Comments on: Guest Post: Review of Barry Ritholtz’s "Bailout Nation"

By: Hugh

Hugh — Mon, 13 Jul 2009 06:09:15 +0000

Thanks for the review. I think the principal deep causes are known: the paper economy with its securitization, deregulation, capture, massive fraud, moral hazard, and redistribution of wealth to the richest 1%.

By: MutantCapitalism

MutantCapitalism — Mon, 13 Jul 2009 01:54:58 +0000

Richard,
Foreclosures profitable even at 40% market value decline?
Yes, but for who? Saavy real estate investors who buy them, definitely.
Upkeep, property taxes, insurance etc. on REOs can cost more than selling them cheap. Assume there's a nice loss write off to be had doing this too. Many of these loans were insured so if no one hollers fraud, there's an insurance payout. The big players
already made their killing betting these mortgages would default with credit default swaps.
Mortgage servicers made out very well too, particularly with default servicing at a higher pay rate than servicing performing loans, not to mention all their bogus fees. Losers are homeowner victims of mortgage servicing fraud and investors who got sold a bill of goods rife with fraud.

By: Richard Smith

Richard Smith — Sun, 12 Jul 2009 21:29:00 +0000

Blissex – yes – FDIC is much less useful without Glass-Steagall.

We had a very mini version of this disaster in the 70s in the UK. Small deposit taking banks were speculating in equity and property. It ended in the "secondary banking crisis" with a brutal property crash (peak to trough was 75% as I happen to know since my parents managed to time their house move to coincide with it). The BoE intervened ah-hoc with big capital injection to rescue Slater-Walker (and others? can't remember) and avert a wider banking collapse. NatWest, one of the precursors of RBS was right on the brink later on in the crisis – plus ca change. For some reason we didn't conclude that having banks do that sort of thing was a bad idea.

By: Blissex

Blissex — Sun, 12 Jul 2009 21:03:18 +0000

«if successive US governments had been committed to making Glass-Steagall work as intended,»

Even better, recent USA administrations have gone the opposite way: they have sort of made it mandatory instead of forbidden for deposit taking institutions to own brokerages and investment banks, precisely in order to cover the "risks" (losses) of the latter with the deposits of former, which was what Glass-Steagall was meant to prevent.

As someone said, the FDIC has sort of an impossible job in a world in which retail deposits are what fuels speculation at brokerages and investment banks, and this by Treasury mandate nonetheless...

By: Richard Smith

Richard Smith — Sun, 12 Jul 2009 20:03:00 +0000

Anonymous Jones:

"I am not a fan of those repeal explanations that hold the premise, "well, everyone was getting around it anyway.""

Err, neither am I - I hope you don't think that's what I was saying above.

Where there's a will, there's a way: if successive US governments had been committed to making Glass-Steagall work as intended, there would have been no concession to allow banks to own 25% of securities trading firms, no US firms in London at Big Bang, no SSB acquisition by Citi, and no repeal of G-S.

But recent US Govts didn't think like that: so here we are.

Mutant - Are foreclosures profitable after 40% price declines? It would be very interesting to see evidence that they are. Not implying you haven't got any, just wondering where it is.

By: MutantCapitalism

MutantCapitalism — Sun, 12 Jul 2009 18:28:39 +0000

Ritholtz totally does not get the VALUE of foreclosures to Wall Street schemers. Credit events [intentionally fabricated or otherwise] such as defaults along with foreclosures were not just obscenely profitable, they [homeowners] were a main food source that fed the beast. His statements below not only lack credibility but a grasp of the big picture.

Re: "The Virtue of Foreclosure"

"If they could banks would prefer to avoid foreclosure."p270

"The mad attempt to avoid any and all foreclosures is counter productive. The foreclosure process is how an overpriced market returns back to normalcy. That is what is now happening, and excess interference will only slow down the eventual return to a healthy economy." p271

from: Bailout Nation by Barry Ritholtz

By: Anonymous Jones

Anonymous Jones — Sun, 12 Jul 2009 16:16:10 +0000

I am not a fan of those repeal explanations that hold the premise, "well, everyone was getting around it anyway." I'm not sure the answer in that situation is always de jure repeal; the answer could just as well be to amend the law so that its spirit will be sustained in practice. The point here is not about the actual legal repeal but the de facto repeal that happened because the legislature and the agencies did not craft new laws and regulations to impede Citi in its path toward the de facto repeal of Glass-Steagall. That's the problem; not the end-with-a-whimper de jure repeal.

By: Blissex

Blissex — Sun, 12 Jul 2009 14:24:25 +0000

The "reform" of auditor liability in 1995 is an interesting detail.

But the start of the madness that ended up in bailout probably lies in two other events in 1995:

* The Japanese ZIRP, that created a colossal flood of credit across the world.

* Allowing 0% capital cover for many types of bank assets.

The political will to ride these two "free market innovations" was the overall theme, but Greenspan was just an expression of that will, not the mastermind, and the Fed only the conduit.

Also I am leaning more on the notion that what mattered more was the unlimited *supply* of credit (of course only to the well connected) than its low price ("Fed*mart always low interest rates -- always").

By: Independent Accountant

Independent Accountant — Sun, 12 Jul 2009 13:44:13 +0000

I'd like to see Glass-Stegall reinstated and opposed its repeal. I opposed the 1995 Litgation Reform Act as being an accountants, lawyers and investment bankers "get out of jail free card" act. What else is new?