Tag Archives: housing bubble

Reading The Senate Report On The Financial Crisis

I’ve been reading Senator Carl Levin et al.’s report on the financial crisis recently in an attempt to figure out what happened and what’s happening in financial capitalism. These reports are becoming more and more important, so I thought I’d share a few general ideas I’ve learned so far if anyone else is interested.

The general ideas are: (1) There isn’t one person we can blame. Many different kinds of people are involved; (2) Policymakers made it okay for banks to become big businesses; (3) Some companies treat their clients like enemies; (4)  Some banks take advantage of people who want to live in houses; (5) “Subprime” just means “bad,” and some companies sold bad stuff on purpose.

1) There isn’t one person we can blame. Many different kinds of people are involved. These include investment banks like Goldman Sachs, lending banks like Washington Mutual, borrowers like you and me, federal economic policymakers, and credit rating agencies like Standard & Poor’s.

Robert Reich recently badmouthed the report in the New York Times Book Review for not blaming one person or entity. I’ve wanted to place blame on a single entity also, but the report is clear: many kinds of people are at fault. The reasons they’re all at fault may be similar in some profound way (greed, short-term thinking, lack of education and communication, etc) but the mechanics behind each entity’s role in the crisis is unique. It’s too complex to blame one person or company.

2) Policymakers made it okay for banks to become big businesses. Before the 1990s there were mostly small, local banks. Large national banks and lenders are new things. The government allowed banks to grow in size and cross state boundaries.

“Until relatively recently, federal and state laws limited federally-chartered banks from branching across state lines. Instead, as late as the 1990s, U.S. banking consisted primarily of thousands of modest sized banks tied to local communities…In 1994, for the first time, Congress explicitly authorized interstate banking, which allowed federally-chartered banks to open branches more easily than before…These and other steps paved the way, over the course of little more than the last decade, for a relatively small number of U.S. banks and broker-dealers to become giant financial conglomerates.” (p.15-16)

The financial crisis didn’t stop this trend, either:

“By the end of 2008, Bank of America had purchased Countrywide and Merrill Lynch; Wells Fargo had acquired Wachovia Bank; and JP Morgan had purchased Washington Mutual and Bear Stearns, creating the largest banks in U.S. history. By early 2009, each controlled more than 10% of all U.S. deposits.” (p.16-17)

3) Some companies treat their clients like enemies. In the last twenty years, large financial institutions like investment banks and lenders did more “proprietary trading.” This is where a company thinks about it’s own profit independently from the profit of the people it serves (its clients).

“Over the last ten years…some firms began referring to their clients, not as customers, but as counterparties.” (p.17)

Institutions involved in the financial crisis set up situations where they wanted  their clients to do poorly. If their clients lost money according to these situations, they made more.

4) Some banks take advantage of people who want to live in houses. As banks got larger and were allowed to make more money, they found ways to keep getting bigger and keep making more money. One way was to let people who want to live in houses take out big loans even though it was unlikely that they could pay those loans back.

“When borrowers took out larger loans, the mortgage broker typically profited from higher fees and commissions; the lender profited from higher fees and a better price for the loan on the secondary market; and Wall Street firms profits from a larger revenue stream to support bigger pools of mortgage backed securities.” (20)

A lot of people want to live in houses. A lot of these people don’t save a lot and don’t know much about finance. Borrowers, brokers, and banks let these people take out huge, high-risk loans to make more money. “Higher risk loans grew from about 19% to about 55%” and “lenders employed few compensation incentives to encourage loan officers or loan processors to produce high quality, creditworthy loans in line with the lender’s credit requirements.” (p.25)

5) “Subprime” just means “bad,” and a lot of companies sold bad stuff on purpose. If a loan is high-risk then that means it’s likely you’re going to get in trouble if you take it.  It means you won’t be able to pay it off and you’ll go into a lot of debt. It’s bad. Everyone involved in the credit crisis encouraged borrowers to take these kinds of loans, which are called “subprime.” Then other people manipulated the high-riskiness of the loans to make more money.  It was profitable to sell bad stuff. In fact, what made the stuff profitable was that it was bad.

I’m trying to be as fair as possible here. I don’t want to make any generalizations that are violent, sarcastic, ironic, or unjust.  I just want to understand why there are some people that choose to hurt other people to make more money for themselves. It seems like this report is a good case study.