MUST-READ: Barry Ritholtz: What really caused the financial crisis (the Big Truth vs. the Big Lie)

[highplainsdem]

http://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html

A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair.

Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.

-snip-

The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

-snip-

And what about those facts? To be clear, no single issue was the cause. Our economy is a complex and intricate system. What caused the crisis? Look:

-snip-

That's followed by 12 paragraphs that offer a very succinct, and damning, explanation of the financial crisis, putting some of the blame on Congress for deregulating the financial sector and on the Fed for turning a blind eye to bank abuses, but most of the blame on Wall Street.

[roseBudd]

1. Help support OWS share this article on Facebook

[ieoeja]

2. This one in the article can't be repeated too often.

"● To keep up with these newfangled originators, traditional banks developed automated underwriting systems. The software was gamed by employees paid on loan volume, not quality." {emphasis mine}

Bankers judge you by your wealth. "Since you don't make much money, I assume you aren't very good," a boss I once had at a bank said to me. Bankers believe that greedy employees will do a better job. Given the choice between a mortgage loan officer who is diligent and one who just cares to get the most commission, bankers will always choose the latter. Add to this that they then re-sell the riskiest loans immediately, passing the risk off to the investment bankers, then they get their commission, the bank gets its fees, and they have just proven how much better they are than any idiot doing due diligence.


Groupon went public on Friday. Groupon has a half billion dollar debt, have never made a profit, and have offered no plans to address the loss outside of going public and passing the loss onto the investors. The geniuses on Wall Street naturally drove the price skywards. Did they invest their own money? Probably not. This is probably where all of our 401(k)s are being invested without our knowledge or consent.

[salin]

3. +10

!

[econoclast]

6. Actually this is just flat wrong. Fannie and Freddie originated Automated Underwriting

From an article in the Chicago tribune in 1998:
"In the past four years, electronic commerce has helped Fannie Mae accelerate the pace and make it simpler and quicker for the home loan applicant.
"In the past, we as an industry used to put the consumer through the ringer," says Mike Williams, Fannie Mae's senior vice president for customer technology services. "You had to get multiple pay stubs, W-2s, tax returns and other documents to create a big, fat file so the underwriter could evaluate the credit risk. People would spend days and weeks worrying about if they were going to get approved."
Enter technology, more specifically systems such as the Desktop Underwriter, a credit evaluation program that Fannie Mae introduced in 1995.
"With Desktop Underwriter, we're now processing over 31,000 underwriting requests per day," Williams says. "What it's allowed the lender to do is sit down with the consumer at the point of sale and, in a matter of minutes, tell (the consumer) that they're approved and tell them what steps they need to take in order to close the loan. We have lenders that are now approving loans in minutes and closing them in a few days."
The increased speed stems from a few factors. First, the necessary information--items such as credit reports--can be gathered electronically. Additionally, the use of sophisticated financial analysis models has decreased the number of information items needed to make an underwriting decision. The most recent version of Desktop Underwriter requires between 35 and 40 data fields to be entered into the computer, versus 200 to 300 on traditional underwriting forms, Williams says.
"We have really narrowed it down to the critical factors that drive credit risk," he says.
The increased use of technology has, of course, reduced the need for humans to complete data-entry and analysis tasks. As a result, lenders can be more cost-efficient and pass some of those savings along to consumers, Williams says.
Products such as Desktop Underwriter, along with a similar program created by Fannie Mae's peer company, Freddie Mac, have led to explosive growth in automated underwriting, says one banking technology expert. About 60 percent of today's lenders use automated underwriting, less than four years after Fannie Mae and Freddie Mac introduced the first systems, says Jeff Lebowitz of Silver Springs, Md.-based SSP Associates, a technology consulting firm.....
"To our knowledge, that's the fastest rate in which the industry has adopted any technology," he says.
Technology is also enabling Fannie Mae to introduce new products to the marketplace more rapidly than in the past. A recent example: Fannie Mae's Flex 97 mortgage, a 3 percent-down loan that allows the consumer to use a gift of funds for the down payment.
"Because we can evaluate the credit risk, we can say this is a credit-worthy borrower," Williams says, "so we can give them an increased level of flexibility in how to raise the down payment."

[banned from Kos]

4. No one has the balls to name names - but I do. Here they are:

1- Countrywide (the biggest pusher of ARMs and liar loans by far)
2- Washington Mutual
3- Golden West
4- IndyMac
5- Ameriquest
6- Bear Stearns
7- Merrill Lynch
8- Lehman Brothers
9- Citigroup
10- the ratings agencies.

Goldman had NO mortgage origination business. It was the guys making the loans that burned us.

[ieoeja]

5. Clerk laid off from Merril Lynch said her bosses were completely confused by laid off employees ...

... getting angry when they were sent home in limos. They thought it was a really nice gesture on their part and expected the laid off employees to appreciate it.

So f'ing out of touch.