Goldman Sachs Group Inc. executives were grilled by U.S. lawmakers who compared the bank’s mortgage bankers to bookies as Senator Carl Levin asked why they sold securities the company itself called “shitty.”
“How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal?” the Michigan Democrat asked Daniel Sparks, who ran the bank’s mortgage unit at the time. “Does that bother you at all?”
Members of the Levin’s Permanent Subcommittee on Investigations, winding up a probe of Goldman Sachs that has lasted more than a year, used today’s hearing to pepper current and former executives with questions about their duty to clients and the ethics of betting against the housing market as the bank also sold mortgage-linked securities to customers.
When George Bush tried to rein in the derivatives market, Chris Dodd and Barney Frank stopped it. Barak Obama was on the Senate committee that killed Bush’s effort (of course, he wans’t at the committee meeting as he was already running for president). Further, these instruments were not sold to grandmothers in Iowa; they were sold to the Wall Street bigwigs, who were all betting someone else would get caught holding the bag. AIG was at the end of the line when everything collapsed and you got holding the bag to the tune of $180B because they were too stupid to short the bundled derivatives. BTW, the derivatives market got huge because of the Fair Housing Act, passed by Dodd, Schunmer and Frank and signed by Clinton. If they really want to investigate, they need to be investigating each other. Is it any wonder why Congress has a 10% approval rating? The bigger question is should the 10% who approve be allowed to walk the streets without a guardian.
Mr. Keller, you have hit the Bull’s Eye! Collect your Kewpie Doll.
THX, DNM.
Sorry, David, the legislation was a minor factor. The fundamental, underlying cause was greed (well-explained in CNBC’s David Faber’s special, House of Cards). Once all Street discoverd how to package mortgages not just into Mortgage-Backed Securities (MBS) but also into derivatives AND how to get even junk rated AAA (so it could be sold to pension funds, etc.), there was an insatiable demand for mortgages to fill the investments. That led to an explosion of “exotic” mortgages and a sharp drop in loan standards. The political climate of 1993-2007 in favor of higher rates of home ownership was merely an enabling factor.
Bill–I did a presentation last summer on the topic as it relates to the future hardening of insurance markets. I did a lot of research on the topic, so I will have to respectfully disagree with you. There is plenty of blame to go around but it all started with Dodd and Frank. Freddie and Fannie had a great deal to do with the expansion of derivatives, because the bogus loans they were giving out had to be financed. They are mysteriously left out of Dodd’s current bill.
Bill–I do agree with your comment about the political climate after 1997; but the rush to have cheap mortages was as a direct result of the Fair Housing Act combined with Dodd essentailly being on the payroll at Countrywide. The justice department, even under Bush, was threatening banks with legal action if they didn’t follow the act and give mortages to people who couldn’t afford them. Bank of America was directly threatened with anti-trust charges if they didn’t open offices in predominently low income neighborhoods; and Freddie and Fannie were providing the fuel, urged on by one of the Freddie board members, an obscure Congressman named Rahm Emmanuel.
Mr. Keller, again, Bull’s Eyes with #5 and #6. Hopefully, Mr.Matz will verify with his own objective independent research and realize the error of the ‘talking points’ he has been fed.
David,
With over 25 years direct involvement (at the consumer level) in the mortgage arena, I can testify from personal experience that your remarks are inaccurate. In fact, you are the first person I have heard blame the Fair Housing Act (which one?), although many have pointed to the Community Reinvestment Act.
There are many other factors, and there are plenty of good books and other references that accurately explain the origins of the crisis.
1. House of Cards (above) provides a good illustration of how the derivatives removed risk from the loan origination process and created a virtually unlimited demand for mortgages to feed Wall Street.
2. Fool’s Gold by Gillian Tett provides a frightening look at how some Chase whiz kids at a drunken retreat in 1997 came up with the idea for some of the products that would cause the mortgage meltdown.
3. Chain of Blame documents the subprime side of the debacle.
4. The highly toxic pay option ARMs were pushed heavily by WaMu and Countrywide not out of any gov’t pressure, but because they were so profitable that even after paying some former pizza delivery guy four points for every victim, they could still sell the loans to Wall Street and make five points, about ten times what they could make on Fannie/Freddie loans (but only if the pizza guy tricked the borrowers into taking the worst possible terms).
5. When Fannie/Freddie floundered in the accounting scandals post-9/11 (resulting in the downfall of Clinton crony Franklin Raines) the subprime and exotic lenders stepped into the void, made larger by the Fed’s ultra-low rates, which were purely the result of stimulus needed after the 2000 recession and 9/11 jolt.
6. Federally-regulated banks (e.g. B of A, Wells) did offer some very nominal incentives for loans that were in certain targeted census tracts. But the loans were still subject to normal underwriting standards.
The mortgage meltdown was caused by lender and Wall Street greed, not gov’t pressure. To be sure, lenders took advantage of gov’t encouragement of housing ownership, but only to increase their profits.
You are correct that Dodd, with his “Friends of Angelo” loan was caught with his hand in the cookie jar, along with others. But it is significant that the failures began with the subprime, then the option ARMs and alt-A, and only after the crisis was well underway did it spread to the more conservative Fannie/Freddie loans. However, it is worth noting that the attempted reform of Fannie/Freddie by Sens. Hagel, McCain, and Dole was blocked by Sens. Dodd and Obama, among others. At the time, Sen. McCain warned that Fannie/Freddie posed a risk of “systemic failure”.But had not the reckless subprime and option ARM lending destroyed the real estate market F/F might yet have survived.