Tuesday, August 10, 2010

Not Helping - The White House On Financial Reform

A friend sent me this link today, to an official White House video titled: What Wall Street Reform Means To You.

Wowza.  Talk about a liberal interpretation of the facts!    Let's talk about a few claims:

"Let's say that you were a homebuyer at the height of the market.  Before you could get the keys,  you would have had to fill out a pretty big stack of mostly unintelligible mortgage documents from a big bank"

If there is a reader out there who has an unintelligible mortgage, PLEASE send me a copy of it - I need to see it.  As I've mentioned before, a friend of mine has an interest only adjustable rate mortgage - one of the more complicated sounding varieties - and the contract is nothing that your average high school student couldn't understand.  I've also mentioned before that I would be in favor of making these contracts even shorter and simpler, but I think the claim that the contracts themselves were too complicated is bogus (to change my mind on this, all you have to do is send me your mostly unintelligible mortgage contract).

"The mortgage is essentially and IOU for the cost of the house.  You might think that the bank would put that IOU in a safe place while you went about making monthly payments"

I'm gonna stop you right there, Kal Penn (is that you, Kumar?) - see, one problem is that you stopped making the monthly payments! If only you hadn't stopped making the monthly payments (because you couldn't afford the home and never should have been given the mortgage in the first place) it wouldn't matter how reckless the banks were... but oh wait - I jumped the gun, and I'm certainly not trying to absolve the banks of responsibility:

Back to the spin:

"But instead, that IOU took a little detour..."

TO THE CASINO!!! YEAHH!!! They even have a cartoon of a roulette table!  Seriously - this is exactly what happened - the big bad banks actually took your "IOU" to the casino, put it on the roulette table, and shouted "PAPER PLAYS!"  (SARCASM ALERT!)  Still,  if you had kept making your monthly payments, that wouldn't have been a problem.  See, the problem is that the bank never should have given you that loan in the first place - THAT - giving you the mortgage even though you couldn't afford to pay it back -  was the recklessness by the banks (they were reckless in another way too, wait just a minute for it).   Of course, no one was complaining at the time...  No one ever complained on the way up that they were given too much house or too much mortgage.

"And as often happens when gamblers play with other people's money or money they don't have, the big bank bet big and lost big."

The banks did bet big. And they did lose big.  Indeed.  That was another huge problem.  They owned tons of mortgages which they incorrectly thought were low risk, and lost a ton of money on them.  Since they massively mis-estimated the risk, they owned far too many of these mortgages relative to their capital base - that's pretty much the gist of most of this video, in fact.

"And since the bank was so big, the entire economy was affected when it lost. As a result, millions went unemployed, small businesses couldn't get credit, the middle class got squeezed.  Which brings us back to your nice new home.  If you lost your job, you couldn't make your mortgage payments. Worse, because of falling home values, you wouldn't be able to sell it either without taking a big loss, putting you at risk of foreclosure by the big bank.  And to make matters worse, everyone's 401k probably took a big hit too."

Again, this is one of the lines of false logic that drives me bonkers.  Look - we had a massive multi-year bubble.  It was unsustainable.  No one complained on the way up when their 401k portfolios nearly doubled off the post September 11th lows.  No one complained when the easy money and bad lending standards gave us all a false sense of paper wealth, mortgages we never should have qualified for, or home equity which many then proceeded to actually spend and borrow against.  It was inevitable that the bubble would collapse.  The alternate universe that might have occurred if only the Big Bad Banks hadn't been so Big and Bad isn't that we'd all be drinking pina coladas on the beach in Maui as our home values continued to appreciate - it's that much of the appreciation never would have happened in the first place, and that the economy would have stalled far sooner.  It's that you wouldn't have been able to pull equity out of your home to redo your landscaping, buy a flat screen TV, and pay for your kid's college.

"And to top it all off, the government had to bail out the big bank using your tax dollars because it was, as they say, "too big to fail."

Because the government GROSSLY failed in its regulatory duties and didn't prevent all the shenanigans that caused the bubble and the crash in the first place.   The bailouts sucked/still suck - but for the government to complain about having to do the bailouts because they didn't prevent the issue in the first place - ugggh... Pretty backwards.

"The risky behavior on Wall Street had to be stopped."

Absolutely, but don't forget the consequences of that - that means all of the people who never should have got mortgages to buy houses they couldn't afford will NOT get mortgages to buy houses they can't afford in the future. 

The rest of the video is about making mortgages, credit cards, overdraft fees and student loans simpler - which I strongly support - and about how the reform "closes a loophole" that allows the big banks to gamble with your IOU in the first place - which remains to be seen.

I'm somewhat skeptical of the claim

"banks will be prevented from growing so large that they put the entire economy at risk if they were to fail," 

since the OPPOSITE is happening - the big banks are getting bigger and consolidating.

Of course, it sums up with the "it's not your fault" motif of 

"you can rest a little easier knowing that your home, your family and your future will be protected from the irresponsibility of others."  

That kinda blew my mind - I almost though it was a SnL skit for a minute.  Remember - the reason you defaulted on your mortgage is because you borrowed more money than you could afford.  We can blame anyone you like for that, but that's the root cause.

Naturally, as one of my friends, Yangabanga,  put it, it wouldn't have quite the same populist ring if they titled the Wall Street Reform Act the "I'm a friggin' idiot for buying 10x more house than I could afford" Act.  (and please people, I know you didn't all buy 10x more house than you can afford, and if you really want to leave me hateful angry comments about how it's not your fault, please be sure to give me all the details: when/where you bought your home, how much you put down, what kind of mortgage you have, your earnings situation, the cause of your hardship, how far underwater you are now,  etc, and I'll try to discuss it with each and every one of you)

Listen up kids - I know Wall Street acted irresponsibly - the point of this post is not to deny that fact.  The point is that as we've seen so often, this video, produced and sanctioned by The White House,  is a vast distortion of the facts, and if we continue to refuse to acknowledge that homebuyers bear a lot of responsibility here too, then we cannot possibly prevent a repeat of that behavior in the future.  The people who defaulted on their mortgages and got foreclosed on were not innocent victims of the irresponsibility of others  - we need to learn the mistakes that were really made so that we can avoid repeating them.


note: I can already predict how the comments on this one will go, because this topic always ends the same way, and it comes back to a favorite topic on my blog: moral hazard.  The bank bailouts (which I railed against loudly, from day one) created the sickest kind of moral hazard on a national scale,  and now homeowners feel like "hey, they got their bailout - where's my bailout."  I sympathize - I really do - but I don't believe in compounding the bailout error.


Anonymous said...

As usual K.D., I totally agree with your take on the situation.

Marshall Jung said...

As usual this continues to be the most level headed and straight-foward blogs on the net. KD I appreciate it.

Kid Dynamite said...

I appreciate the complement - thank you.

Easycure said...

I lost my house due to foreclosure in June. When I was laid off in August 2009 from a lucrative custom home design position in Central Oregon, I could see the writing on the wall. I stopped making payments on the house and started pooling my money. GMAC Mortgage ate my $320,000 loan and sold it to Bank of America, who now has it on the market for $179,000. Who is the winner here? I don't know, but I'm in a crappy little apartment in DFW area of Dallas and still unemployed. I appreciate the politicians for killing the housing market. It cost me my job and my home.

Kid Dynamite said...

yeah Easycure, I think we may have discussed this previously. Who's the winner? the banks (cause those GMAC losses got subsidized by the government!) and it sucks. it's a problem. I guess the other winner is the teacher who is saving her money trying to buy a house she can afford who needs house prices to fall further.

in a rational world, the bank, wanting to avoid foreclosure, would re-fi you at the current market value. (I am guessing that's what you're saying - that you would be willing to re-fi into the $179k they have it on the market for?) i've written about that too - perhaps one reason that they don't do that is because it might incentivize more people to try to get that deal, and then the floodgates open on the banks. It's a problem for the banks that leads them to make the seemingly irrational biz decision of paying more to foreclose on you and sell the house to someone else, rather than "re-sell" the house to you at that lower price with lower costs to them...

Jon said...

People do realize that the example of a bank being unwilling to re-fi and rather chooses to foreclose is a perfect example of an institution trying it's best to avoid moral hazard right?

Kid Dynamite said...

jon - that's a way of rephrasing my second paragraph in the reply to Easycure.

Devil's Elbow said...


I completely agree with you, but I think your argument could be made slightly differently.

Of course there were plenty of people who piled on the debt (mortgage, credit card, student loans, etc etc) in order to live above their means. They got tazed big-time when the housing market crashed - and that is on them. I don't have a problem with people leveraging themselves into financial ruin - thats their choice, and they should live with the consequences.

I also don't have a problem with financial institutions playing craps with their own money - as long as it is their own money.

However, I do have a problem when the dummies in question make decisions that, collectively, affect those that lived by their means and had little or nothing to do with inflating the bubble. A miserable job market and high unemployment have pretty far-reaching effects - I see them almost everywhere I go.

In Fantasy Land, there would be two financial reform acts - a real one for Wall St. and one for the dummies who can't be bothered to read their mortgage agreements. You put way too much faith in the intelligence of the average American - there are a lot of incredibly stupid people walking around in this country, who will do things that you or I would never dream of. Yelling at them to not be so stupid really isn't going to do a whole lot of good. Coddling them and blaming the big bad banks isn't going to do a lot of good either. So what will? That is the question, I think, that we should be looking to answer. Do I think it will be addressed by those in charge - no.

Really enjoy reading your blog, always a nice change from the mainstream outlets.

Kid Dynamite said...

DE - I agree pretty much with that. The only distinction I'd point out is in your paragraph about those affected by the popping of the bubble. I think most who were affected by the consequences of the economic crash were also, although they may not realize it, beneficiaries of the blowing of the bubble. I tried to explain this in the post, in the part about what the alternate universe would have looked like.

Devil's Elbow said...

I certainly agree that most saw gains from the bubble years, in the form of rising wages, appreciating home values, lower interest rates and rising stock values - some real gains and some paper gains. And, to be sure, the smart ones would have cashed out some of this and saved it - "just in case" money, if you will. However, I think it could be noted that gains during boom years are recognized more slowly than losses during a crash. It may be unwise to discount the psychological effect of suddenly losing a job - especially in a blue collar profession, where many don't have the luxury of moving to Asia to find work.

I may also be a little jaded - my senior year career fair happened to be the same week as the collapse of Lehman. Quickly realized I should have been in the engineering school instead of getting an econ degree.

Kid Dynamite said...

DE - i'm not expecting people to have locked in their paper gains at the top - all i'm saying is that were it not for the bubble, many may have found themselves unemployed years sooner, and most others would never have received mortgages (which they would later default on) in the first place

Greycap said...

No question, many people who lost "their" homes were actually granted the enjoyment of a luxurious lifestyle beyond their means at very reasonable prices. They got a good deal. But you can hardly expect the White House, or any politician, to put it that way.

Really, as spin goes, this is pretty mild stuff. Whenever a disaster is so big that "everybody" shares some blame, focusing on any one group tends to shield the others. The White House, for reason of political expediency, likes to talk about the banks. You, because of your ideological obsessions, like to talk about individuals. But this was a bubble of demand for mortgage assets, not demand for houses. Mortgages were sold not bought. When not enough could be sold, they were synthesized instead.

So between you and the White House - who is the bigger spin-meister, KD?

Kid Dynamite said...

Greycap, I kinda like your new hardon for me.

to answer your question - the White House is definitely the bigger spinmeister. I'm surprised you called it "mild," as they are telling Joe Six Pack (who remember, isn't quite as smart as you are) that it's all the Big Bad Banks' fault that we had an economic crisis. That is patently false.

As clearly explained in the post above, the video made nary a single mention of the fact that there were many other parties responsible, with homebuyers right near the top of the list. I even spent the time transcribing it for you so you could read the exact text.

I also, however, DID make mention of the bank's responsibility many many times, so again, the White House is clearly the bigger spinmeister.

hope that made it simpler for you.

again, it's always helpful if people of intelligence (a class I put you in) help to educate and spread the truth, rather than the political spin. It makes me sad that you've chosen the latter.

If the average ignorant American is led to believe that he did nothing wrong - that it was all someone else's fault - then we cannot possibly prevent this from happening again. But i'm sure you'll tell me that's a product of my ideologies, and not the truth.


Yangabanga said...

Good teacher mention ;)

Unknown said...

It is fraud to knowingly misrepresent the risk of securities you are peddling, and it is clear that that is exactly what happened, with the necessary complicity of the major ratings agencies, whom the Fed is still using to rate the crap that taxpayers are on the hook for paying. No one is going to jail.

It is pure gambling to be long unsecured CDS. Do it, but don't come begging as Paulson did to the USG for a bailout.

The investment banks bear a lot of the responsibility, the rating agencies, the complicit non-regulators, fraudulent mortgage brokers.

The homebuyer, sorry, but he is too ignorant to be as responsible as the knowing criminals.

Kid Dynamite said...

blurtman - the biggest problem was clearly not that the banks fraudulently sold too many structured products - but rather, that they failed to realize the risks inherent in them and BOUGHT too many of them!

the mortgage brokers/originators probably frequently fraudulently represented the quality of loans that THEY sold to the banks. are there even any of them left?

VJK said...


" Mortgages were sold not bought.

How can one sell anything without a *willing* party to buy ? Are you saying that those who could not afford to buy were somehow coerced into the contract ?

If there was no coercion, then your statement does not make sense.

Unknown said...

The banks, as the rating agencies are on the record admitting themselves, did not want to know. You've gott dance as long as the music is playing. Why not keep sellng toxic crap which feeds your bonuses, and bet on the USG bailouts?