Michael Osinski - How One Man Broke the US Economy

[GG]

And Elizabeth Warren is complete simpleton who knows very little about the financial world.

 

It doesn't matter. She was quoted in a newspaper, thus she's a respected authority.

[GG]

Yes!!!!

 

FYI,

 

the securitizations regarding the subprime MBS's would of never have been rated as high as traditional Mortgage-backed-Securities. Therefore their exposure to subprime lending would of been much less than what it was. But since the repeal of GS, they were able to get much higher exposure because it was "deregulated". That is not to difficult to understand.

 

Whaaat? Do you even know how securitizations are rated? The major difference between ratings on subprime RMBS vs traditional RMBS is the notching between AAA and BB tranches. Otherwise, subprime RMBS did and would have still had a good portion of AAA in its structure, even if Glass and Steagall rose from their grave to lobby against the repeal of their baby.

[Magox]

It doesn't matter. She was quoted in a newspaper, thus she's a respected authority.

Oh ok.

 

How about Joseph Stiglitz? He's only an economic nobel laureate. You guys will continue to discredit anything that doesn't support your argument.

 

At least I back up my data.

 

http://www.vanityfair.com/magazine/2009/01/stiglitz200901

 

Read the article.

 

Guess what he says? I'm sure you have an idea.

 

Let me just copy this part for you:

 

No. 2: Tearing Down the Walls

The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act—the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest—toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”

 

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

 

There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks—the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.

 

As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation—a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant—and successful—in their opposition. Nothing was done.

 

 

 

keep turning a blind eye.

 

[Lurker]

It doesn't matter. She was quoted in a newspaper, thus she's a respected authority.

Elizabeth Warren is without a doubt the least knowledegable person connected to this whole sorry saga. Everytime I read anything she has to say, I just shake my head. She's a lawyer who doesn't know JS about what she's talking about, IMO...

[Magox]

It doesn't matter. She was quoted in a newspaper, thus she's a respected authority.

Wrong again!

 

She is on the congressional panel of oversight for the TARP.

 

It's getting really tiring having to correct you over and over.

[Lurker]

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

This is all true, but doesn't really support your original contention: that GS repeal caused the meltdown.

 

All Stiglitz is saying is that the repeal could create added risks for the banking system because problems at a FHC's I-bank subsidiary could now put their FDIC-insured commercial banking sub at risk as well. I don't think anyone here is disputing that.

 

But the flood of capital into the housing market has nothing to do with that argument...

 

There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves.

 

I'm not a fan of the SEC's role in the way it (poorly) regulated the I-banks. IMO, the agency lost a lot of talent and motivation during the Dubya years. Maybe that's not causality either, but it's an unfortunate coincidence...

[bills_fan]

At least I back up my data.

 

Did you even READ the link I sent you to...the treatise on Securities Activities of Banks? If so, perhaps you missed the regulatory timeline that begins on page 1-10, detailing the various agency decisions beginning in 1970 that chipped away at GS. By 1999 and the repeal of certain portions of GS, there was no separation anyway. Therefore, your statement that the repeal of GS caused this mess by permitting commerical banks to enter into business activities they were otehrwise prohibited to enter is clearly erroneous.

[GG]

Elizabeth Warren is without a doubt the least knowledegable person connected to this whole sorry saga. Everytime I read anything she has to say, I just shake my head. She's a lawyer who doesn't know JS about what she's talking about, IMO...

 

With all due respect, that honor should go to every single member on the Congressional Oversight Committee (Except for Chris Shayes, who's no longer serving)

[DC Tom]

Ok Robin, I did read and understand what he wrote. I am very well informed of the supporting arguments for the repeal of GS.

 

The GS act was not perfect, I never claimed that it was, there will always be loopholes in how to manipulate markets when greed is involved. The argument that BillsFan had was a strong argument that was repeated over and over from Gramm and Leach, which is what I had mentioned in an earlier post, but you discredited that quickly. That argument was a similar argument that was used from lobbyists trying to repeal the act, funded by guess who? that's right, the banking industry. So you have to take that with a grain of salt.

 

Correct?

 

Actually, that is completely UNLIKE what you said in an earlier post. Your response to "Glass-Steagal was repealed because it had been progressively eroded for years" was "Gramm and Leach were capitalist lackeys." You still haven't answered the point with your "Well...there were loopholes" statement above, but at least now you're trying to have a discussion.

 

Risk taking was all ready taking place, no one disputes that, I certainly havn't. What I said was that the repeal of GS increased the level of risk taking, and dimished the role of regulation for Depository institutions through many of the "deregulated" Mortgage-Backed-Securities markets.

 

Its very simple, if the repeal of GS had never occured, Citigroup, B&A and many others would of never of had the access to these "deregulated" financial instruments. That is what I am saying. That is a fact.

 

What precisely do you mean by "deregulated financial instrument"? What regulations do you think were on mortgage-backed securities? Having worked with them for five years up until a month ago, I think I do know something about it...and I can assure you, Citi, BofA, et al. would have had access as long as the securities were rated high enough by Moody's and S&P. So are you trying to say now that the ratings agencies failed in their responsibility for regulating the MBS market? There were plenty of violations of regulations going on in the past seven years - again, with some direct experience with mortgage origination, I could tell you stories that would make your skin crawl. But those had nothing to do with Glass-Steagal either (in fact, those violations were of HUD regulations, not Treasuary.)

 

THAT, more than anything, is the reason for the explosion of sub-prime loans you attribute to Glass-Steagal: the regulations which lenders were supposed to follow in lending money to homeowners simply stopped being enforced. Glass-Steagal's repeal had nothing to do with it, since it was already being largely ignored anyway. If it did have anything to do with the increase in subprime lending, it would have cause a gradual increase corresponding to the gradual erosion of the law, not the sudden spike in subprime lending you attribute to it's repeal.

[GG]

Oh ok.

 

How about Joseph Stiglitz? He's only an economic nobel laureate. You guys will continue to discredit anything that doesn't support your argument.

 

 

 

As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation—a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant—and successful—in their opposition. Nothing was done.

 

keep turning a blind eye.

 

 

It would be helpful that not only that you understand what you post, but you should read it first too.

[Lurker]

With all due respect, that honor should go to every single member on the Congressional Oversight Committee (Except for Chris Shayes, who's no longer serving)

I put absolutely no faith in anyone on a Congressional committee to know anything. These guys are all staff-driven, so we end up with policy made by 20-somethings...and the lobbyists who whisper in their ears. The regulators have to be the cops on the beat, and when they're not...

[DC Tom]

the securitizations regarding the subprime MBS's would of never have been rated as high as traditional Mortgage-backed-Securities. Therefore their exposure to subprime lending would of been much less than what it was. But since the repeal of GS, they were able to get much higher exposure because it was "deregulated". That is not to difficult to understand.

 

 

What is this "deregulation" of mortgage-backed securities you keep throwing around? I don't think that means what you think it means.

 

 

By the way...Glass-Steagall permitted commercial banks to invest in mortgage-backed securities to begin with. It pretty much had to - otherwise Fannie Mae couldn't have operated as intended when it was created. So again...is your "deregulated mortgage-backed securitites" supposed to mean "Fannie- and Freddie-insured mortgage-backed securities"? Because if so, you might actually have a point...sort-of. The problem with that point (if you're actually making it) is that many of the Fannie and Freddie securities were garbage as well, for reasons having nothing to do with Glass-Steagall. That gets into - again - the thirty-year trend of increasingly weak lending standards to satisfy a government policy promoting home ownership.

 

It's kind of tough to argue that GLBA allowed commercial banks to invest in garbage, when investment in the securities was allowed under Glass-Steagall to begin with, and said securities became garbage for reasons having nothing to do with Glass-Steagall. And by "tough to argue", I mean "tough for a rational person to argue". I'm sure you will anyway.

[Magox]

Actually, that is completely UNLIKE what you said in an earlier post. Your response to "Glass-Steagal was repealed because it had been progressively eroded for years" was "Gramm and Leach were capitalist lackeys." You still haven't answered the point with your "Well...there were loopholes" statement above, but at least now you're trying to have a discussion.

 

 

 

What precisely do you mean by "deregulated financial instrument"? What regulations do you think were on mortgage-backed securities? Having worked with them for five years up until a month ago, I think I do know something about it...and I can assure you, Citi, BofA, et al. would have had access as long as the securities were rated high enough by Moody's and S&P. So are you trying to say now that the ratings agencies failed in their responsibility for regulating the MBS market? There were plenty of violations of regulations going on in the past seven years - again, with some direct experience with mortgage origination, I could tell you stories that would make your skin crawl. But those had nothing to do with Glass-Steagal either (in fact, those violations were of HUD regulations, not Treasuary.)

 

THAT, more than anything, is the reason for the explosion of sub-prime loans you attribute to Glass-Steagal: the regulations which lenders were supposed to follow in lending money to homeowners simply stopped being enforced. Glass-Steagal's repeal had nothing to do with it, since it was already being largely ignored anyway. If it did have anything to do with the increase in subprime lending, it would have cause a gradual increase corresponding to the gradual erosion of the law, not the sudden spike in subprime lending you attribute to it's repeal.

In response to this:

Actually, that is completely UNLIKE what you said in an earlier post. Your response to "Glass-Steagal was repealed because it had been progressively eroded for years" was "Gramm and Leach were capitalist lackeys." You still haven't answered the point with your "Well...there were loopholes" statement above, but at least now you're trying to have a discussion.

 

I never claimed that there was a single factor that caused the financial meltdown. I stated that in a previous post. I also never claimed that the Glass-Steagall act was perfect, of course there were many imperfections and loopholes. There were definitely strong arguments that were made for the repeal of Glass Steagall. I don't discount the advantages of the Repeal, because it did provide added liquidity to the markets. My argument is that the Repeal of the G S as imperfect as GS was, in my view, and many other respected economists saw it as a huge risk to repeal it.

 

In regards to this question:

 

So are you trying to say now that the ratings agencies failed in their responsibility for regulating the MBS market?

 

I absolutely do partially blame the ratings agency. It is an absolute joke, S&P, Fitch and Moody's. These guys were motivated by money. In order to rate a bond that was issued, they would be payed by the potential issuer of the bond. How distorted is that? So yes, the ratings agency is a joke in my view.

 

In response to this:

 

There were plenty of violations of regulations going on in the past seven years - again, with some direct experience with mortgage origination, I could tell you stories that would make your skin crawl. But those had nothing to do with Glass-Steagal either (in fact, those violations were of HUD regulations, not Treasuary.)

 

I don't doubt you what so ever, I have dealt with a couple mortgage brokers here in Miami. This is one of the mortgage scam capitals of the world. I know of the unscrupulous activities that take place. There is little doubt in my view, that this also played an important role of the crisis that we are in. And yes, that has nothing to do with GS. I never said it did.

 

In response to this:

 

If (repeal of GS) it did have anything to do with the increase in subprime lending, it would have cause a gradual increase corresponding to the gradual erosion of the law, not the sudden spike in subprime lending you attribute to it's repeal.

 

The bottom line is that before the repeal of GS, 5% of all home loans were subprime, in 2008 that number shot to 30%. I don't really believe in coincidences the way GG does. I would say that played a role in it. As well as many other things. No doubt that role of Freddy and Fannie was a part of it, no doubt that Greenspan keeping interest rates down for too long played a HUGE role in it, no doubt unscrupulous mortgage activies took place.

 

My argument is that the majority of the losses did not occur through poor underwriting. yes, that is a central root, and the underlying losses had to do with poor underwriting. But the majority of losses that took place were through MBS, CDO, and SIV's.

 

Warren Buffet had referred to these derivatives, which are basically side bets on these underlying assets, he referred to them as "financial instruments of mass destruction"

 

here is a copy of an excerpt from an article. I remember seeing it on television some time late last year. I thought it was a great interview, maybe you saw it.

 

the bet that blew up Wall Street. The TNT was the collapse of the housing market and the failure of complicated mortgage securities that the big investment houses created and sold around the world.

 

But the rocket fuel was the trillions of dollars in side bets on those mortgage securities, called "credit default swaps." They were essentially private insurance contracts that paid off if the investment went bad, but you didn't have to actually own the investment to collect on the insurance.

 

"If I thought certain mortgage securities were gonna fail, I could go out and buy insurance on them without actually owning them?" Kroft asks Eric Dinallo, the insurance superintendent for the state of New York.

 

"Yeah," Dinallo says. "The irony is, though, you're not really buying insurance at that point. You're just placing the bet."

 

Dinallo says credit default swaps were totally unregulated and that the big banks and investment houses that sold them didn't have to set aside any money to cover their potential losses and pay off their bets.

 

"As the market began to seize up and as the market for the underlying obligations began to perform poorly, everybody wanted to get paid, had a right to get paid on those credit default swaps. And there was no 'there' there. There was no money behind the commitments. And people came up short. And so that's to a large extent what happened to Bear Sterns, Lehman Brothers, and the holding company of AIG," he explains.

 

In other words, three of the nation's largest financial institutions had made more bad bets than they could afford to pay off. Bear Stearns was sold to J.P. Morgan for pennies on the dollar, Lehman Brothers was allowed to go belly up, and AIG, considered too big to let fail, is on life support to thanks to a $123 billion investment by U.S. taxpayers.

 

"It's legalized gambling. It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell," Dinallo says.

 

Here is a link to the entire interview. It's a great read.

 

Btw, GG, this is where AIG played a role

 

http://www.cbsnews.com/stories/2008/10/26/...in4546199.shtml

[DC Tom]

I never claimed that there was a single factor that caused the financial meltdown. I stated that in a previous post. I also never claimed that the Glass-Steagall act was perfect, of course there were many imperfections and loopholes. There were definitely strong arguments that were made for the repeal of Glass Steagall. I don't discount the advantages of the Repeal, because it did provide added liquidity to the markets. My argument is that the Repeal of the G S as imperfect as GS was, in my view, and many other respected economists saw it as a huge risk to repeal it.

 

No, you said Glass-Steagall was the biggest contributor to the financial crisis. If I may quote you:

 

Now tell me that the repeal of the Glass-Steagall act wasn't the biggest influence that opened up the gates to the financial crisis that we are in.

 

So now you're changing your mind?

 

I absolutely do partially blame the ratings agency.

 

For not regulating the markets properly? That was my question: "So are you trying to say now that the ratings agencies failed in their responsibility for regulating the MBS market?" No doubt they failed - but did they fail as a regulatory body, as you seem to be saying?

 

And what kind of waffling is "I absolutely do partially blame..."?

 

 

I don't doubt you what so ever, I have dealt with a couple mortgage brokers here in Miami. This is one of the mortgage scam capitals of the world. I know of the unscrupulous activities that take place. There is little doubt in my view, that this also played an important role of the crisis that we are in. And yes, that has nothing to do with GS. I never said it did.

 

My wife and I have dealt with dozens (if not hundreds). Trust me, you have no idea of the fraud that was allowed. My wife does real estate closings...she routinely had lenders tell her "Don't show the paperwork to the buyer, we don't want them to see the terms of the loan until after they sign." (To her credit, she'd tell them to !@#$ off and report them to HUD...who usually did nothing.) That kind of fraud played a VITAL role in the process - it created the risk to begin with.

 

The bottom line is that before the repeal of GS, 5% of all home loans were subprime, in 2008 that number shot to 30%. I don't really believe in coincidences the way GG does.

 

No, you believe that correlation equals causation. Can you possibly explain a causal effect by which the repeal of Glass-Steagall - a law that had nothing to do with restricting poor lending practices - would cause a five-fold increase in subprime lending?

 

My argument is that the majority of the losses did not occur through poor underwriting. yes, that is a central root, and the underlying losses had to do with poor underwriting. But the majority of losses that took place were through MBS, CDO, and SIV's.

 

And yet, you've argued that the losses were caused in part by poor lending practices (by non-lenders like Fannie and Freddie, no less ); by securitization of mortgages, good and bad; by "deregulation" of mortgage-backed securities (still haven't explained what you mean by that, either); and by the repeal of a law that never disallowed commercial bank investment in mortgage-backed securities to begin with.

 

What's more, for ANY of your arguments, you haven't even postulated (much less demonstrated) a mechanism for that loss. Even your newest argument - "the majority of losses that took place were through MBS, CDO, and SIV's" - great, how? How did Lehman lose $40B overnight, and what does that possible have to do with Glass-Steagall or Gramm-Leach-Bliley?

 

Warren Buffet had referred to these derivatives, which are basically side bets on these underlying assets, he referred to them as "financial instruments of mass destruction"

 

Yes, we know you can cut-and-paste, but did you understand it? Do you even know the difference between a credit-default swap and a mortgage-backed security? Or what a reinsurer like AIG really did? Or how Glass-Steagall relates to either?

[Lurker]

The bottom line is that before the repeal of GS, 5% of all home loans were subprime, in 2008 that number shot to 30%.

 

See my prior post about housing affordability...

 

My argument is that the majority of the losses did not occur through poor underwriting. yes, that is a central root, and the underlying losses had to do with poor underwriting. But the majority of losses that took place were through MBS, CDO, and SIV's.

 

The majority of losses have come from mark-to-market writedowns of these securities because there's no longer a market (and hence a market price) to value this paper at. Sure, some securities have collapsed because of poor underwriting & rising defaults/foreclosures, but the majority of MBS paper continues to perform (i.e., people pay their mortgages).

 

(BTW, a SIV is an off-balance sheet entity created to hold investment securities, not a security itself).

 

Warren Buffet had referred to these derivatives, which are basically side bets on these underlying assets, he referred to them as "financial instruments of mass destruction"

 

As you say, Buffett's talking about credit default swaps, but they are a whole 'nother animal than MBS or even synthetic securities like CDOs. CDS hedging products have been around for a long time, and again are not something created by the repeal of GS. Their abuse is very worrysome, but again it gets back to the SEC/OTS not doing a better job of reigning them in, as it applies to AIG.

 

Moreover...I can't believe I've wasted most of my work day on this.

[DC Tom]

As you say, Buffett's talking about credit default swaps, but they are a whole 'nother animal than MBS or even synthetic securities like CDOs. CDS hedging products have been around for a long time, and again are not something created by the repeal of GS. Their abuse is very worrysome, but again it gets back to the SEC/OTS not doing a better job of reigning them in, as it applies to AIG.

 

But I think he might be pointing out that the repeal of Glass-Steagall allowed commercial banks to invest in CDS's - which gets back, in a roundabout way, to GG's mention of Basel requirements.

 

 

Which would have been a valid point...six pages ago, before he made Fannie and Freddie lenders and gave S&P regulatory authority over deregulated mortgage bonds.

[Magox]

No, you said Glass-Steagall was the biggest contributor to the financial crisis. If I may quote you:

 

 

 

So now you're changing your mind?

 

 

 

For not regulating the markets properly? That was my question: "So are you trying to say now that the ratings agencies failed in their responsibility for regulating the MBS market?" No doubt they failed - but did they fail as a regulatory body, as you seem to be saying?

 

And what kind of waffling is "I absolutely do partially blame..."?

 

 

 

 

My wife and I have dealt with dozens (if not hundreds). Trust me, you have no idea of the fraud that was allowed. My wife does real estate closings...she routinely had lenders tell her "Don't show the paperwork to the buyer, we don't want them to see the terms of the loan until after they sign." (To her credit, she'd tell them to !@#$ off and report them to HUD...who usually did nothing.) That kind of fraud played a VITAL role in the process - it created the risk to begin with.

 

 

 

No, you believe that correlation equals causation. Can you possibly explain a causal effect by which the repeal of Glass-Steagall - a law that had nothing to do with restricting poor lending practices - would cause a five-fold increase in subprime lending?

 

 

 

And yet, you've argued that the losses were caused in part by poor lending practices (by non-lenders like Fannie and Freddie, no less ); by securitization of mortgages, good and bad; by "deregulation" of mortgage-backed securities (still haven't explained what you mean by that, either); and by the repeal of a law that never disallowed commercial bank investment in mortgage-backed securities to begin with.

 

What's more, for ANY of your arguments, you haven't even postulated (much less demonstrated) a mechanism for that loss. Even your newest argument - "the majority of losses that took place were through MBS, CDO, and SIV's" - great, how? How did Lehman lose $40B overnight, and what does that possible have to do with Glass-Steagall or Gramm-Leach-Bliley?

 

 

 

Yes, we know you can cut-and-paste, but did you understand it? Do you even know the difference between a credit-default swap and a mortgage-backed security? Or what a reinsurer like AIG really did? Or how Glass-Steagall relates to either?

I'm leaving my office now, So we will continue another day, the wifey gets upset when I'm chattin too much on the net.

 

To answer one point. I said "it opened up the flood gates" there is a big difference. I am very careful with my words.

 

Also, you said waffling. That isn't waffling. I absolutely do partially blame them for part of the mess that we are in for rating the bonds much safer than what they were. Absolutely meaning that I do blame them completely. Partially because it was a portion of the problem, not the entire problem. ok?

 

and regarding this point:

 

And yet, you've argued that the losses were caused in part by poor lending practices (by non-lenders like Fannie and Freddie, no less ); by securitization of mortgages, good and bad; by "deregulation" of mortgage-backed securities (still haven't explained what you mean by that, either); and by the repeal of a law that never disallowed commercial bank investment in mortgage-backed securities to begin with.

 

What's more, for ANY of your arguments, you haven't even postulated (much less demonstrated) a mechanism for that loss. Even your newest argument - "the majority of losses that took place were through MBS, CDO, and SIV's" - great, how? How did Lehman lose $40B overnight, and what does that possible have to do with Glass-Steagall or Gramm-Leach-Bliley?

 

I've answered this at least 10 times. But in short, the repeal of the GS act encouraged more risk taking from depository institutions that were not properly equipped to take on this sort of risk. Go to the Stiglitz article, it is a very good read. I remember reading it a while back. He's a pretty smart dude.

 

We will continue this another day.

[Magox]

See my prior post about housing affordability...

 

 

 

The majority of losses have come from mark-to-market writedowns of these securities because there's no longer a market (and hence a market price) to value this paper at. Sure, some securities have collapsed because of poor underwriting & rising defaults/foreclosures, but the majority of MBS paper continues to perform (i.e., people pay their mortgages).

 

(BTW, a SIV is an off-balance sheet entity created to hold investment securities, not a security itself).

 

 

 

As you say, Buffett's talking about credit default swaps, but they are a whole 'nother animal than MBS or even synthetic securities like CDOs. CDS hedging products have been around for a long time, and again are not something created by the repeal of GS. Their abuse is very worrysome, but again it gets back to the SEC/OTS not doing a better job of reigning them in, as it applies to AIG.

 

Moreover...I can't believe I've wasted most of my work day on this.

LOL

 

me neither.

 

I got nothing done today.

[DC Tom]

I'm leaving my office now, So we will continue another day, the wifey gets upset when I'm chattin too much on the net.

 

To answer one point. I said "it opened up the flood gates" there is a big difference. I am very careful with my words.

 

Also, you said waffling. That isn't waffling. I absolutely do partially blame them for part of the mess that we are in for rating the bonds much safer than what they were. Absolutely meaning that I do blame them completely. Partially because it was a portion of the problem, not the entire problem. ok?

 

and regarding this point:

 

And yet, you've argued that the losses were caused in part by poor lending practices (by non-lenders like Fannie and Freddie, no less ); by securitization of mortgages, good and bad; by "deregulation" of mortgage-backed securities (still haven't explained what you mean by that, either); and by the repeal of a law that never disallowed commercial bank investment in mortgage-backed securities to begin with.

 

What's more, for ANY of your arguments, you haven't even postulated (much less demonstrated) a mechanism for that loss. Even your newest argument - "the majority of losses that took place were through MBS, CDO, and SIV's" - great, how? How did Lehman lose $40B overnight, and what does that possible have to do with Glass-Steagall or Gramm-Leach-Bliley?

 

I've answered this at least 10 times. But in short, the repeal of the GS act encouraged more risk taking from depository institutions that were not properly equipped to take on this sort of risk. Go to the Stiglitz article, it is a very good read. I remember reading it a while back. He's a pretty smart dude.

 

We will continue this another day.

 

For someone who's "very careful" with his words, you need to learn the distinction between "encouraged" and "allowed".

 

And even then, you wouldn't be right. As you have been told at least ten times, the risk taking that GLBA "encouraged" (i.e. allowed) was already happening.

 

AND...that risk-taking did not extend to underwriting subprime mortgages. Really, how can you say that Glass-Steagall had nothing to do with mortgage underwriting, then in the same post blame the repeal of Glass-Steagall for increased underwriting of subprime mortgages, THEN state that the majority of losses didn't occur through poor underwriting anyway? Glass-Steagall caused an increase in subprime mortgages that Glass-Steagall didn't regulate, that didn't cause the majority of losses anyway? THIS is what I mean when I say your arguments aren't coherent.

[Lurker]

...Sigh. One last post for me, then I've got to focus on my 'day job' so it's not a total washout today.

 

I've answered this at least 10 times. But in short, the repeal of the GS act encouraged more risk taking from depository institutions that were not properly equipped to take on this sort of risk. Go to the Stiglitz article, it is a very good read. I remember reading it a while back. He's a pretty smart dude.

IMO, the risk to the banking system does not come from increased risk-taking by the banks themselves. It comes from the reality that losses at FHC I-banking subs can pull down the whole enterprise, putting FDIC-insured deposits at risk.

 

This is the only new variable added by GS repeal. IMO, the credit market meltdown would have occured even if the banking system had continued to be fire-walled from the I-banking casino.

 

Investment banks most likely would have been judged too big to fail (i.e., Bear, ML) from a systemic risk point of view, and forced into shotgun marriages or needed to be propped up by the Treasury/Fed. But the FDIC insurance fund would not have been at risk, as it clearly is today.

 

 

Just curious, do you work in the financial services industry? A few of us here do, so this is stuff we live and breathe every day...