Federal Commission on the Financial Crisis

[jjamie12]

Commission Findings

 

I find it VERY hard to take this with any kind of seriousness when you read this:

 

The report does knock down at least partly several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the aggressive homeownership goals set by the government as part of a philosophy of opportunity were not major culprits.

 

And then there's this:

 

The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire, the report states. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.

I'm not even really sure what this is supposed to mean -- Of course they did. I mean -- they really, really, really screwed up. Just like in every 'financial crisis'.

 

 

Also -- No mention of (in fairness -- this isn't the report, it's just a synopsis of what the report will say):

 

1 - Rating Agencies

2 - Investors in MBS

 

Thoughts?

Edited January 27, 2011 by jjamie12

[GG]

Linky no worky

[jjamie12]

Commision Findings

 

Maybe this works?

[GG]

Commission Findings

 

I find it VERY hard to take this with any kind of seriousness when you read this:

 

 

 

And then there's this:

 

 

I'm not even really sure what this is supposed to mean -- Of course they did. I mean -- they really, really, really screwed up. Just like in every 'financial crisis'.

 

 

Also -- No mention of (in fairness -- this isn't the report, it's just a synopsis of what the report will say):

 

1 - Rating Agencies

2 - Investors in MBS

 

Thoughts?

 

Perhaps you should read the entire report first (or at least to page xxv)?

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

[jjamie12]

Perhaps you should read the entire report first (or at least to page xxv)?

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

Good. Thanks for this -- the original linked article didn't have the actual report in it.

[DC Tom]

Perhaps you should read the entire report first (or at least to page xxv)?

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

 

A government panel concludes it's not the government's fault? Shocking...

[GG]

A government panel concludes it's not the government's fault? Shocking...

 

No, they blamed everybody. At least from a 30K view, it's fairly evenhanded.

 

I'll skim the whole thing one of these days ...

[DC Tom]

No, they blamed everybody. At least from a 30K view, it's fairly evenhanded.

 

I'll skim the whole thing one of these days ...

 

I haven't had a chance to read it (power was out until about 2 this afternoon, then I was busy for the rest of the night). Just heard about it on the radio and read some quick summaries...radio here is making it out to be "The panel found that the financial acted irresponsibly, but the Republicans on the panel are trying to convince us otherwise, shame on them."

 

I'm sure the paper is more even-handed than that. As it's a government exercise, and they're trying to analyze something hideously complex, I'm sure it's also a load of bull ****.

[Magox]

There were two other groups with dissenting opinions from the six that came out with this report... Between the three groups they pretty much covered everything.

[Gary M]

There were two other groups with dissenting opinions from the six that came out with this report... Between the three groups they pretty much covered everything.

 

So what do they do next?

 

Nothing

[GG]

There were two other groups with dissenting opinions from the six that came out with this report... Between the three groups they pretty much covered everything.

 

I should add that the 10 factors that the three dissenting Republicans offered in the WSJ editorial yesterday is a good synopsis of the causes. But in cursory review, they're all saying the same thing but coming to it from different angles.

 

Summary, everyone is to blame.

[IDBillzFan]

So what do they do next?

 

Nothing

They did what they were supposed to do: give everyone someone else to blame.

 

"Well, according to the Federal Commission on the Financial Crisis..." for the next 20 years.

[GG]

Ten Factors WSJ Editorial:

 

For those without WSJ subscription:

 

"Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay.

 

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles -- the dot-com bubble of the 1990s, for example -- that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?

 

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

 

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. The losses spread in two ways. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.

 

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10)."

[DC Tom]

Ten Factors WSJ Editorial:

 

For those without WSJ subscription:

 

"Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay.

 

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles -- the dot-com bubble of the 1990s, for example -- that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?

 

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

 

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. The losses spread in two ways. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.

 

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10)."

 

Anything that doesn't explicitly call out the American homebuyer for being a complete !@#$wit is incomplete if not counterproductive. If the above is an accurate representation of the content of the report, it's compounding the problem of pretending that the American consumers are somehow disconnected from the financial industry and government policy.

[Peace]

Anything that doesn't explicitly call out the American homebuyer for being a complete !@#$wit is incomplete if not counterproductive. If the above is an accurate representation of the content of the report, it's compounding the problem of pretending that the American consumers are somehow disconnected from the financial industry and government policy.

 

 

Shh, those are voters you're talking about.

 

To reinforce this point, about 5 years ago, my wife and I were considering moving into a different house. We went through the pre-approval exercise and got pre-approved for a 720,000 mortgage and was reassured that with our credit, we could get much more if we needed to.

 

I can tell you right now that I couldn't afford close to a 700K house, let alone more...but some bank stood ready to loan me the money.

Edited January 28, 2011 by Peace

[GG]

Anything that doesn't explicitly call out the American homebuyer for being a complete !@#$wit is incomplete if not counterproductive. If the above is an accurate representation of the content of the report, it's compounding the problem of pretending that the American consumers are somehow disconnected from the financial industry and government policy.

 

The above is one of the dissenting opinions to the report's conclusion. But the formal report does not specifically point a finger at the consumer, either. It's easier to say that it was the bankers' & regulators' fault, and every person who took out a mortgage between 1999 and 2007 was misled.

[KD in CA]

I should add that the 10 factors that the three dissenting Republicans offered in the WSJ editorial yesterday is a good synopsis of the causes. But in cursory review, they're all saying the same thing but coming to it from different angles.

 

Summary, everyone is to blame.

 

 

Even the people who applied for mortgages they had no ability to repay and didn't read any of the documents before signing them?

[GG]

Even the people who applied for mortgages they had no ability to repay and didn't read any of the documents before signing them?

 

I imagine so.

 

People forget that a good chunk of "subprime" mortgages were taken out by middle class house flipping speculators. After all, there's no way property values would decline in Arizona, Florida or the Inland Empire.

[DC Tom]

I imagine so.

 

People forget that a good chunk of "subprime" mortgages were taken out by middle class house flipping speculators. After all, there's no way property values would decline in Arizona, Florida or the Inland Empire.

 

I'd like to see actual numbers attached to "a good chunk". Not that I doubt...but I'd bet it varies a lot regionally. In DC, I'd guess it's about 70-30 in favor of actual homeowners.

[GG]

I'd like to see actual numbers attached to "a good chunk". Not that I doubt...but I'd bet it varies a lot regionally. In DC, I'd guess it's about 70-30 in favor of actual homeowners.

 

I'll see what I can dig up.

 

It definitely was a regional thing. Florida was largely real estate speculators, so were portions of AZ & NV.

 

Here's an interesting find from 2006

 

 

As an aside, nice to see the government truly acting on behalf of the consumer. Remember the non-call database, and how the financial industry got a pass from the inclusion? Well, it still isn't fixed. As soon as we filed our application to refinance the house, we've been geeting 5 calls/day from mortgage brokers.

 

Way to go Dodd Frank.

Edited January 28, 2011 by GG