That big economic crash in 2008? Yeah it was avoidable.

Seriously.  Which is what a lot of us have been saying all along.

Money quote:

The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.[snip]

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.

Of course much of this has been said before and will be said again and we’ll have to listen to a bunch of know-nothings prattle on about how it’s all Fannie and Freddie’s fault.

I like this paragraph:

“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.”

The economy isn’t a force of nature and it doesn’t have to be treated as one and the crash of 2008 wasn’t a hurricane we couldn’t prevent – it was the result of choices and a lot greed and a lot of deliberate inaction on the part of people who placed far too much faith in “the market”.

  1. #1 by brewski on January 26, 2011 - 12:16 am


    The Federal Commission to which you refer has 10 members. Six of them are Democrats, 4 Republicans. Of the 6 Democrats they all seem to be politicians, career regulators, lawyers and Democrat campaign contributors. None seem to be economists or have much in the way of education in the field of economics.

    Of the 4 Republicans, one has a Ph.D in economics, one is a politician, one is staffer/advisor, one lawyer/fellow.

    It seems to me that if you are to choose 10 people to investigate the causes of the biggest economic fiasco of the last 70 years that you might want to pick people who know something about the subject.

    Phil Angelides? Gimme a break.

    Then there is the report itself, which only the 6 Democrats endorsed. So it is wrong to say that the commission came to the conclusions if 4 out of the 10 did not.

    The Financial Crisis Inquiry Commission’s main report….is backed only by the panel’s six Democratic appointees. The four Republicans have written two separate dissents…

    The differing narratives may further limit the commission’s impact on financial-regulation policy or on who the government should hold accountable for the worst economic collapse since the Great Depression…

    “It will make interesting reading, but I don’t know anybody in a policy position that is waiting for” the report, said Wayne Abernathy, a former Treasury Department official who is now an executive vice president at the American Bankers Association in Washington.

    “They broke with the effort to form a consensus pretty early, and from then on people started discounting their work.”


    So it is pretty inaccurate to say that “a bunch of know-nothings will prattle on” about anything. I don’t see how the Princeton economics professor is the “know-nothing” and the campaign rainmaker with the degree in “social thought” is somehow to be considered a sage on the topic of macroeconomics and monetary policy and their effects on asset bubbles.

    The commissioners:

    Phil Angelides – Politician, degree in “government”, Democrat

    Bill Thomas – Politician, degree in political science, GOP

    Brooksley Born – Regulator, degrees in English and law, Democrat

    Byron Georgiou – Lawyer, degrees in “Social Thought and Institutions” and law, Democrat (He gave $115,000 to Democrats in the 2008 election cycle, including more than $50,000 to the Democratic Senatorial Campaign Committee)

    Bob Graham – Politician, degrees in political science and law, Democrat

    Keith Hennessey – Senate Staffer and White House advisor, degrees in math, political science and public policy, GOP

    Douglas Holz-Eakin – Economist, degrees in economics including Ph.D. GOP

    Heather Murren – Investment Banker, unclear degree, possibly finance, donates mostly Democrat including Obama and Hillary

    John W. Thompson – Business executive, education in business and management, Democrat contributor

    Peter J Wallison – Lawyer/Fellow, education in law, GOP

    Just as a curiosity, what makes you think the crash was not due to a bubble created by easy money policy and subsidies for mortgages? Do you have a reason why these facts did not create a bubble which eventually crashed, as all bubbles do, or does it just not fit your narrative well enough?

    Please prattle on.

    • #2 by Glenden Brown on January 26, 2011 - 9:23 am

      brewski –

      Let’s just review: The Republicans refuse to sign on, so you assume the report is automatically partisan but what you are ignoring is that the Republicans may be refusing to sign on precisely because it’s not partisan – because it doesn’t meet their ideological demands they refuse to agree to it. Where have we seen that before? Oh yeah, every single god damn issue in the last four years. People like Barry Ritholtz who have studied this issue deeply (and Joseph Stiglitz and Paul Krugman and others) have reached similar conclusions to the FCIC’s report, it seems the problem is not the commission’s findings but rather the ideological blindness of Republicans.

  2. #3 by Uncle Rico on January 26, 2011 - 6:55 am

    two words rarely mentioned in this debate: rating agencies

  3. #4 by Uncle Rico on January 26, 2011 - 7:01 am

    btw, money is still easy. The federal funds rate is 0.25; the federal discount rate is 0.75; the average rate on a 30 year fixed mortgage is about 4.75%.

  4. #5 by brewski on January 26, 2011 - 9:36 am

    Yes, the ratings agencies were one of a large number of spectacularly bad players in this fiasco.

    The issue of rating agencies is an illustration of larger conceptual framework of behavioral economics. When people’s personal incentives are to do undesirable things, they will do undesirable things. Where people’s personal incentives are to do desirable things, they will do desirable things.

    If ratings agencies are paid to give AAA ratings to shit they will give AAA to shit.

    If banks are paid to sell shit loans to Fannie and Freddie, they will sell shit loans to Fannie and Freddie.

    If depositors are shielded from harm for depositing cash into shit banks, they will deposit cash into shit banks.

    If taxpayers are incented to lever up, they will lever up.

    If congressmen are re-elected for pandering to every special interest group, the will pander to every special interest group.

  5. #6 by brewski on January 26, 2011 - 9:46 am

    …the Commission’s majority erred in assuming that it knew the causes of the financial crisis. Instead of pursuing a thorough study, the Commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions–that the crisis was caused by “deregulation” or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives, and a financial system addicted to excessive risk taking. The Commission did not seriously investigate any other cause and did not effectively connect the factors it investigated to the financial crisis. The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally fails to show how practices that had gone on for many years suddenly caused a worldwide financial crisis. In the end, the majority’s report turned out to be a just-so story about the financial crisis, rather than a report on what caused the financial crisis.

    Peter Wallison

  6. #7 by Richard Warnick on January 26, 2011 - 10:02 am

    The Bush economic crash of 2008 reminds me of the 1912 Titanic disaster. The powerful people in charge said full speed ahead, don’t worry about icebergs. Then when the crash happened, the first-class passengers got in the lifeboats and the rest of us went down with the ship!

    Risk-taking is easy when you don’t have to worry much about the downside. According to Les Leopold’s calculations, the financial sector has destroyed $8 worth of wealth for every dollar it earned over the last 5 years. The Wall Street banksters get huge bonuses while 25 million Americans remain unemployed or under-employed.

  7. #8 by brewski on January 26, 2011 - 10:19 am

    The commission lacks credibility since it is largely made up of partisans on both sides, most of whom do not seem to be experts in this field. The smart thing to do would have to picked a completely non partisan commission of people who are all experts in the field. There are plenty of experts in economics, banking and regulation who are not campaign contributors or elected politicians.

    Out of this entire commission I only see Brooksely Born and Douglas Holtz-Eakin as being qualified to sit on it. All the others either have no knowlegde of the subject or are too politically aligned to be credible.

    Would you be against the idea of a non-partisan commission of actual experts?

  8. #9 by brewski on January 26, 2011 - 10:34 am

    From an objective and expert source:

    the current financial crisis as being caused at two levels: by global macro policies affecting liquidity and by a very poor regulatory framework that, far from acting as a second line of defence, actually contributed to the crisis in important ways. The policies affecting liquidity created a situation like a dam overfilled with flooding water. Interest rates at one per cent in the United States and zero per cent in Japan, China’s fixed exchange rate, the accumulation of reserves in Sovereign Wealth Funds, all helped to fill the liquidity reservoir to overflowing. The overflow got the asset bubbles and excess leverage under way. But the faults in the dam – namely the regulatory system – started from about 2004 to direct the water more forcefully into some very specific areas: mortgage securitisation and off-balance sheet activity. The pressure became so great that that the dam finally broke, and the damage has already been enormous.

    Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee
    Adrian Blundell-Wignall is Deputy Director of the OECD Directorate for Financial and Enterprise Affairs
    Paul Atkinson is a Senior
    Research Fellow at Groupe d’Economie Mondiale de Sciences Po, Paris
    Se Hoon Lee is Financial Markets Analyst in the
    Financial Affairs Division of the OECD Directorate for Financial and Enterprise Affairs

  9. #10 by brewski on January 26, 2011 - 10:55 am

    Risk-taking is easy when you don’t have to worry much about the downside

    So true.

    This is true when it comes to deposit insurance which shields depositors from giving cash to banks which take excessive risks.

    This is true when it comes to securtization which shields mortgage originators from making bad loans when they sell the loans to Fannie, Freddie and others.

    This is true when it comes to ratings agencies.

    This is true when it comes to politicians who get to gamble with your money and then you pay if he loses:

    I want to roll the dice a little bit more in this situation towards subsidized housing

    Barney Frank

  10. #11 by Richard Warnick on January 26, 2011 - 10:56 am

    I thought it was a right-wing article of faith that there was no connection between financial de-regulation and the Bush crash?

  11. #12 by brewski on January 26, 2011 - 11:15 am

    That may be.
    I am not a right winger.
    When it comes to economics I look for evidence, not faith.
    You will have to ask a faithful right winger and not me.

    I think the objective expert source that I quoted has it right. The bubble was caused by the liquidity and the regulatory framework was unable to deal with it.

    That does not suggest that if Glass-Steagall had not been repealed, for example, that the exact same outcome would not have happened.

    If Glass-Steagall was still in place there still would have been excess liquidity and there still would have been banks making bad loans and selling them to Fannie, Freddie and others. There is nothing in Glass-Steagall which would have precented any of that. Glass-Steagall separated banking from underwriting. It did not prevent banks from making bad loans. So the whole Glass-Steagall repeal argument is a canard.

    If we had some super lending regulations such as home loans can only be made to people with 20% cash down, and FICO scores over 700, and have an income to debt service ratio >3, and only loans to owner-occupiers, then that would have prevented a lot of the excess lending. But try to get that past Barney Frank and Maxine Waters.

  12. #13 by Richard Warnick on January 26, 2011 - 11:58 am

    Democrats and poor people did not wipe out Wall Street. Fannie and Freddie never originated home loans.

    The mythmakers who want to re-write history to avoid the re-regulation of financial markets point the finger of blame at powerless people while ignoring who did this. In a just world, hundreds of financiers would be serving prison sentences by now!

  13. #14 by brewski on January 26, 2011 - 12:34 pm

    Democrats and poor people did not wipe out Wall Street



    Democrats and rich people wiped out Wall Street.
    Robert Rubin
    William Daley
    Goldman Sachs $994,795
    Citigroup Inc $701,290
    JPMorgan Chase & Co $695,132

    Good job ignoring evidence. What was that you were saying about “faith”?

  14. #15 by cav on January 26, 2011 - 1:02 pm

    Wall Street’s been wiped out? Wait a minute…apparently my memos haven’t been getting thru.

    I knew there was graft, corruption and contorting the rules into gordian knots, but Wall Street doesn’t seem to be doing too bad by the looks of all the golden bonuses – nobody’s been jailed!

  15. #16 by cav on January 26, 2011 - 1:11 pm

    The fed will continue to “loan” money at no interest for the big boys to invest in treasuries at 4%.

    The little guys sunk the economy because we just couldn’t grasp amidst all the bs, just how we were voting against our own self-interests. Or something.

  16. #17 by cav on January 26, 2011 - 1:23 pm

    On the up side – what’s up is down!

  17. #18 by brewski on January 26, 2011 - 2:55 pm

    I know this is against the tradition of this site, but more from non-partisan experts:

    The Case of the Missing Meltdown

    Canada and the U.S. have a lot in common. Both countries are wealthy, stable, technologically advanced democracies with highly developed financial systems. However, as many point out — including the Wall Street Journal, which also recently asked why Canada avoided a mortgage crisis — Canada has no Fannie Mae and no Freddie Mac. There is no mortgage interest tax deduction. There are no 30-year fixed-rate home loans that can be freely refinanced and prepaid. Mortgage lending is far more conservative, and Canadian mortgage lenders have a lot more recourse than American ones.

    If Canadian homeowners default, their other assets and income are on the line, not just the property. Strategic defaulting is not an attractive option. There is more incentive to pay down mortgage debt because there is no tax deduction. Canadians mostly pay their mortgages electronically and automatically from their checking accounts — so extra effort must be made to actually miss a monthly payment. Canadian fixed-rate mortgages generally come with anti-refinancing prepayment penalties to protect lenders from interest rate drops, and the mortgage interest rates on these loans are fixed for a maximum of five years — an incentive to pay the debt down faster.

    While these provisions aren’t so friendly for consumers, they have ensured that Canadian banks have (so far) survived the international financial crisis without requiring the taxpayer bailout. Furthermore, Canadian neighborhoods and individual homeowners have not been destroyed en masse by property bubbles burgeoning and bursting. Canada didn’t completely sidestep the recession, but home loan default rates are much lower than in the U.S., where one in 10 mortgages are in trouble.

    Fannie Mae and Freddie Mac justified their existence and their high-profit risky policies by flogging the home ownership dogma. They and their (doomed) investors claimed that the GSE-dominated mortgage finance system created the highest home ownership rates in the world (not true). Fannie Mae’s annual reports proudly flaunted a house with its American flag flying. Today, the GSEs are just bankrupt behemoths, and for all practical purposes they are government property. This is not to suggest that we replace our American system with a Canadian model, but is just to show that there may be many means to the same end.

    Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

    Hmmm. So let me get this right. So Canada is this superior egalitarian liberal society with single-payer health care and all that. And they didn’t have a mortgage meltdown. And some of the reasons are:
    They have harder ass bankruptcy laws than the US.
    They don’t have tax deductions for mortgage interest.
    They have harder borrowing requirements.
    They don’t subsidize loans by a Fannie or Freddie.

    Richard, you are starting to sound like a birther on this.

  18. #19 by james farmer on January 26, 2011 - 3:23 pm


    Sounds to me you are advocating more government regulation in the US.

  19. #20 by Richard Warnick on January 26, 2011 - 3:32 pm

    I applaud Canadians for their general honesty, which apparently extends to the real estate profession. American realtors and mortgage originators… not so much, in my experience. I find it hilarious that you quoted someone who is part of the consumer finance industry, which is now conducting a blame-the-victims campaign to cover up their own fraud.

    BTW please get in the habit of including links — I can Google them if I have time, but why not cite properly?

    The mortgage-interest deduction doesn’t really benefit homeowners (should I say “home-owers”) although real estate agents talk about it as if it did. The deduction helped justify higher interest rates on loans and inflated property values.

    Strategic default is not a good option for anyone in this country, either. It wrecks your credit rating forever. Hardly anybody is doing it… yet. But people could get desperate enough to abandon ethical standards — just the way big corporations and Wall Street operators do every day.

    “Canadians mostly pay their mortgages electronically and automatically” .. and Americans don’t?

    I guess I don’t understand what you are getting at, unless it’s to flog the tired canard about Fannie and Freddie being responsible for the financial crisis. Fannie and Freddie were victims of the mortgage meltdown, not perpetrators.

    One thing President Obama failed to mention last night is that we’re on track for 1.2 million foreclosures this year, up from a million last year. Bush’s “ownership society” is still in the process of crashing down around us, and the real estate market may take decades to recover.

    And another thing– unemployment is predicted to stay above 9 percent this year and won’t return to normal until at least 2016. Bush = Worst President Ever.

  20. #21 by brewski on January 26, 2011 - 4:05 pm

    I find it hilarious when you quote Maddow, Olbermann and Media Matters, as though they have any idea what they are talking about most of the time.

    The point is that if you have things like deposit insurance, then in order to protect those deposits to be essentially risk free, then you need to make deposit-takers operate essentially risk free. If not then you are playing risk arbitrage with the taxpayers’ money, which we did and are.

    In order to make banks essentially risk free, Canada has enacted lending standards and bankruptcy laws that no one in the American professional left would tolerate. The American professional left somehow thinks that making it easier to declare bankruptcy, making it easier to get into debt, making it easier to buy something that you can’t afford is somehow desirable social policy. Evidently our friends to the North disagree.

    Also, it has nothing to do with honesty. It has to do with incentives. Canadians don’t incentivize buying housing that they can’t afford, and we do.

    The deduction …. inflated property values.

    Excuse me while I faint.
    Really, our government has a policy which inflated property values (e.g. a bubble) which then crashed? What news! Shhhh….don’t tell Glenden.

  21. #22 by Richard Warnick on January 26, 2011 - 4:29 pm

    Ah, “the American professional left.” A fancy name for a tiny handful of people who are utterly powerless– bet it looks scary on Glenn Beck’s blackboard!

    I’ll trust Nobel Prize-winning economist Paul Krugman (is he a member of the “professional left”? – he must be because nobody with any clout ever listens to him!) before I attach any credibility to a mortgage-industry hack.

    I hope my bank deposits are risk-free, because the banks are currently paying almost no interest on deposits. Actually, I put my savings in a credit union because banks are run by crooks.

    Without the housing asset bubble, the Bush administration would have had nothing to show in the way of economic growth. Hence the “ownership society” bullcrap. Which you comically blame on Democrats.

  22. #23 by brewski on January 26, 2011 - 4:39 pm

    So are you saying that you agree that the US should make it harder to get a loan, make it harder to declare bankrupcy, and get rid of the mortgage deduction?

    I have never seen the oft referred to Beck blackboard. I rarely ever see Beck and when I do it is because I am flipping past him.

    Krugman nails it here:
    He should get a Nobel just for this.

  23. #24 by cav on January 26, 2011 - 5:10 pm

    Did you know Glenn Beck is also subject to fainting spells?

    It’s true!

  24. #25 by Richard Warnick on January 26, 2011 - 5:34 pm


    It is already too hard to get a real estate loan because of the current mortgage mess.

    It is already too hard to declare bankruptcy thanks to the anti-consumer bankruptcy bill passed during the Bush administration.

    The mortgage deduction can go, as far as I’m concerned. Start with the deduction for second homes.

    I just flip past Beck too, and the last time I saw him he had expanded to four blackboards covered with insane conspiracy theories!

    [Note: this image is satire i.e. not real]

  25. #26 by shane on January 26, 2011 - 8:49 pm

    The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.

    Welcome to the department of redundancy department…

    The fact that government regulation is intended to avoid corp mismanagement and heedless risk taking is somewhat glossed over by the phrasing here.

    What the free market types refuse to see, is that the government role in this should be like the refs role in a sporting event. Ever go to a game where no one followed the rules because no one was assigned the job of ref and no penalty occurred if you broke them? Welcome to Wall Street under the free marketers. Why should I follow the rules if the ref has been told by the boss to ignore the rules and let them play?

    The difference is that when a team ignores the rules of, say for example, basketball, it doesn’t make the market collapse.

    Interestingly brewski, while i haven’t read the whole thing, and maybe Wallison is right, and they fail to show how the practices forced the meltdown, right here on OneUtah we had a video from youtube of all places that did show it.

    Maybe the the panel thinks that if it is understandable enough that it is on youtube they don’t need to say it. That is their mistake. Basic physics (and I mean basic on the level of “if i drop this in an environment under the influence of local gravity, it falls) is enough to see that the things done in those jackass movies are bad ideas, yet people do them.

    When people’s personal incentives are to do undesirable things, they will do undesirable things. Where people’s personal incentives are to do desirable things, they will do desirable things.

    Since it is never possible to set up the system so that only desirable things are incentive, you thus need rules. Under any system there is incentive to be the one who cheats the system. Thus regulations or rules are always necessary, thus a pure free market is never possible.

    That is how we got into this. The people who should have made others follow the rules got overwhelming incentive to cheat.

  26. #27 by Te whoops on January 26, 2011 - 8:58 pm

    You are so clueless shane, the players are the ref, is the government, is allie allie oxen free. The “government’ is owned by Wall Street, in a revolving door scenario. You can’t see obviously.

  27. #28 by Richard Warnick on January 27, 2011 - 9:17 am

    FDL has a liveblog of the FCIC report release.

    Phil Angelides did not rule out prosecutions. The commission made criminal referrals but will not discuss them publicly.

    We sent potential violations to the proper authorities, under our obligations, and that is all we will say on this matter.

  28. #29 by brewski on January 27, 2011 - 9:23 am

    Since it is never possible to set up the system so that only desirable things are incentive, you thus need rules. Under any system there is incentive to be the one who cheats the system.

    Shane, yes.
    But it matters not just that we have rules, but it matters that we have rules which reward desirable behavior and punish undesirable behavior. As a simple example, the mortgage deduction rewards people who lever up which is essentially subsidized by their neighbors who don’t lever up. Deposit insurance does not punish risky banks since people will put their money there anyway since they won’t be harmed if the bank goes under. Bank bailouts means that executives of risky banks keep their jobs and shareholders don’t get wiped out. Fannie and Freddie buying loans originated by others including subprime loans means that others will be rewarded to selling Fannie and Freddie as much as possible even if the quality is poor.

    If we ran basketball games where you could make as many fouls as you want and not get thrown out, then you’d see a lot more fouls. If we ran football games where players who tackled their opponent by their facemask got a standing ovation we would get a lot more facemask tackles.

    Canada’s set up rules to ensure that their banks are much safer than ours by making sure that mortgages will be paid back. We haven’t.

  29. #30 by Richard Warnick on January 27, 2011 - 9:32 am

    I think it’s unfair to claim FDIC is to blame for “risky banks.” Because consumer deposits are insured at local banks, there is a system of regulation in place.

    The Bush Crash involved investment banks that do not take deposits and are not regulated the same way as commercial banks.

    • #31 by Glenden Brown on January 27, 2011 - 9:56 am

      This is one of the surreal conversations. The essential debate here is that we need better regulation – I think everyone agrees on that. We need a regulatory structure that is adaptable as circumstances change. It’s worth pointing out that we have examples other than the US and Canada. Both Ireland and Spain had housing bubbles similar to the US (the London Times had a story over a year ago pointing out that Ireland has more than a five year supply of new homes already built – literally they could stop building for five years and not run out of new houses to sell). Both nations had lax regulatory regimes.

      There is more than enough blame to go around but it seems to me the theoretical, ideological underpinnings of the problem are found in neo-liberal economics with its religious faith in “the market”. Of course that doesn’t work.

  30. #32 by cav on January 27, 2011 - 10:09 am

    Two wheels were already in the ditch leading to the edge of the cliff, and the accelerator held by the lead foot of status quo…

    I blame sputnik.

  31. #33 by brewski on January 27, 2011 - 11:29 am

    but it seems to me the theoretical, ideological underpinnings of the problem are found in neo-liberal economics with its religious faith in “the market”. Of course that doesn’t work.

    It seems to me the theoretical ideological underpinnings of the problem are found in the need to subsidize housing, subsidize debt, subsidize the morgage market and then expect that “the market” isn’t going to get distorted and that bubbles aren’t an inevitable result of those subsidies. Of course that doesn’t work.

  32. #34 by brewski on January 27, 2011 - 11:40 am

    Deposit insurance removes one kind of discipline and necessitates another kind of discipline. So if deposit insurance makes people behave as those their bank deposits are essentially risk free, then the regulations on those deposit-takers must also make them essentially risk free. This is like Canada and also the Volcker Rule.

  33. #35 by brewski on January 27, 2011 - 11:49 am

    The Bush Crash involved investment banks that do not take deposits and are not regulated the same way as commercial banks.

    This is just plain incorrect.

    The crash was caused by home loans going bad. Home loans went bad because people got loans from institutions like Countrywide, Bank of America, Citibank, Wachovia Bank, most of whom are actual bank banks (not Countrywide in this example), and all of whom sold those loans to Fannie and Freddie. The Fannie and Freddie bought $5.5 Trillion in mortgages.

    Laurie Goodman is a well regarded expert on securitization and MBS. She is the former UBS mortgage analyst — Institutional Investor #1 ranked — and is now at Amherst Securities (Bloomberg video here). In a 17 page report released Tuesday, Goodman tried to estimate the total losses that the now-government-owned GSEs will accrue.

    This is not an abstract question: Since the Christmas Eve massacre when the Treasury department removed all government caps on aid to Fannie/Freddie, Uncle Sam aka the taxpayers are on the hook for unknown amounts. Given the GSE’s hold $5.5 trillion dollars in mortgages, the potential losses are $100s of billions, if not trillions of dollars.

    And what are those estimated losses Goodman projects for the GSEs ?

    Freddie will likely lose around $178 billion of its $1.86 trillion credit guarantee book, and Fannie will likely lose $270 billion of its $2.81 trillion book. Combine the credit guarantee books of the two firms, and you reach a $4.67 trillion book, with estimated losses at just under ~10%, or $448 billion.

  34. #36 by Richard Warnick on January 27, 2011 - 12:13 pm

    You blamed the FDIC for “risky banks.” Now you are blaming Fannie and Freddie, who came in at the end and got shafted.

    No, the Bush Crash of the financial sector was caused by the collapse of the unregulated “shadow banking system” that committed fraud in the sale of mortgage-backed securities.

    The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds.

    Laurie Goodman is correct that the real estate markets will take many years to recover. This is particularly true because the government is doing everything they can think of to keep financial institutions from having to eat the losses from the crash. We, as consumers and taxpayers, are getting screwed all over again.

  35. #37 by cav on January 27, 2011 - 1:41 pm

    Let’s not overlook the disastrous wars, their fix-it costs, the diminution of our status, the decline of the dollars value, yadda, yadda, and the fact that we don’t seem to have learned a thing.

    A touch-up coat ain’t gonna accomplish much for the foreseeable future.

    In the meantime, take my meager SS check. I know you want it!

    Too many murderous assholes.

  36. #38 by brewski on January 27, 2011 - 1:41 pm

    I did not “blame” the FDIC. I pointed out that the phenomenon of deposit insurance removes one kind of discipline and necessitates another kind of discipline. Also, saying Fannie and Freddie came in at the end and got shafted is like exonerating a drug buyer for the evils of the drug pusher. It takes 2 to make a transaction and Fannie and Freddie created the market.

    Your link lists numerous other causes if you bothered to read the whole thing. You are cherry picking the one cause which fits your preconceived notion and ignoring the rest. And you accuse me of the same thing. I guess according to Olbermann that makes you the worst person in the world.

  37. #39 by James Farmer on January 27, 2011 - 1:49 pm

    cav: Better quiet down some, less brew discover his entire economic analysis is worthless given these disastrous wars and their costs; then he won’t be able to raise Sweden and Norway and the like as model economies for the US.

  38. #40 by brewski on January 27, 2011 - 1:55 pm

    You still haven’t explained how a tax code which collects less revenue is needed to pay for these wars.

  39. #41 by brewski on January 27, 2011 - 2:00 pm

    But to help our companies compete, we also have to knock down barriers that stand in the way of their success.

    For example, over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change. (Applause.)

    So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.

    Barack Hussein Obrewski
    State of the Union Address
    January 25, 2011

  40. #42 by James Farmer on January 27, 2011 - 2:19 pm


    I agree with BO and you that the code can and should be simplified. But, in order to bring our house in order, folks need to get used to the idea of paying more in taxes, at least for the time being. Whether that is through the existing tax code or an entirely new tax code remains to be seen.

  41. #43 by cav on January 27, 2011 - 2:31 pm

    I enjoy, and am informed by brewskis’ analysis, but suggest there’s no infection of the ear lobe without effect on the little toe.

    Some hideous shit may be ‘off budget’ but it isn’t far from the heart, mind, and circulatory system of the body politic.

  42. #44 by brewski on January 27, 2011 - 2:32 pm

    I was able to balance the budget using the New York Times’ online tool without raising taxes. It wasn’t that hard.

    As I have mentioned before, it is not just how much we tax but also how we tax. Or maybe better put what we tax. It doesn’t take a leap of faith to consider that taxing savings, investment, hiring people and hip replacements makes less sense than taxing pollution.

  43. #45 by cav on January 27, 2011 - 3:09 pm

    Barack Hussein Obrewski

    Irish much?

  44. #46 by brewski on January 27, 2011 - 4:02 pm

    That would be O’brewski. Totally different name.

  45. #47 by brewski on January 27, 2011 - 4:08 pm

    By the way, I was listening to the 3rd grade analysis of the tax simplification proposal on NPR this morning and I was stunned by their stupid questions and lack of understanding. Basically they were asking several ways by just rephrasing it “why bother simplifying the tax code at all if you aren’t going to raise revenue?”

    That question alone should make them lose their jobs.

    The obvious first answer is that simplicity in itself has value by lower the burden on people and companies to just comply with the code. Reducing the cost of compliance and enforcement is good for everyone.

    The less obvious second answer, but it should be obvious to an economics correspondent, is that the lower top marginal rates will reduce investment and capital that are paying income taxes on their marginal dollar of profit to flee to other places.

    But that would be too much for NPR to understand.

  46. #48 by Richard Warnick on January 27, 2011 - 7:44 pm


    The Bush Crash didn’t have one single cause, that’s obvious. Did you see this sentence?

    Paul Krugman, laureate of the Nobel Prize in Economics, described the run on the shadow banking system as the “core of what happened” to cause the crisis.

    Tax simplification seemed like a good idea when Reagan did it. Problem: they lowered the rates to please the rich people and removed some loopholes– then Congress quickly put the loopholes back and kept the lower rates!

  47. #49 by cav on January 27, 2011 - 10:05 pm

    Wall Street’s Collapse to Be Mystery Forever

    To get to the heart of what went wrong with the report released yesterday by the Financial Crisis Inquiry Commission, check out its account on page 254 of how the largest investor in a cash fund managed by Bank of America suddenly pulled out $20 billion of its money in November 2007.

    The withdrawal crippled the fund, which had $40 billion of assets at its peak, forcing Bank of America to step in and prop it up. The commission included a note about the episode in the back of its report.

    “The identity of the investor has never been publicly disclosed,” it says. The note then referred readers to the source of the information: A couple of stories published in December 2007 by Bloomberg News and the New York Times.

    And here I had thought the purpose of the commission’s inquiry was to uncover new facts that the public didn’t already know. Such as: The identity of the mystery investor that single- handedly kneecapped Bank of America’s Columbia Strategic Cash Portfolio, once the largest cash fund of its kind in the U.S. The commission had subpoena power. It should have been able to get this information. It didn’t, though.

    Feature, not bug.

  48. #50 by cav on January 28, 2011 - 9:11 am

    What recession? Hedge fund honcho John Paulson profited more than $5 billion in 2010, possibly the largest haul in investing history, according to a news report.

    This means that Paulson was making $158.55 per second last year.

    • #51 by Glenden Brown on January 28, 2011 - 9:20 am

      There’s a fascinating article at the American Prospect that points out that American businesses have figured out how to make profits even with the economy sucking and that’s a bad thing.

  49. #52 by cav on January 28, 2011 - 10:28 am

    From your link:

    America’s leading corporations grow more and more decoupled from the American economy. Their interests grow increasingly detached from those of our workers, our consumers — and our economic future.

    This is a sword that cuts both ways. Our workers, consumers and economy are exactly what enabled these money grubbers to amass their ‘wealth’. So it’s time for us to re-imagine their roll. I’m in no way compelled to continue having such vile riff raff in leadership positions – nor can we afford them.

    I’m hard pressed to come up with a scenario less sensitive to the needs of the broader populace than continuing the ridiculous and catastrophic profiting by a few at the top of the corporate money chain.

    I’m thinking digitalized, laser enabled guillotines (nothing at all like present day factory slaughterhouses) for the new age which is fast approaching. American workers, if so inclined, are very much capable of such innovation – with or without the Jack Welchs among us. I would hope it wouldn’t come to that.

  50. #53 by brewski on January 28, 2011 - 12:32 pm

    It’s a bad thing if you are an American, but it is a good thing if your other options are being calf deep in a Chinese rice paddy.

    Why does the Left decry American companies hiring Chinese workers in China, or Mexican workers in Mexico, but supports the notion of Chinese workers coming to America or Mexican workers coming to America, legally or otherwise?

  51. #54 by Richard Warnick on January 28, 2011 - 1:04 pm


    What is your source for the alleged “Left” policy positions you describe?

  52. #55 by brewski on January 28, 2011 - 1:54 pm

    I read OneUtah.

  53. #56 by cav on January 28, 2011 - 2:59 pm

    echo chamber!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  54. #57 by Uncle Rico on January 28, 2011 - 10:25 pm

    So, after a review of millions of pages of documents, interviews with over 700 witnesses, and 19 days of public hearings, 6 members of the Financial Crisis Inquiry Commission issued a 545 page report discussing the causes of the financial crisis. The other four members, who we are told are eminently more qualified to analyze these issues because of their superior economic credentials, issued this after throwing a tantrum over the potential use of the words “Wall Street,” “shadow banking,” “interconnection,” “deregulation,” “magic,” and “alchemy.” Impressive.

  55. #58 by Uncle Rico on January 29, 2011 - 11:50 am

    Question presented:

    “According to the Act, the FCIC was established to ‘examine the causes, domestic and global, of the current financial and economic crisis in the United States.'”


    “We believe that the financial crisis was, at its core, a finanical panic that was precipitated by highly correlated mortgage-related losses concentrated at large finanical firms in the United States and Europe.”

    In other words, finanical panic was the cause of the financial and economic crisis, not a predicable reaction to it.

    I’m glad we got to the bottom of that.

  56. #59 by shane on January 29, 2011 - 3:24 pm

    Good news brewski, the local cartoonist likes your work.

  57. #60 by cav on January 29, 2011 - 3:29 pm

    Raise the Social Security contributions cap or remove it altogether.

    Apply the pay-go underwriting style to wars, the MIC, and contractors of same.

    Freeze the salaries of federal workers – cut salaries of senators, congress-people and supreme court justices.

  58. #61 by cav on January 29, 2011 - 3:45 pm

    Panic? Or opportunism?

    Both = profits.

    If I had a coin to flip, you know I’d flip it.

  59. #62 by brewski on January 30, 2011 - 8:24 pm

    I have no idea what that has to do with me.

  60. #63 by Uncle Rico on January 31, 2011 - 8:02 am

    Just stop it Wells Fargo. That doesn’t fit the narrative!

  61. #64 by cav on January 31, 2011 - 9:35 am

    At a World Economic Forum dinner on Jan. 28 discussion of what would happen if a big bank were allowed to fail. The group, which included Nomura Holdings Inc. Chief Operating Officer Takumi Shibata, 58, former Italian Finance Minister Domenico Siniscalco, 56, and ING Groep NV CEO Jan Hommen, concluded that governments have no choice but to come to the rescue of any failing multinational megabank because there is no system to handle a controlled failure.

    If a government was unable to save such a bank, the contagion and damage could be severe.

    “I came into this dinner somewhat pessimistic and worried about the assignment we are here to discuss,” Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a Bloomberg News columnist, said halfway through the evening. “I am now terrified. There is an incipient sovereign crisis here mixed in with the bank crisis.”
    /if simon johnson is terrified…

    Is the underlying question here: Who / what saves the government, when it is discovered that it is not so big that it cannot fail?

  62. #65 by cav on January 31, 2011 - 9:47 am

    I may have posted this already. but…

    MERS was manufactured by the industry to evade proper recording of property sales in county recorder’s offices. This will sound overly dramatic, but there is no other way to accurately state it: MERS was from its inception a criminal conspiracy designed to cheat counties out of recording fees, the US Treasury out of taxes, and homeowners out of their homes. That conspiracy will have to be proven in the courts, but everyday and everywhere courts are ruling against MERS. You must have a clear chain of title, demonstrating proper assignment of the mortgage at every step. It looks like none of MERS’s mortgages meet that.

    Judges are waking up to the multiple scams. In Utah, judges are allowing homeowners to pursue a “quiet title action”. The owner seeks clear title to property free of lien by lenders or others. Typically, in a home purchase, the homebuyer signs a promissory note (note) held by the lender and a deed of trust (mortgage) that is recorded at the county recorder’s office. The holder of the note has the right to receive mortgage payments; the mortgage provides the right to foreclose. In US law, the “mortgage follows the note”—the note holder who has the mortgage can foreclose if the payments are not made. In a quiet title action, the owner takes advantage of the fact that MERS purposely separated notes and mortgages, listing itself on the trust deeds as the beneficiary of the note.

    Utah courts have recognized that as a fraud. MERS—with no financial interest in the mortgage—cannot be beneficiary. It is just a data registry. It makes no loans. It has virtually no employees. It does not receive mortgage payments. It was designed to defraud counties and the IRS. Hence, homeowners can go to court without any notification to MERS, serving legal papers only to the legal owners of the title to the property. This is usually some title company, that is supposed to be the trustee of the trust deed (mortgage). In cases in Utah, these title companies either did not respond at all, or they simply said that they didn’t “know who the beneficiary of the trust deed is” and denied any interest in the deed. The judges then handed the deeds over to the homeowners. While they can still be sued for the mortgage payments they owe, the homeowners got their homes free and clear. In other words, no one can foreclose on them. Their debts are unsecured.

    Read more:

  63. #66 by Uncle Rico on January 31, 2011 - 10:01 am

    Jan Hommen, concluded that governments have no choice but to come to the rescue of any failing multinational megabank because there is no system to handle a controlled failure.

    Indeed. The “too big to fail” problem that Dodd-Frank was intended to address will not only not go away, it has gotten, and will cotinue to get, worse. Per SIGTARP’s most recent quarterly report to Congress:

    “Thus far, the Dodd-Frank Act appears not to have solved the perception problem. The largest institutions continue to enjoy access to cheaper credit based on the existence of the implicit Government guarantee against failure. Indeed, earlier this month one of the world’s most influential credit rating agencies, Standard & Poor’s (“S&P”), announced its intention to make permanent the prospect of Government support as a factor in determining a bank’s credit rating, a radical change from pre-TARP practice. According to S&P, “We believe that banking crises will happen again. We expect this pattern of banking sector boom and bust and government support to repeat itself in some fashion, regardless of governments’ recent and emerging policy response.”(Emphasis added.) S&P intends to “recognize government support throughout the cycle and not just during a crisis,” and has described the U.S. Government’s likelihood of support for a systemically important bank as “moderately high.” In short, S&P is telling the market that it does not believe that the Dodd-Frank Act has yet ended the problems of “too big to fail,” and given the discounts that such institutions continue to receive, the market seems to be listening.”

    • #67 by Glenden Brown on January 31, 2011 - 10:26 am

      The financial sector is holding the rest of the economy hostage. We need to get aggressive, we need to break up too big to fail banks, we need to break apart the monopolies they’re creating. We need to face the problem head on and it’s not going to happen because gov’t is terrified the financial sector will deliberately crash the economy if they don’t get what they want. And they’re right to fear.

  64. #68 by cav on January 31, 2011 - 10:21 am

    Austerity for them, but not for us.

    Simon connects the dots, from davos:

    Leading bankers, in particular, insisted on the paramount importance of providing unlimited government support to their sector during 2008-09; now they insist with equal or greater vigor that support to all other parts of society be curtailed.

    Sounds fair enough, eh?

  65. #69 by cav on January 31, 2011 - 10:26 am

  66. #70 by brewski on January 31, 2011 - 1:16 pm

    Canada has a total of about 70 banks. The US has something like 8,000. So banking concentration doesn’t seem to contribute to instability as your post implies. I know you don’t like evidence, but you sound like a global warming denier. You love truthiness.

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