Financial Crisis: The Greatest Hits

"We conclude this financial crisis was avoidable," says the official report from the Financial Crisis Inquiry Commission, released yesterday. "The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire."

The committee's report, two years in the making, is a 623-page tome of everything you could ever want to know about the financial crisis. Most of it is dry repetition of standard stuff reported ad nauseum over the past three years: Housing prices went up. Banks were idiots. The bubble popped. Hell broke loose.

But a few quotes caught my attention. Hopefully they will catch yours, too.

On regulation: We do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup's excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not.

On trustworthy advice: More than 200,000 new mortgage brokers began their jobs during the boom, and some were less than honorable in their dealings with borrowers. According to an investigative news report published in 2008, between 2000 and 2007, at least 10,500 people with criminal records entered the field in Florida, for example, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion.

On lobbying power to overturn regulations: From 1999 to 2008, the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions. What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.

Alan Greenspan on how to stop fraud: "If there is egregious fraud, if there is egregious practice, one doesn't need supervision and regulation, what one needs is law enforcement," Greenspan said. But the Federal Reserve would not use the legal system to rein in predatory lenders. From 2000 to the end of Greenspan's tenure in 2006 the Fed referred to the Justice Department only three institutions for fair lending violations related to mortgage.

Better late than never: The Fed did not begin routinely examining subprime subsidiaries until a pilot program in July 2007, under new Chairman Ben Bernanke. The Fed did not issue new rules ... until July 2008, a year after the subprime market had shut down. These rules banned deceptive practices in a much broader category of "higher-priced mortgage loans"; moreover, they prohibited making those loans without regard to the borrower's ability to pay, and required companies to verify income and assets. The rules would not take effect until Oct. 1, 2009, which was too little, too late.

On being caught off-guard: Charles Prince, the former chairman and chief executive officer of Citigroup, called the collapse in housing prices "wholly unanticipated." Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway, which until 2009 was the largest single shareholder of Moody's Corp., told the commission that "very, very few people could appreciate the bubble," which he called a "mass delusion" shared by "300 million Americans." Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group, likened the financial crisis to a hurricane.

Ex-Countrywide CEO Angelo Mozilo on his contribution to society: "Countrywide was one of the greatest companies in the history of this country and probably made more difference to society, to the integrity of our society, than any company in the history of America."

Welcome to America: Consumers testified to being sold option ARM loans in their primary non-English language, only to be pressured to sign English-only documents with significantly worse terms. Some consumers testified to being unable to make even their initial payments because they had been lied to so completely by their brokers.

On the soundness of the mortgage market: The firm's analysis indicated that about $1 trillion of the loans made during the [2005-2007] period were fraudulent.

On self-control: As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in "catastrophic consequences." Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in "financial and reputational catastrophe" for the firm. But they did not stop.

The darlings that JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) bought: Nearly one-quarter of all mortgages made in the first half of 2005 were interest-only loans. During the same year, 68% of option ARM loans originated by Countrywide and Washington Mutual had low- or no-documentation requirements.

Nope, nothing to see here: The value of the underlying assets for CDS outstanding worldwide grew from $6.4 trillion at the end of 2004 to a peak of $58.2 trillion at the end of 2007. A significant portion was apparently speculative or naked credit default swaps.    

On Goldman Sachs (NYSE: GS  ) riding the AIG (NYSE: AIG  ) bailout train: Goldman also produced documents to the FCIC that showed it received $3.4 billion from AIG related to credit default swaps on CDOs that were not part of Maiden Lane III. Of that $3.4 billion, $1.9 billion was received after, and thus made possible by, the federal bailout of AIG. And most -- $2.9 billion -- of the total was for proprietary trades (that is, trades made solely for Goldman's benefit rather than on behalf of a client) largely relating to Goldman's Abacus CDOs. Thus, unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman.

On the unflappable Citigroup (NYSE: C  ) : The CEO of Citigroup told the commission that a $40 billion position in highly rated mortgage securities would "not in any way have excited my attention," and the co-head of Citigroup's investment bank said he spent "a small fraction of 1%" of his time on those securities. In this instance, too big to fail meant too big to manage.

On confidence and stupidity: At the end of 2007, Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market. It was the equivalent of a small business with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every day. One can't really ask "What were they thinking?" when it seems that too many of them were thinking alike.

On Fannie and Freddie acting better than the private market: While they generated substantial losses, delinquency rates for GSE loans were substantially lower than loans securitized by other financial firms. For example, data compiled by the commission for a subset of borrowers with similar credit scores -- scores below 660 -- show that by the end of 2008, GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2% versus 28.3%.

Lost housing wealth wasn't the biggest problem: Of the $17 trillion lost from 2007 to the first quarter of 2009 in household net wealth -- the difference between what households own and what they owe -- about $5.6 trillion was due to declining house prices, with much of the remainder due to the declining value of financial assets. As a point of reference, GDP in 2008 was $14.4 trillion.

On our neighbors to the north: Canada had strong home price increases followed by a modest and temporary decline in 2009. Researchers at the Federal Reserve Bank of Cleveland attributed Canada's experience to tighter lending standards than in the United States as well as regulatory and structural differences in the financial system. 

Nope, no bubble here: In 2003, the average price was $155,000 for a new house in Bakersfield, at the southern end of California's agricultural center, the San Joaquin Valley. That jumped to almost $300,000 by June 2006.

The forgotten renters: Renters, who never bought into the madness, are also among the victims as lenders seize property after landlords default on loans. Renters can lose the roof over their heads as well as their security deposits. In Minneapolis, as many as 60% of buildings with foreclosures in 2006 and 2007 were renter-occupied.

Final words: As a nation, we set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government failed to ensure that the philosophy of opportunity was being matched by the practical realities on the ground. Witness again the failure of the Federal Reserve and other regulators to rein in irresponsible lending. Homeownership peaked in the spring of 2004 and then began to decline. From that point on, the talk of opportunity was tragically at odds with the reality of a financial disaster in the making.

You can read the rest of the report here. In the meantime, drop a thought or two in the comments section below.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns Bank of America preferred. The Fool owns shares of Bank of America and JPMorgan Chase &. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 28, 2011, at 2:06 PM, BBRAF wrote:

    yes

  • Report this Comment On January 28, 2011, at 2:08 PM, BBRAF wrote:

    intresting that nothing is mentioned about the policies to promote morgage availlability at any cost.

  • Report this Comment On January 28, 2011, at 2:33 PM, safgt wrote:

    The greatest failure leading up to the crisis was the decision by federal law enforcement to cease pursuing large and meaningful white-collar criminal cases against powerful corporations. I saw it first hand. Larger corps get a walk and the medium to small ones are gradually eaten up by the larger left unchecked.

  • Report this Comment On January 28, 2011, at 6:44 PM, Darwood11 wrote:

    Yep, just goes to show, you can't trust ANYONE.

    The "great one" W. Buffett: ""very, very few people could appreciate the bubble," which he called a "mass delusion" shared by "300 million Americans.""

    Bottom line: the whole thing was fueled by greed. Even WB profited when the whole thing collapsed, and he got a "sweetheart" deal with preferred GE stock, at special terms.

    I've been reading the report. My hat's off to Morgan for doing the same.

    The sad thing is, I'm just a "John Q Public" and I could see it, I screamed about it, and I told everyone I knew to "duck for cover in 2007."

    But the f----g experts, who got paid handsomely (and still are) to manage all of this, they couldn't see it.

    Well, that's the way the cookie crumbles!

    Well, Mr. Greenspan, enjoy your retirement. You did a great job - NOT!

  • Report this Comment On January 28, 2011, at 8:17 PM, kahoy wrote:

    Trust JPM...the only bank that didn't need the bailout

  • Report this Comment On January 28, 2011, at 8:32 PM, Merton123 wrote:

    I come from a perspective as an auditor who has worked 17 years with 18 years more to go before retiring for Washington Department of Revenue. The majority of people don't recognize our community depends upon the value of its community. The majority of the public corporations like IBM, GE do not have an owner who is watching the helm. In South America, Eastern Europe, Africa, the employees value system influence them to rob the corporation blind - that is why you don't see many home grown corporations in those areas. From an auditing perspective to be able to discover fraud in these large corporations is almost impossible. The size of the operation, complexity of the transactions, the auditor depends upon the internal controls and does a lot of sampling. The audit can easily be circumvented if there is collusion within management ranks (e.g., Enron). Our entire system depends upon the majority of people doing the right thing. And when that doesn't happen you have the Savings and Loans Crises, and currently the Mortgage Crises. Can an investor protect themselves agaisn't corrupt corporations, instititions and so-forth? Yes - by doing business with reputable companies like Vanguard. A retiree (like my parents) were not affected by the credit crises because Vanguard did their job in Wellesly and Wellington Funds which have been around since the great depression. I guess the bottom line from this grizzled veteran who has seen the realities from the inside is that by supporting spirituality values in our society you will experience material prosperity. When a society departs from spirituality inevitably poverty and despair will raise their ugly heads in those communities. No amount of regulation conducted by fallible human beings can overcome a culture of none spirituality - not here, not in Mexico, not in Russia, or anywhere else in the world in my opinon.

  • Report this Comment On January 28, 2011, at 8:38 PM, ChrisFs wrote:

    While I appreciate your points, I take issue with your conclusion at the end.

    You conclude saying "As a nation, we set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government failed to ensure that the philosophy of opportunity was being matched by the practical realities on the ground."

    You start with 'we' (which presumably includes the large banks), and then jump to the govt failing to match personal realities.

    In a free market economy, the government isn't supposed to do that, that is the job of the lenders themselves(aka the banks). And had the govt even suggested that the banks employ sane lending practices, those same banks would have cried out about how bad govt interference was, and how they knew what was right and the govt only killed jobs. To conclude the article by blaming the govt is to blame the cops for your car getting stolen. The primary blame rest with those who did the lending. Who have vast numbers of MBAs, CFAs, and PHDs and still decided to go this route because it was more profitable in the short term.

    And in the end, these free market fanatics had the gall to turn to the government for help and then obstruct the modification of mortages at the same time.

  • Report this Comment On January 28, 2011, at 9:44 PM, TMFHousel wrote:

    ChrisFs,

    "While I appreciate your points, I take issue with your conclusion at the end.'

    Keep in mind these are quotes from the FCIC's report, not my own analysis.

  • Report this Comment On January 28, 2011, at 10:14 PM, turkeybird wrote:

    Greed and corruption go hand and hand. Our ranking committee chairman that are supposed to over see these matters had once again failed us. There were plenty of warnings out there - those culprits are still in office and have never been taken to task. All the more reason to have term limits and very harsh punishment for all those that take advantage of public trust.

  • Report this Comment On January 28, 2011, at 11:35 PM, racchole wrote:

    ChrisFs,

    The real truth here is that the United States is not a "free market economy" but instead is a managed market economy. The whole idea of a free market is what we experienced 100+ years ago with the Vanderbilts and Carnegies - aka a monopolistic economy. Between then and now, the United States economy has become managed by the government. Therefore, the government is just as much to blame as the greedy, immoral individuals that made these crises happen. Furthermore, the government is equally responsible in creating a stable future for our economy. While we do not like to think of the government as the one in control (and it really isn't in control, yet), we do depend on them to make sure that 300+ million people can make a country and an economy run smoothly from top to bottom.

  • Report this Comment On January 29, 2011, at 1:23 AM, IronHamster wrote:

    If the report doesn't mention Carter's or Clinton's programs to increase home ownership, it isn't worth the paper it's printed on. Refer to such old practices as 20% down and "red-lining". If we had continued to do that, this mess never would have happened.

  • Report this Comment On January 29, 2011, at 4:06 AM, firemachine69 wrote:

    We're gonna end up being in the same boat. Of course, the greedy real estate bastards are all upset that Canada just upped the minimum deposit required to 7%... What the heck. It should be 40-50% for new build, and 25% for an older home. Only the most financially disciplined would then own a home (and the responsibilities that come with it.)

  • Report this Comment On January 29, 2011, at 11:36 AM, Merton123 wrote:

    When a person reads in between the lines of the report - what has occurred was a failure of the financial industry to police itself. A major shift in crime prevention occurred when the Police in conjunction with the Community started neighborhood watch. The neighborhood when they saw suspicious behavior called the police and the two worked as partners in providing security in the neighborhoods. There are neighborhoods who don't want to work with the police and surprise those are the neighborhood that have high crime. We as individuals don't have that much influence over changing a particular's neighborhood attitude towards self policing. However, we can vote with our dollars and only do business with the neighborhoods which believe in self policing. Motley Fool is a good example of a neighborhood which believes in self policing.

  • Report this Comment On January 29, 2011, at 12:28 PM, MDSFER wrote:

    The "quants" based vulnerability to default on the mathematical model conceived by Goldman Sachs

    and sold to large financial institutions. According to this model - human behavior is ideal, i.e., not greedy. You cannot program or compute human behavior - no such algorithm exists. In addition, the "bell shaped curve" derived from the normal distribution function is not correct - did not predict the degree of risk involved - but was still used extensively.

  • Report this Comment On January 29, 2011, at 12:36 PM, jrj90620 wrote:

    Govt was the root cause of this mania and bust.Primary reponsibility was the Fed's easy money policy.Then add in govt buying mortgages through Fannie,Freddie and FHA.Then promotion of housing to the poor by Bush and rest of government.Add in FDIC deposit insurance that backed savers no matter how irresponsible a bank operated.So,absolute power corrupts absolutely.What's new?

  • Report this Comment On January 29, 2011, at 1:02 PM, herzele wrote:

    If you remember the movie PAPPION --The French Goverment sent all the crooks that were involved in the financial melt down to a island prison. We sent all our Crooks,(Bankers) to Florida. Some,(AIG) took his Billon,or(S) to live in England. He was afraid to stay here. Were any of them sent to Jail ?,NO. The best Congress money could buy, made sure they were safe,

  • Report this Comment On January 29, 2011, at 1:34 PM, old44 wrote:

    In Tunisia, one man sets himself on fire and a nation starts to demand change. While the basis for the action are different than the subject of this blog, the United States economy was torched by greed and lack of regulation in our financial markets, yet the theme of so many articles written on the subject don't include mention of any meaningful change.

    If I were more educated on the issues I'd give an opinion. Instead I ask the question. How do we go about getting some meaningful change in regulations where the greedy can no longer dupe a whole country out of their futures?

  • Report this Comment On January 29, 2011, at 1:53 PM, fairhopejohn wrote:

    Good list and there is a lot of blame to go around. But the list is signficantly incomplete without listing the American public speculating on the ever increasing real estate values. Sure the money was easy and the underwriting lax, but no one put a gun to anyone's head and told them (us) to buy a house which they could not afford the payments, accept low initial loan rates with the promise the rates would adjust and most likely adjust to a higher rate, or buy multiple condo units hoping to flip them. All adjustable rate mortgages have bold disclaimers stating the rates will adjust with examples of rates going higher. The blame should also be shared by speculating real estate developers (disclosure - I am a real estate developer). Heck - there were so many (mostly novice) real estate developers, I will just throw them in the broad category of the American Public.

    As I said earlier, there is a lot of blame to go around, but the American Public must take a signficant amout of the blame. I do not accept the underlying notion the American Public is so naive not to know they (we) were increasing their risk and merely puppets to the loan originators. Totally Naive - no. Very Greedy - yes.

  • Report this Comment On January 29, 2011, at 2:24 PM, Merton123 wrote:

    History teaches us that every generation a financial disaster almost always occurred. Kudos has to be given to both President Bush and Obama in averting another great depression this time around. Could the mortgage crises been averted - I don't think so for the various reasons that the other people have written about above. We can not legislate away human nature.

    What can we do moving forward? Like Fairhopejohn says in a prior post take personal responsibility for our lives. We live in a country where foreigners literally die in the process of immigrating here to partake of the American Dream. Is the government in charge of our lives or are we in charge of our lives? I believe that we are in charge of the choices we make in our lives. And we are very lucky to live in a country which provides a lot of opportunities to get ahead if a person is willing to apply some elbow grease.

  • Report this Comment On January 29, 2011, at 2:31 PM, remoloco wrote:

    I sold my mortgage banking business in December, 2003. It looked like a CRAZY business to be in because of the amount of sub-prime lending and how each of the large banks was trying to outdo the other by reducing the amount of documentation required and the lowering of a prospective borrower's credit score requirements. It amazes me that B of A purchased Countrywide when they originated loans through my company that Countrywide would not consider. It is also amazing that Moody's and Standard and Poors would rate the mortgage backed securities as Aaa when they had absolutely no experience with sub-prime mortgages previously.

  • Report this Comment On January 29, 2011, at 2:34 PM, jimdog wrote:

    The Housing and Redevelopment Act during the Carter years set the stage. Fannie and Freddie mandated that banks make mortgage loans to people who couldn't afford rent. With Barney Frank and Chris Dodd driving the bus, what could go wrong?

  • Report this Comment On January 29, 2011, at 2:59 PM, wjleitold wrote:

    The article barley mentions Fannie and Freddie. Their aggregate default rates look good because they bought a lot of good quality; but they were key in developing subprime beyond a niche market, under the pressure of HUD policy and they bought a lot in 2006. Andy Cumo when Head of HUD said it all; “poor credit history should not be a barrier to home ownership” and so it was no longer. The silliest idea is that bubbles can be properly identified in real time and dealt with in real time. Only ¼ bubbles end badly. What would all of the outraged populist politicians have said if the Fed had raised rates; “Depriving working class people of the American dream and right wingers attacking Federal housing policy”; the hearings would have repeated the committee for public safety in the French revolution and guillotines would have been set up in the Washington Mall. How silly to “think” a better word “fantasy”, that someone is omniscient enough and powerful enough in a free society to protect us; those same people probably believe that Social Security and Medicare can do likewise. As for Greed, it’s always with us hence the biblical admonitions; there is no evidence that there is more greed now. Demagogues always critic basic human nature as a cause the critics presence is a giveaway of demagoguery, and promise to improve human nature or protect against it; then they open reeducation camps and when that fails >>>.

  • Report this Comment On January 29, 2011, at 3:01 PM, mountain8 wrote:

    We as a country will never take responsibility for anything as long as we rely on the government to keep giving us benefits.

    "A democracy will only last until the citizens realize they can get money from the government for doing nothing. Then they will vote for those who promise to give them things, rather that who's qualified or responsible. Socialism is the next step in the evolution."

    (Roughly paraphrased from Taylor)

  • Report this Comment On January 29, 2011, at 3:03 PM, graclee wrote:

    I am amazed more blame wasnt laid at the feet of Fannie and Freddie. Our corrupt government led the charge and the greedy banks followed suit all in the name of profit. But I am still thankful to be a citizen of a country that can correct itself through a change in politics. Now lets stop the spending and get our financial house in order before China puts us completely under its thumb!!!

  • Report this Comment On January 29, 2011, at 3:56 PM, robin212 wrote:

    Unless society starts paying regulators comparable salaries as the private sector there will always be lack of intellectual firepower to police wall street. Why would you want to work for the regulators at 1/10 the salary to look over cdo's and other structured products when you can make 10x that at Morgan Stanley?

  • Report this Comment On January 29, 2011, at 4:34 PM, JustEconist wrote:

    I think some of the most important causes of the crisis mentioned in the report didn't caught the authors attention :

    1-DEREGULATION by FED and CLINTON:

    Meanwhile, the OCC, the regulator of banks with national charters, was expanding the permissible activities of national banks to include those that were “functionally equivalent to, or a logical outgrowth of, a recognized bank power.”

    

    Among

    these new activities were underwriting as well as trading bets and hedges, known as

    derivatives, on the prices of certain assets. Between  and , the OCC broadened the derivatives in which banks might deal to include those related to debt securities (), interest and currency exchange rates (), stock indices (),

    precious metals such as gold and silver (), and equity stocks ().

    Fed Chairman Greenspan and many other regulators and legislators supported

    and encouraged this shift toward deregulated inancial markets. They argued that inancial institutions had strong incentives to protect their shareholders and would

    therefore regulate themselves through improved risk management. Likewise, inancial markets would exert strong and effective discipline through analysts, credit rating agencies, and investors. Greenspan argued that the urgent question about

    government regulation was whether it strengthened or weakened private regulation.

    Testifying before Congress in , he framed the issue this way: inancial “modernization” was needed to “remove outdated restrictions that serve no useful purpose,

    that decrease economic eiciency, and that . . . limit choices and options for the consumer of inancial services.” Removing the barriers “would permit banking organizations to compete more effectively in their natural markets. The result would be a

    more eicient inancial system providing better services to the public.”

    (SH A D O W BA N K I N G page 35)

    2-the Community Reinvestment Act (CRA):

    In conducting our inquiry, we took a careful look at HUD’s affordable housing

    goals, as noted above, and the Community Reinvestment Act (CRA). The CRA was

    enacted in  to combat “redlining” by banks—the practice of denying credit to individuals and businesses in certain neighborhoods without regard to their creditworthiness. The CRA requires banks and savings and loans to lend, invest, and provide

    services to the communities from which they take deposits, consistent with bank

    safety and soundness.

    The Commission concludes the CRA was not a signiicant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only  of high-cost loans—a proxy for subprime loans—had any connection to

    the law. Loans made by CRA-regulated lenders in the neighborhoods in which they

    were required to lend were half as likely to default as similar loans made in the same

    neighborhoods by independent mortgage originators not subject to the law

    (CO N C L U S I O N S O F T H E FI N A N C I A L CR I S I S IN Q U I R Y CO M M I S S I O N x x v i i)

    From the report online:

    http://www.fcic.gov/report

  • Report this Comment On January 29, 2011, at 5:08 PM, Davemuse wrote:

    jimdog-

    The government did prohibit red-lining, and also required making loans available to modest-income people, but I am unaware of them being required to make a specific unsound loan to any applicant. The laws were premised on due diligence by the lending bank to make rather sound loans, and my local bank did a nice job of this during our lost decade, whereas elsewhere there were train wrecks. It seems to me that a "snake oil" explanation has been sold to many people. Importantly, I always remember that we once did this right with low-downpayment VA housing loans to returning soldiers with no significant credit history after WWII and the Korean War -- and that worked out well.

  • Report this Comment On January 29, 2011, at 5:23 PM, daleaeb wrote:

    If you're too stupid to live within your means, check the fine print or do some due diligence, then you got what you deserved. Shame on you "Joneses"!

    FAIRHOPEJOHN has the best comment on this page:

    I do not accept the underlying notion the American Public is so naive not to know they (we) were increasing their risk and merely puppets to the loan originators. Totally Naive - no. Very Greedy - yes.

  • Report this Comment On January 29, 2011, at 5:39 PM, Classof1964 wrote:

    Those who say that bubbles cannot be identified in real time, including Greenspan, must either be ideologues dealing in assumptions and an ideal world or financially and/or historically unsophisticated. One can, for example, look at Value Line and get an idea of what various guidelines of stock value have been over time, e.g., P/Es, price to book value, etc., and make a judgment on whether prices have gone to an extreme. In real estate one can look at cost per square foot, or price relative to assessment, how large price increases have been year to year, or the relationship of price to the average income in a given area. Those who say government should not regulate the free market or, given human nature, should not attempt to reduce fraud, theft, or duplicity, these people abandon the market to the most unscrupulous, duplicitous, and greedy. It is extremely unfortunate that politically on the national level the moderate right has been decimated by the radical right. The Tea Party types who expose an ideology that was appropriate for the 18th and early 19th century, when the great majority of people were small farmers settling a frontier and of necessity dependent on themselves and the relatively few neighbors in their area. The "free market" does not do many things that are necessary for a decent civilization and tends to monopoly and grossly unequal concentration of wealth if it is not balanced by good government. Anyone familiar with US history from 1865-1929 should recognize that point. Inequality in wealth is once again at 1929 levels: In 2005 the top 1% of Americans (300,000) had nearly as much income as the botton 150 million Americans. This privileged 1% doubled its share of the national income from 10% in 1980 to 22.8% in 2006. Over the same time period the bottom 90% saw its share of the national income fall from about 2/3 to a little more than half. So is it surprising that anonymous billionaires and special interests are financing radical right candidates and talking heads to overwhelm the media with libertarian ideas? The big corporations involved in the global economy get 40-60% of their earnings abroad. The small and medium businesses are dependent on the American market that has been 70% dependent on consumer spending. Reading the quotes Morgan House selected makes one wonder whether we are approaching 1929 again.

  • Report this Comment On January 29, 2011, at 7:03 PM, richie54 wrote:

    Why aren't President Obama, former senator Christopher Dodd and representative Barney Frank held accountable for their roles in Fannie Mae and Freddie Mac shelling out billions to keep this shell game moving?

    At least Senator Dodd didn't run for re-election last year.

  • Report this Comment On January 29, 2011, at 10:41 PM, Tomohawk52 wrote:

    With regard to the comment about Canada: just give it time. The housing bubble in the larger cities is inflating just fine. At some point it's going to burst and I am sure that everyone will point the finger at everyone else.

  • Report this Comment On January 30, 2011, at 12:44 AM, jfrankh57 wrote:

    Why not just make penalties so stiff that a white collar criminal would blanch rather than jump off a steep cliff such as these were and while we are at it, make sure penalties apply and are enforced to/on our elected officials as well!

  • Report this Comment On January 30, 2011, at 1:34 AM, wjleitold wrote:

    Regarding Class of 1964’s comment the current research by Adam Posen an External Member of the Monetary Policy Committee for the Bank of England, and a Senior Fellow at the Peterson Institute for International Economics debunks the idea that bubbles are readily recognizable and most of them pass away without major consequences. I think that you need to reconsider your preconceived belief in this matter not withstanding Value Line (the problem is more complex) in view of empirical research.

  • Report this Comment On January 30, 2011, at 9:35 AM, gkirkmf wrote:

    Lest we all forget the Commodity Futures Modernization Act of 2000 which Phil Gramm and President Clinton blessed us with... I give you Eric Dinallo's comments from the Financial Times. (SEE BELOW) For those rabid Democrats (capital D) and those rabid right wing patriots (small P) I recommend that you read the bill in its entirety , especially the section which exempts CDS;s from the gambling laws of the State of New York. CDS's were a MAJOR cause our financial disaster. They are what gave all the banker their comfort zone. They allowed them to "think" that as long as they were insured they could do anything they wanted.

    * Eric Dinallo, “We Modernized Ourselves into the Ice Age”, Financial Times, March 30, 2009 (“Dinallo FT Opinon”) (stating “unregulated speculation” was a major cause of the bank panic of 1907, in reaction states passed “anti-bucket shop and gambling laws, outlawing the activity that helped to ruin the economy”, and the CFMA “exempted credit default swaps from these laws” which meant “we might have avoided the worst of the current troubles if we had not overturned laws adopted in response to earlier crises.”) For the PWG’s recommendations to exclude from the CEA (and include in the CEA’s preemption of state laws) OTC derivatives in “non-exempt securities” see PWG Report at 17 (for swaps) and at 29 (for hybrid instruments).

  • Report this Comment On January 30, 2011, at 4:27 PM, allynayotte wrote:

    Having read all of the comments here, I have concluded that there is much blame to spread around regarding the mortgage mess, which continues to unfold. I'm not taking a position about any of it but just want to relate a true story and wonder why there have been no criminal investigations regarding mortgage brokers and their practices during the height of the bubble.

    Also, no one seems to mention the huge profits that individual sellers made on sales before the bubble burst. Lots of folks on the selling side did very well.

    Here's my story.

    In 2006, a young (28 years old) employee of mine, with a wife and 5 kids, told me that he wanted to buy a home. Until then he had been a renter. He made $40,000 a year and his wife made a similar amount but she was paid "under the table" so could not prove her income for mortgage purposes.

    I warned him not to buy the first thing they saw and to look around for something that was affordable. I might mention that when I asked him if he had a "budget", he wanted to know what a "budget" was. The following day, he told me that his wife had found a place and that they had put in an offer at $535,000, pending loan approval. His payment would by $3200 a month. I sat him down and went through the numbers with him, telling him that he needed to think about insurance and real estate taxes. He blew me off and said "he'd get a 2nd job". They went ahead with the purchase at full price!

    6 months before the bubble burst, he told me that he was being foreclosed on and was 5 months behind in his payments and said he wished that he had listened to me. By then, his credit was destroyed and he couldn't get a landlord to rent him an apartment without 3 months rent up front, which he didn't have. A wife and 5 kids on the street!

    I suspect this is a familiar story to a lot of folks, but here's the real problem.......

    After the fact, he confided to me that he hadn't qualified for the loan on his own but with "stated income" provisions in place, he was urged by the mortgage broker in the realtors office to say that he owned my company and made $100,000 per year. Both he and the broker signed that mortgage application using my campany's information on the document, which constitutes out-and-out fraud and conspiracy. The loan went through.

    My question is this: Why have these realtors and mortgage brokers, the real originators of the huge fraud perpetrated on the American people, been allowed to escape unscathed with their unbelievable profits, only to re-emerge in the mortgage brokerage business".

    Yes, Fannie and Freddie and Wall Street facilitated the mess but where are the state regulatory people who should be prosecuting these out-and-out frauds? Dead silence!

    Only in America!!!!

  • Report this Comment On January 30, 2011, at 9:52 PM, btrask3 wrote:

    Many of the comments above use many past tense references...

    It will probably be more constructive if we start talking in the present tense.

    Each time we comment.

    Each time we research a company.

    Each time we invest.

    And when we vote... particularly when we vote.

  • Report this Comment On January 30, 2011, at 11:50 PM, traderpat9 wrote:

    at least our children should benefit from what i consider THE BIGGEST BLOW TO AMERICAS ECONOMY-a 100 times worse than the STOCK MARKET CRASH OF 29-more middle class americans owed homeS & i say owed homes than people in the 20's owned stock & i never see housing values getting anywhere close to what they were. this is a blow that anyone involved in should hold their heads in shame. you killed americas economy forever as we know it. but as i feel no one feels accountable for anything in this country anymore. everyone blames the other guys & this is why america is being laughed at by the entire world. we got what we deserved THANKS TO THE GREEDY ONES!!

  • Report this Comment On January 31, 2011, at 12:05 AM, ET69 wrote:

    Hey I just found the solution! Nationalize the bas....ds without compensation. After all they ripped us all off. Now where is that book I was reading....hmmm....oh here it is; The Communist Manifesto ...written by a couple of guys...ahhh..who was it?....Oh ya Marx and Engels...have ya heard of them?

  • Report this Comment On January 31, 2011, at 9:03 AM, Bresslers8 wrote:

    Two points- First, I remain frustrated and furious that I Have been dragged down by this mess. I played by the rules. I never took out equity or second mortgage against my property just because it was available. I recognized I needed to continue to pay down my mortgage so it will be paid off prior to retirement. I have been saving for retirement because that's what one needs to do since pensions are a thing of the past. I lost a lot of money because of this avoidable fraudulent chain of events. I did everything responsibly right, but because of the heartless greed and stupity of others I am forced to suffer by being dragged in to this arena of financial terrisiom.

    Secondly, I have been a strong advocate for many years, most of my life (54 yrs.) actually of reducing government intervention in business. I have always been of the mind that most business men are good people. I further believed that in instances that was not the case, competition would largely keep things in check. It never dawned on me that greed would become so overwhemingly powerful, as to encompass thousands if not millions of people within the same industry and related industries to conspire at the same time to deceive so many people to literally topple the worlds economy. I hate to believe the future answer is to depend on more government control.

  • Report this Comment On January 31, 2011, at 11:03 AM, steveelcpo wrote:

    What about Barney Frank? I didn't see him named in your list. If one single person in Congress has some responsibility, it has to be him. He was the guy who said that Fannie/Freddie were just fine as late as 2007/2008, when as Chairman of the House Banking committee he had to know that there were problems.

    There's a lot of blame to go around in addition to the ones you list;

    -CEO's who made bad decisions with no board/stockholder oversight and were not penalized for their actions, criminal in some cases.

    -American public who thought there could be no end to increase in home values and kept mortgaging to buy more.

    -The rush to give everyone home ownership. Face it; some people can't afford it and are poor credit risks. Changing the measuring stick doesn't make them any better.

  • Report this Comment On January 31, 2011, at 1:43 PM, caddis16 wrote:

    The states don't prosecute because they are dead broke.

  • Report this Comment On January 31, 2011, at 4:04 PM, wjleitold wrote:

    Eric Dinallo is not and economist, not and economic historian; he is a Democrat Party stalwart with a large vested interest in the Democratic Party narrative; “OP ED” means “opinion editorial”, the emphasis is on opinion. He was formerly the NYS insurance commissioner (a highly political position) under the Spitzer – Paterson regime; he is hardly a disinterested objective observer. He and you are very wrong about the causes of the crash of 1907; the primary problem in the crash of 1907 was lack of liquidity and that lack contributed to the view that the US needed a central bank to be a lender of last result on good collateral; hence the creation of the Federal Reserve System. One of the main causes of the current crisis is insolvency not lack of liquidity, there and was plenty of liquidity in the system. A common misjudgment in financial crisis is that the problem is lack of liquidity; no one wants to believe that their assets are not worth what they paid for them or that their business is broke; Dick Fold, Stan O’Neal, Anthony Mozilla are the poster children for this fantasy.

  • Report this Comment On January 31, 2011, at 4:29 PM, FutureMonkey wrote:

    My question for Morgan: Did you get the Kindle edition from Amazon or buy the paperback?

    I went Kindle for my copy, so hopefully I at least get some return on my AMZN shares. Kind of wishing I had the paperback, just to have a tangible historical document. Thats what this is, History of the event. Perhaps also fascinating study of the magical thinking that supports economic bubbles and our reaction to them after they burst. Housing, tulips, its all good.

    I actually bought a book in 2005 entiled "How to Profit from the Coming Real Estate Crash" Kind of wish I had found time to read it...bummer.

  • Report this Comment On January 31, 2011, at 4:34 PM, TMFHousel wrote:

    "My question for Morgan: Did you get the Kindle edition from Amazon or buy the paperback?"

    PDF.

  • Report this Comment On February 01, 2011, at 9:39 AM, BleuSail wrote:

    The credit unions never needed a "bail out" because they don't loan any money unless you meet meet certain income to debt ratios, they offer slightly better interest and loan rates and guess who they are mainly run by or who the bank managers have to answer to? Its members. This is a slap in the face to us all as this is actually being run the way it should and you can see it working every day.

  • Report this Comment On February 01, 2011, at 11:46 PM, showmestate wrote:

    I would encourage anyone interested in this topic to read "Too big to Fail" and also listen to the story about Magnetar (which is mentioned in the FCIC report) which was broadcast on Public Radio and produced by This American Life. Both provide valuable insights into the current crisis and its causes. It's hard to believe that none of the players in this drama had an inkling of what was brewing. And if we truly believe they didn't, then why were they in positions of power and authority in the first place?

    I agree with the earlier poster who recited the facts related to the transfer of wealth in our society. Any student of history can see the resemblance to the period which produced Rockefeller, Carnegie and others like them. These men profited by being smart, but they also profited by tilting circumstances in their favor, with the help of government. It's hard not to conclude that the government has relinquished a lot of its integrity to promoting private and personal goals. When Henry Ford was asked why he paid his workers generously, his answer was simple. He wanted them to be able to afford to buy one of his cars. That seems to be the lesson which is lost here. If 1% of the population controls 22% of the wealth, that is devastating to an economy. That 1% can't spend the amount of money they are making and instead, accumulate wealth rather than invest in activites which drive economic growth.

    This discussion should focus not only on the leaves on the tree, but also the body which created and sustains them.

  • Report this Comment On February 02, 2011, at 5:07 AM, ngc121629 wrote:

    There is an old cliche to which I subscribe.Put ten bright men on a committee and the most likely result will be an average not a sum!.

    To make any progress on financial reform;start with basics!

    1 :What derivatives are essential to free market societies (not just for individuals or hedge funds) e.g. what new jobs do they produce?.

    Until this question is answered and free trade becomes "Fair Trade" -All the rest is just mental maturbation! ;Unless the capital markets are aligned with social justice;the west's capitalism is headed for collapse and revolution

    Tunisia Egypt and th Middle east dictatorships propped up by the US and Europe for cheap oil

    will now pay the price for not promoting the general welfare of the people !! For a lack of a credible energy independence policy the right wing will find out how secure their assets will be in the next few years.They will not get a 2nd TARP

  • Report this Comment On February 02, 2011, at 7:39 PM, Davemuse wrote:

    Morgan,

    What a great service you provided by highlighying the key points in the report. The disagreement among committee members helps dilute the value of those key points, but time may well confirm their importance, current politics notwithstanding.

  • Report this Comment On February 03, 2011, at 2:13 PM, easyavenue wrote:

    Old44:

    I think you have the right perspective in this discussion - focus on realistic preventive measures - when you said:

    "How do we go about getting some meaningful change in regulations where the greedy can no longer dupe a whole country out of their futures?"

    We can forever diagree about causation, but only find its usefulness in constructive changes resulting in preventive measures. There will always be greedy people because to whatever degree it is human nature. You can't stop those feelings from happening in people. But you can stop people from turning those feelings into action. It takes 1) spiritual growth and 2) effective regulation and punishment.

    Self-regulation won't work in today's spiritual and moral void. Gandhi called commerce without morality one of the eight great blunders of the modern world. This crisis is a good example. We need to spiritually and morally mature as individuals and as a society. I prefer not to see such growth from a formal religious standpoint but from a growth of the inner self, of the individual's spirit and soul. So no, I'm not a Thumper Stumper.

    Government regulation and punishment can only be as effective as we make it. If the current oversight is not effective then we need to vote in people who are effective. We can also comment on proposed rules in the making by every Agency at... help me here. It used to be that weekly Fed newspaper, I forget the name, where they publish every proposed rule, but now with the internet I'm no longer sure where the central comment point is. Anyone?

    EA

  • Report this Comment On February 04, 2011, at 12:55 PM, carolsmithhsa wrote:

    This review of this government report just serves to cofnrim what we all knew was occurring -- regulators could have done something to avert the out-of-control mortgage acquisition and securitization shemes -- but did not. I have come to unfortuantely believe they will not do so in the future either -- because the government regulators all used to work for the various financial institutions or have very close ties to them - and they will not truly harm or effectively hinder them in any pervasive regulatory compliance process. Slap on the wrists -- yes; real teeth to compliance -- no.

    So from a personal planning perspective, I have decided to put my 'money where my mouth is' and have revamped my portfolio largely away from large financial institutions where I believe there is too much opportunity for twisting and hidden behavior loaded with exotic financial instruments (next versions yet to be invented) -- toward consumer markets where actual tangible consumption items are being created. At least in this equation you have an interested consumer in the value triangle who can choose not to buy products and withhold their money contribution in the news of bad or unethical company behavior. So Johnson and Johnson and Kraft and Walmart here I come!

  • Report this Comment On February 04, 2011, at 3:03 PM, biscuitfool wrote:

    With the makeup of the commission that generated this report, it is no surprised that most of the blame was direct toward Wall Street and the very people that securitize all manner of debt to the benefit of the average borrower.

    Very little was mention about the two groups who actually caused this problem.

    First and foremost, the Federal Government encourage, cajoled and threatened lending institutions to lend more to the "undeserved market." Social Engineering. The FHA and it's minions, Frannie and Freddie, encouraged by congress lowered lending standards and backstopped these bad loans with taxpayer dollars for a political end.

    Secondly, borrowers always overreach when it comes to something they want.

    Stop the insanity at it's source A simple formula free from government interference that says, "I'm sorry, but you can't afford this loan.

    Without the original bad loans, you have nothing to securitize and spread all over the globe, and nothing to write CDS insurance on, period.

    No Bubble

  • Report this Comment On February 06, 2011, at 3:13 PM, WmMatz wrote:

    Many good comments. let me amplify a few of the points.

    Comments about brokers miss the larger point. Loan origination has been the poor step-child of financial services. There were no education or training requirements for people to "do" loans. Even the limited licensing requirements for brokers did not apply to loan officers for lenders. So folks could be delivering pizza or pumping gas one day and "advising" on million dollar mortgages the next.

    The result was that borrowers had no one to give competent loan advice, unless less they were lucky enough to have one of the few originators who had legitimate financial education and experience. Attys, CPAs, CFPs, etc. could not help, as they lacked sufficient understanding of the loan system and product options. I know, as I have been training these folks to raise their awareness. (Sadly, I have testified as an expert in atty malpractice cases on this issue.)

    Today, only 20% of the peak number of brokers have passed the SAFE test for NMLS registration. But lest anyone applaud the "weeding out", note that those who fail can still do loans, but now they have to work for a bank,whose loan officers are curiously exempt from the test.

    Has this shift from 35% to 85% bank originations helped the consumer? Hardly. I compared a 30-year fixed loan pricing at B of A and a broker. B of A cost $8,000 more on a $400k loan.

    However, the fundamental problem is not pricing. The most important consideration is to ensure that borrowers get the right loans because home loans are typically borrowers' most important financial transactions. The loan process is a point at which all borrowers should be doing financial planning to ensure that loans match their overall plans. Yet, as I noted, they are unlikely to find that ability in loan originators.

    All of the foregoing comments only address the continuing weakness in loan origination. But another area requires factual comment.

    Many suggest that gov't pressure was a major factor in the crisis. This is simply not true. The major culprits of subprime and Pay Option ARMs were aggressively marketed for one reason: greed! Lenders found that by deceiving borrowers and investors (in MBS) they could make vastly greater profits on these loans. (For details, read the AG lawsuit/settlement against Countrywide or the Senate report on WaMu.) As noted above, Fannie/Freddie loans (with occasional, small incentives for targeted census tracts) have a much lower rate of default. No question that there was mismanagement at Fannie/Freddie and that reform was needed. But those were secondary factors.

    Any objective analysis will show that the major factor was the lenders and Wall Street conspired to cook up a massive quantity of loans that could be labelled AAA and sold without recourse. This caused lenders (not brokers) to throw away quality standards in a rush to volume with no risk. The Senate report accurately characterizes the WaMu process as a "conveyor belt of toxic sludge". There has been no real accountability of lenders, investment banks, and ratings agencies for all the deliberate violations of existing lending laws. And those culprits seek to place the blame everywhere except at their own doorsteps.

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