The bail out is a financial “pardon” for those who went along while heaping future debt on the wage earning majority of the public.

Knowing as much as I can find out from the media, it looks like House and Senate leadership should have put their political jobs on the line and practiced statesmensship instead of enabling a chief executive drunk with power.

Posted by Thomas E. Shafovaloff | Report as abusive

We will never get rid of these bums until people realize that both political parties are equally at fault.

Posted by kelly p | Report as abusive

Back around 1997 I sat in an economic conference where a high level US gov economic official, an aged wise economist, in a moment of unguarded honesty, said:

“I deeply fear our entire monetary, budgetary, foreign trade and financing architecture is awfully dangerous. We are using are reserve-status currency power to create massive free-lunches by feeding off the world’s savings, then leveraging that savings to insane proportions. We will have a decade of undreamed but unearned riches. Bubbles after bubbles. Then one day we will find we are screwing ourselves. There will be one too many bubble. Because what’s unsustainable simply won’t. But our entire society is into it, and nobody can stop it. So it will have to stop itself. I fear our high economic power might be finished along with it.”

That was a decade ago. When those in-the-know already knew. What they cannot know was the trigger. That trigger, turned out, was not economic. It was mass insanity caused by runaway greed.

Posted by Tom K | Report as abusive

Rubin: “There was virtually nobody who saw that low-probability event as a possibility.”
Krugman, Roubini, Faber, Ackman even the NY Times of May 2005.

Posted by dhome | Report as abusive

There’s also one thing that nobody mentioned, yet it’s one of the things, if not the main one, that caused the current economic malaise. And that thing – oil.
Gasoline – no matter how you slice it – is a necessity right there with food and before housing. When people have to choose between falling behind in mortgage payments and getting where they HAVE to be NOW, guess what they’d do? Yep you guessed right – fill’er up. And especially this is about less affluent people tending to drive older, bigger vehicles consuming more gas. Shiny new Prius or Lexus RX400h is the well-to-do suburban thing. The American heartland drives older pickup trucks and Suburbans, and inner cities are full of used vans and SUVs. The same people make the bulk of subprime borrowers. It is not just a coincidence that many of them were pushed over the top when oil prices became insane. In 2005 oil crossed $50/bbl and then went up, up and away all the way to $146.81 last Summer. The consequences soon followed.

While the oil sheiks wallowed in unearned cash, Americans struggled to make ends meet. And it was not only at the pump – everything delivered by road or rail went up. Finally they started breaking down and default on credit cards and mortgages. And then it started feeding on itself, sucking in housing prices, banking, financials, retail, autos, jobs – no need to go into details of the vicious cycle here, everyone remembers the timeline.

Everyone is talking about $700BN bailout. But multiples of that were overpaid to OPEC (that consists mostly of regimes not-so-friendly towards USA by the way). Oil can be at $147/bbl only in the dreams of Chavez and Ahmadi-whatever-his-name of Iran. Even $47 is too much. Just about the century turn I remember the Saudis spoke about stabilizing it around $30 that they called “fair price”. I have a close relative at one of oil majors – he recently told me that they calculate profitability of new projects based on twenty-something price (don’t remember exact number, some mid-to-upper $20es).

Posted by Anonymous | Report as abusive

Jerri: Most loan officers knew that borrowers were stretched to the max with the loan they were going to undertake. It does not imply that they were incapable of managing the debt. Since most loans had a teaser rate with ceilings, clients were aware that they had to refinance before the two years was up to avoid possible increase in rates. These programs allowed the borrower to get into the home, made lenders money. Majority of borrowers should have refinaced but never did as they did not heed the call of loan consultants.

Most of them(banking and investment world) will tell you they did not know of this mess coming, but they knew. Just the severity is beyond their expectations. The sad part is the core of this economy revolves around it and it has caused mistrust from investors globally. The outcome: Investors from overseas will not want to invest in American securities. Lack of this capital will shrink the American very fast.

Posted by rshah | Report as abusive

These bankers know exactly how this crisis happened. It is no coincidence it is happening now and in the order it is transpiring. Oil is suddenly tettering above $40.00 a barrel just as the 3 Big Automakers are begging for a dime. The cheap crude is bait, keep the broke automakers in operation and you’ll have cheap oil to fuel the cars…Bait and switch. The real story is how badly the media and the government controlled Banks and Industry believe the American people to be stupid and in a dead coma. The bankers are banking on us being lulled to sleep by cheap oil and welfare checks versus angry and upset that they are fleecing–have already completely pimped us out–to foreign investors. It’s enough to make me puke my guts out…but I’m saving my guts for after January 20th, I made them need to protest the very country that I love and am growing to despair of.

Posted by Jeremiah | Report as abusive

for anyone interested in unbiased economics and explanation of depresions etc. I recommend Hayek – Nobel price winner or Rothbard, both Austrian School econmists,, … Peter Schiif was able to forsee this crises thanks to Austrians …

Posted by Mark | Report as abusive

Mr. Hart, every society and civilization does have a creation myth, among others myths. The only difference between yours and anyone elses is that you do not consider yours a myth. Mythology is mythology however, christian or not. By traking offense to the comment, you miss the point… as many christians seems to do.

Posted by Mike | Report as abusive

Tell me this Reuters! How can we have increased spending when people are losing their jobs like your reporters are saying? Something is completly NUTZ! see your headline in home/ stockmarket John

Posted by ginsengjohn | Report as abusive

Mike, unless I am missing something I do not see
where you got the notion that Mr. Hart was defending christianity. It seems like you have some sort of axe of your own to grind. The point he was making, I believe, was that his statement did nothing to advance his arguments.

Posted by david e pyne | Report as abusive

No one is speaking about the Automatic Underwriting programs that both Freddie Mac and Fannie Mae used to approve loans and loan packages. They shared those programs with the vendors who sold them loans and with the purchasers of commercial paper who bought packages of those loans. Every one was brought into synch and every one looking arrived at identical conclusions whether right or wrong about the value of mortgages and debt. Everyone marched to the same beat, toward the same cliff.

Posted by Sternberg | Report as abusive

Rubin, Greenspan and the their bunch of like minded fools should all be spanked in public, openly admit they are really stupid, apologize and be required to take financial responsibility help out 20 destitute families.

Posted by Bob DeBellis | Report as abusive

I just can’t agree with his excuse, of course if he is right, the sky is green.
I can’t help but see the main reason for the problem is the oil companies and the sky-rocketed cost of fuel. You have to go to work, you have to have oil for furnaces and that leaves nothing for purchasing other items. Now the makers of those other items can’t make their Co.’s profetable so they have to layoff workers which lowers the available money even more. All the while, the Oil Co.’s laugh all the way to the bank.

Posted by Don | Report as abusive

Unfortunately the persons in charge did not want to produce the right type of regulation required for derivatives and the like.

When Enron went down, the right thing would be to legislate the required regulation encompassing markets newly created. For example anything that should be sold by companies that are publicly owned and exceeds a total value in excess of 10 million dollars should be recorded in an independent organization, like the NYSE and regulated by SEC or another organism.

The risks should be transparent, by making the market value a public information…

The fact is the US Government did not want to regulate, they wanted to create an envinronment of easy money so the economy would look healthy. Fundamental facts were disguised, like the loss of leadership in several industries and technologies.

The questions for the near future are:
– what will happen with the military power of the USA?

– How can a country that has no real economic power keep its currency with value to pay its obligations?

– How retired Americans will keep their income?

– How America will pay it’s huge debt?

These questions and other similar to these will be haunting the next American Government as the markets starts to stabilize and everybody start thinking in their investments….

Posted by Jose Ernesto Passos | Report as abusive

This is a very insightful commentary and most of the comments are equally insightful and thought provoking. Thank you one and all.

Posted by nelson | Report as abusive

????’There is a similar argument on pay making the rounds: that since so many senior managers lost so much of their fortunes in the failure of companies such as Lehman Brothers and Bear Stearns, this demonstrates that there was not a misalignment of risks between employees, shareholders and the governments that ultimately must pick up the pieces when things go wrong.’ ??????

The singular difference here, is that while most of the rest of us are worried about basic food and shelter in our retirement years, these guys will have to endure the torture of reducing from five mansions to three.

???No misalignment of risks???

Posted by Gregg&Brian | Report as abusive

Excellent article. Lack of regulation based on politics demanding an ever growing economic base. Fiction to be sure. When our manufacturing infrastructure has been decimated by outsourcing overseas, and we as a nation are the largest consumers of foreign oil, and our national debt is of gargantuan proportions, seriously how can America continue to function in this manner ?
And now we have the big 3 automakers begging for handouts, while they have done nothing (but cater to the oil industry) to develop, as the Japanese have done, real fuel efficient and innovative autos. They just continue to manufacture the big gas guzzlers that now sit unsold on retail lots.
Not even mentioning the quality issue that drives many Americans to purchase Toyotas and the like. I would personally like to see a law enacted that permits only 4 cylinders autos to be used in the USA, together with the utilization of railroads in lieu of truck transport whenever feasible. This will reduce fuel consumption dramatically, as well as pollution.
The bottom line is that nothing will get done unless we have real regulation in this country, over all facets of our economy. There is far too much greed that dictates our modus operandi, and we may very well be headed towards that great depression, unless we as a nation are willing to bite the bullet, trim down on our wasteful habits, and our government do what is necessary to insure our longterm viability !!!

Posted by Carl Costa | Report as abusive

Agreed but a large source of the pain and still poorly regulated is the prop/casualty and health insurance industry…some smart legislator looking to make a name needs to propose immediate legislation to make insurance regulated by the feds and not the states(who cave in to whatever the insurance cos wants)…AIG is one of the largest takers of TARP $’s all because Mr Greenberg’s model allowed regulation of only portions of the business. The unregulated sham insuring of CDS’s largely pushed us over. Had there been more regulation maybe we would have a regular recession rather than a near depression. The insurance lobby must be all powerful to prevent this important regulation from occurring.

Posted by james | Report as abusive

I’m sorry, didn’t the same sort of thing happen with real estate valuation back in the 1930s and in Japan about a decade ago? So much for a 1000-year flood.

It’s not regulation that is needed, but restraint during over-optimism.

Posted by Rob | Report as abusive

for anyone interested in unbiased economics and explanation of depresions etc. I recommend Hayek – Nobel price winner or Rothbard, both Austrian School econmists,, … Peter Schiif was able to forsee this crises thanks to Austrians …

Posted by Henry | Report as abusive

I think the financial industry needs to follow the advice of the CEO of Samsung, who in the early 90s and in an effort to improve performance, told his managers, “I want you to change everything except your wives and children!”

Posted by Ron Frazer | Report as abusive

regarding Mr. Hart’s comment about the phrase “creation myth” – would someone who believes evolution to be true take offense at calling it a myth? I think they would. Neither can be proven in any case.

Posted by todd g | Report as abusive

Ok Wall Streeters, Time to break out the old hard hat, we are gonna build bridges and roads! Please do not forget a good pair of gloves to protect your manicure.

Posted by kelly p | Report as abusive

[…] Banking spins destruction myth: Hoocoodanode? […]

Posted by Alea | #Links | Report as abusive

This is the very reason that regulation is needed (they did not see this coming?) I am a graphic designer – know nothing about money – and I saw it coming. Greed makes one blind, that is why regulation is needed

Posted by Naomi | Report as abusive

To which creation myth are you referring, Biblical, or Evolution. Such pontificating comments lessen your credibility and imply that you think you are somehow privy to universal knowledge.
Otherwise, your comments do make some sense.
These thousand year floods are coming too often. The solutions, new deal, resolution trust corp. and TARP,are cool names for policies. Policies to cure the problems that result from fleecing the sheep of their retirements, savings, and new worth. It’ deja vu all over again.

Posted by ted | Report as abusive

Love is blind.
And so it seems is Greed
That explains not seeing this “Low Probability”
Then PoP goes the Bubble(s)
A common human ailment be it:
Banker,Baker or Candlestick Maker

Owen (Hereford – Wales)

Posted by Owen Evans | Report as abusive

Plenty of people saw it coming from top to bottom in our society. Even Greenspan admits now that he had a few advisors waving red-flags. But how can the financial wizards riding the dragon that pays them hundreds of millions of $ not believe in its power? It was not greed first that intoxicated them, but power. The power to milk sovereign funds and play with leveraged trillions.
It was spectacular. Either way, we now know it was madness, and just like after Enron and we had to have Sarbannes-Oxley, now we will have to restore respectability to the disheveled drunk in the gutter, ie., investment banking after its decade of Bacchus.

Posted by Dennis | Report as abusive

Something similar, “tulipmania,”hit Holland, circa 1637. See: Extraordinary Popular Delusions and the Madness of Crowds, written by British journalist Charles Mackay around 1830.

Posted by Bob, Severn MD | Report as abusive

Obviously the bankers and financiers will ride the storm head held high and they’ll come out on top with more of our savings AND tax follars in their pockets. We had this coming and everyone in the finance sector knew this would occur, every single one as even a child can do the sums. There are no excuses other than greed and blackmailing bankers are holding us to ransom right now.

Posted by Trev | Report as abusive

An article in the New York Times in 1999 said, in regard to “liars loans” and zero-down payment home loans, and a higher level of mortgage owners defaulting, that this could be sustained as long as the market was growing, but if mortgage holders began to default, then it would result in a financial crisis at least as large as the 1930s depression. They knew, they certainly knew. GW Bush even allowed the investment banks to widen their reserve requirements from 10-to-1 to 30-to-1. The bond rating organizations (Moody, Standard & Poor) also stamped out high ratings on bonds despite evidence they were losing value and not adequately backed. This sounds like no accident. If not by chance, then what is their hidden agenda?

Posted by Bill Sardi | Report as abusive

To think that this is not an orchestrated event is laughable. We now see the consolidation of power within a handful of banks. Institutions are allowed to fail while others are assisted. Changes in policy and tax code are adjusted after the give away of Bear Stearns and Wachovia to J.P. Morgan. Wells Fargo sees the adjusted tax codes and fights J.P. for the spoils of Wachovia. B of A picks up the largest mortgage servicer in the nation as well as Morgan Stanley for a song and a dance. Years of lost market share is reversed within 1 year. What will emerge is a stronger banking sector with stronger pricing power with tighter regulatory controls to eliminate new start ups. Read “The Creature from Jeckyl Island” and see how well the Federal Reserve looks after it’s own.

Posted by vinnie tran | Report as abusive

ugh… ouch…is this America? why do we have soldiers in the streets pointing the eay to the ration lines? time for an emergency and emergency power granted to central government..the ones saying this will last till 2010 are the same ones a year ago were saying the fundmentals of the economy are sound and we are not in a recession. do you believe them now? How low will we go? I think the once in 10,000 year bottom is what we are approaching..for every creation myth there is an appocolyptic myth too, are you sure these are just m

Posted by brian m | Report as abusive

seems to me that the cocaine mentality made this bubble even bigger. This will go down as the ‘great coke bubble’ of the modern era. Any market player could engineer investment vehicles in a roaring bull market- the question would always be ‘how much euphoria do you price into assets?’… amswer. always as much as the market will take. And a roaring bull market will take a lot. The amswer to me is simple. Return to a moderately conservative baseline regulated bank system. And then in bear markets let the failures burn. And never revamp the model when all debt skews to AAA in a bull market…

Posted by mark | Report as abusive

Trillions of dollars and millions of jobs, and still the New York elite write about the ‘perfect storm’ and quibble over their bonuses. Not one bad guy…when in fact there are not prisons enough to hold you clowns…including what passes for a journalist/commentator/yakking head/analyst these troubled days.

Posted by T J Snodgrass | Report as abusive

this article hits it right on the money and wall street is poised to continue on course. the US government gave OUR money to one man with no strings and HE doles it out with no strings. then the banks say they wont even LOAN our money back to us. Many many people tried to tell it like it was, but it was the emperors clothes story. And now the banks ideas of “fixing” things is to let CEOS keep their bonuses, even it they have to be renamed, and tighten credit so much that the recession and layoffs are doomed to worsen. The inmates truly are running the asylum – with OUR money

Posted by bet | Report as abusive

This period is simply the calm before the storm. It’s the begining of the end of our relationship with ‘Capitalism’. The trust is gone. What’s next?

Posted by Brad | Report as abusive

It’s funny how when people are comfortable with something they will latch onto any shred of logic that supports that comfort. the sad, plain reality is:

fractional reserve banking as it is, and its best friend debt, which has even the U.S. government in its grasp, is completely unsustainable.

for now, as in the depression, the rich are getting richer and the poor are left to suffer. the rich mostly being involved in banking, the poor being involved in the actual goods and services that run the country.
the middle class is disappearing.

this is not capitalism, it is not even excusable.
it is a cancer upon the very idea of democracy and freedom, because it has consumed them alive. a federal banking system that is privately held by so few has been an invite to outright debt slavery and manipulation.

any logic and reason that attempts to justify this is not only a colossal failure of the imagination, but of the human soul.

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”
~ Woodrow Wilson ~
(after creating the Federal Reserve)

Posted by jeremy | Report as abusive


All bankers should be required to answer a simple question…..”did you anticipate the impending financial crisis”. All those who answer NO should be forced to leave the industry immediately, because they are not bankers.

Posted by anton kleinschmidt | Report as abusive

Does anyone really think that injecting billions of USD into these international banks (Wall Street) will actually return things to normal?

Yes, ensure that the banks stay afloat long enough to foreclose on your homes. What is the interest rate that these banks will pay back to the US citizen? What is the collateral? This will likely prove to be the heist of all time.

Thomas Jefferson was right when he said;

“If the American people allow these banking institutions and corporations to rise up around them, within 200 years the decendants of those who conquered this continent shall be homeless upon it.”

America, you have revolted for FAR less! Taxation without representation sounds pretty good right about now… Now it’s ownership without representation.

From your friend up north in Canada.

Posted by Baron von Lufthoven | Report as abusive

Of course, a civilian revolution could be interpretted as terrorism under the Patriot Act.

Posted by Baron von Lufthoven | Report as abusive

No analysis of financial terms or economic principles is needed. People are not borrowing because banks raised interest rates, added numerous fees and penalties to credit cards, debit cards, checking accounts, and loans. If this were just a repeat of past economic cycles, the ultra-wealthy would have nothing to fear. This series of events is different. America’s wealthy and powerful class underestimated the ambitions of the developing nations and now they are reaping the whirlwind. The bailout is a ruse to divert billions into the hands of a very nervous ruling class. But, hey, its no big deal. Nothing lasts forever.

Posted by Jim carlin | Report as abusive

Let’s get rid of the Central Bank. We need to get back to a monitary system that is gold backed. The cental bankers are causing the dollar to de-valve, which is stealing from the American people!

Posted by Art | Report as abusive

Mr.Saft has it right, although in my view, it is a cultural response to deregulation, Reagonomics, and the culture of greed that became the rule, rather than the exception. The recent essay by Michael Stewart “The end of the Wall Street Boom” also discussed by Thomas Friedman in the Times, as showing voices crying in the wilderness. There is a series of clips on YouTube where Peter Schiff argues with talking heads who berate him, laugh derisively at his opinions, and generally etc, treat him as a crank over a two year period. The arrogance and lack of humility in people like Rubi and the rottenh herd of sniveling crooks ( they were all making side bets) in a culture of dishonesty has brought us low

Posted by Frank Shifreen | Report as abusive

Like all false theories, the idea that economic markets are somehow isolated and protected from events like wars and famines in the “real” world is probably one of the reasons that the banking crisis occurred. But the absolute main reason is greed. This crisis happened because human nature is what it is. If someone is allowed to basically sell debt, which any normal human being knows is crazy, then hey, why not divided it up and sell it again. Oh, and hey, the company is failing? Well, borrow money from some other entity that holds the derivatives from the loans that first company made to someone else.

The problem being, after dividing and selling ad infinitum, who was left with any real resources? No one. Duh.

We need regulation. We need regulation to protect poor normal humans from idiotic, greedy people who run companies and governments.

Posted by erin van tassel | Report as abusive

“There was virtually nobody who saw that low-probability event as a possibility.”
So Mr Rubin thinks incompetence is an acceptable excuse for failure ?
A buddy of mine who works in finance warned me 2 years ago things were going to get very rough.

Posted by john | Report as abusive

Hoocoodanode! Sounds like the name of a good whiskey we could use to help get through this. That James Saft dude sorta looks like a whisky sipper.

Posted by kelly p | Report as abusive

We not only need to reform and better regulate banking and the financial sector we also need to wake up and evolve mechanisms that enable us to take urgent steps to better regulate our Governments and make sure they are more accountable as the ease with which the banking oligarchs were able to fleece trillions in public money for their own ends from politicians also caught with their snouts in the trough or sleeping on the job is only matched in pure audacity by the free rein industrial oligarchs have been given to rape, pollute and devastate the planet for personal profit.

Posted by desik | Report as abusive

Based on academic training and field experience, I disagree with Saft’s hyothesis in his fourth paragraph that “It’s just that the data we put into the models only covered the boom years.” ; and also disagree with the Best Comment, “..Evoking the image of a 1000 year cycle blah blah blah”. I recall from college and real corporage experience that financiers, bankers, economists, and academists have long known, taught, and experienced the proper asset/debt ratios; including the experience of boom-bust cycles starting with the depression. So give us readers a break.

My 83 year old father has been selling real estate for over 50 years and predicted this 10 years ago. As a result got out of the business because of he perceived as a syndicate of real estate brokers + appraisers + mortgage brokers all in “cahoots” to inflate the price of homes; and bankers for easy money. In his day, the CalVet loan program in California was the only way to get a home loan…or perhaps FHA.

When he got out of the business he asked me; “Son, Why would anyone in their right mind put their $400,000 investment in the hands of lightly trained real estate brokers, mortgage brokers and bankers?, after being in business for over 50 years its time to get out – there are too many amateurs in a high dollar business and that spells trouble – greed!”

So this is nothing new. Perhaps the decision makers have poor memories.

Phillp Wolfe

Posted by Phillip Wolfe | Report as abusive

Your opinion piece was a good one but it and many of the comments that followed lack a context.

The context that I offer is “The End” by Michael Lewis at If the name seems familiar, it’s because he wrote a book, Liar’s Poker, about the games on Wall Street in 1989. The situation then was pretty much the same as it was 20 years later but much, much worse. tional-news/portfolio/2008/11/11/The-End -of-Wall-Streets-Boom

If you’re not terrified by Lewis’ brief article, I would be surprised.

Posted by Rick in Atlanta | Report as abusive

Very good article except you missed the real myth here: The Crisis itself.

All these companies bought mortgage backed securitues, securiteis and bonds backed by student loans and credit card balances. Where did all that money go.

They act like somene burned huge piles of money in the streets. If you gave a mortgage loan and sold it as a security then you got your money back. Only the companies that gamble on a security increasing in value lost money. Why are we bailing out AIG who is gambling off people’s insurance policies and retirement accounts on risky assets with little or no assets to back them. We are staking the compulsive gambler so they can continue business as usual.

American Express became a bank because it is the first year they could not sell bonds backed by payments due. So they are selling a bogus asset that if you dont make your payments the bond is worthless. This should not be legal and the companies that risk millions on such assets need to lose this money so they will stop risking it on this crap.

Rather than give the FHA the Billions to give mortgage loans and refinance mortgages and give the small business administration money to loan, and issuing hybrid vehicle loans we give the money to these gamblers that buy and sell risky assets, this is a heist.

It is so unbelievable that the world is suddenly broke. This is a scam.

Posted by Larry | Report as abusive

The problem is leverage, when you want to ease the transition to the next expansion not possible when not fully deleveraged and no collateral.

Angela Merkel the Federal Chancellor of Germany doesn’t like “Cheap Money” and ” re-flation ” either. She thinks that the re-flation only will last for 5 years before another crises emerges. I think she’s even more on the more positive side than I am. I expect three years max.

Bernanke already admitted himself that he does like dog food; ” such as buying Treasury securities “. Lower interest “certainly feasible”. “Quantitative easing”, no problem! A very chique word for “Who can blow the biggest bubble” .“ Longer-term Treasury or agency securities”; what a illuminating idea, that I didn’t think of this myself. Now we can not only bankrupt a first generation but with 100 years loans we bankrupt the second generation as well.

Posted by Youri Carma | Report as abusive

Robert Rubin, CEO’s, managers and directors have been paid obscene amounts of money (especially in the banking and finance sector. Much of the efforts have been in shifting risk from the suspecting to the unsuspecting. It has then been leveraged upwards to increase the return.

But Mr Rubin and his ilk need to be reminded that with those higher incomes comes responsibility – both good and bad. Very few managers, directors or CEO’s appear to have accepted that responsibilty for the destruction of wealth in both their client’s portfolios or indeed their own firms by resigning or at least offering to resign.

This applies to all leaders. Instead you and I, the taxpayer, are being asked to wear that pain so that they can survive intact.

No ,Mr Rubin, this is your fault and you should resign with your reputation damaged as it should be. Greed and avarice are forever present. Those who succumb to its charms must now pay the piper.

Posted by Brian Bell | Report as abusive

Hoocoodanode? According to Rubin “There was virtually nobody who saw that low-probability event as a possibility.” A low probability event is not a possibility? Give me a break! Lottery winners depend on it.

Rubin might have added that nobody can see any particular fire breaking out in California at any particular place at any precise moment in time. Or any particular earthquake occurring at any particular time. Or any particular person getting killed in an auto accident at any particular time on any particular road.
So why don’t we just abandon fire departments and traffic laws and anti-earthquake building codes? No need for regulation particularly when there is so much money to be made as a result of those “disasters.”
Getting rid of the regulations would make various people billions of dollars and that’s just good business! And when “low probability” events happen on a regular basis? Hoocoodanode? I was too busy pack ratting away my profits.

Posted by Ray | Report as abusive

This has happened before – Long Term Capital Management in 1989. ss/07ltcm.html?pagewanted=1

I’ve been reading about the potential blow-up of RMBS dervatives and CDS for the last couple of years.

These are all poor excuses by, apparently, overpaid frat boys deflecting the blame at our expense.

How could anyone see a 1000 year return period event coming? What a bunch of hooey.

Posted by Wes Schott | Report as abusive