Two stories in the NY Times:
Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”
The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”
***Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape.
It was an obscure little market called credit derivatives.
In the other piece, we learn that maybe the banks aren’t that bad off, after all:
On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.
What would be the point in taking part in the heist if you aren’t allowed to give the masterminds a cut?
Has anyone written the definitive story tracking down if banks were forced to take the cash, and if so, which ones and why? I have seen it referred to and there were bits and pieces here and there, but no big story.
Cat Lady
This should probably be posted in Assholes, too.
Everything old is new again. Like Atrios says, it’s always 1994.
Comrade Stuck
And in 2009, we’re still lookin’ for our lost shaker of salt.
The future could not have predicted that.
jibeaux
Exhibit A to me is the apparently enduring relevance of Rush Limbaugh. Why is he still on? Does anyone get new insights out of Seinfeld reruns or still listen to the Crash Test Dummies?
Ricky Bobby
Lies! Lies and Blasphemies!
The magical FREE MARKET is always self correcting! You fools, you simpleton fools!
Just take your hands off the wheel and hit the gas, the magical market takes care of the rest. Oh, and nevermind the unemployment and/or food riots during the "resetting" period… Let them eat cake.
schrodinger's cat
There seems to be a lot we don’t know about this current financial mess. Does anyone know how this downturn has affected private equity companies like Blackstone etc.
Regulating derivative transactions would be a start and investigating the regulatory agencies such as SEC and the role the rating agencies ( I think John has mentioned this several times) played will be crucial to figuring out what went wrong and how.
gex
I recall Wells Fargo being one that was forced to take bailout money. Kovacevich complained that they were being punished for being responsible while everyone else went nuts.
El Cid
The only lesson to have been learned from the Savings & Loan deregulation, corruption, theft, looting, and fake commercial real estate boom was that John McCain had absolutely nothing to be ashamed of, and there were no other lessons to have been learned, and the fact that taxpayers ended up shelling out about $300 billion (in current dollars) means we did everything correctly.
Michael
Since it was short-term money to a borrower whose solvency was in grave doubt, how about a little payday lender interest rate on the money loaned?
And for the big guys who carp about the shifting, ever more stringent requirements tacked on by the government, perhaps they should consider what effect that sort of conduct has on credit card holders when they jack up the rate or drop credit limits for no reason.
Leelee for Obama
My economics background is nil, however, I predicted this housing mess back in 2003. It was patently obvious the no down payment , or interest only loans would not end well. To say nothing of encouraging people to "flip" houses for quick profit. I know a small "consortium" of people that lost literally millions in this disaster, and I told them when they started that it would not be a happy ending. I have to assume that my "expertise" was overwhelmed by the brilliance of Bush, Greenspan, Snow, et al. After the credit default swaps came to light, I was left, literally, dumbfounded. What kind of insurer insures people for losses and risk that isn’t theirs in the first place?
Also, isn’t it conflict of interest for Andrea Mitchell to discuss any of this? Just wondering….
srv
John, here’s the plan:
1) return money
2) loot
3) go bankrupt
4) get bailed out
Abe F-ing Lincoln
If bank executives are deciding to return essentially free money because of the executive pay restrictions, aren’t they violating their fiduciary duty to act in the best interest of the organization? I know there are some other strings attached, but really, a small bank is going to give back $120 million so they can pay themselves more? How is that in the best interest of the bank and its shareholders?
gbear
I recall reading/hearing a couple of stories about banks being required to take bailout money they didn’t need. It was done in an effort to obscure the identity of the banks that were really failing (and try to head off a run on those banks).
Sorry but I can’t find links to my stories this morning. I googled ‘banks forced to take bailout money’ and a lot of stuff came up, but not the stories I remember, and I don’t know how trustworthy the google results are.
The Moar You Know
I fail to understand the problem. The wealthy are still wealthy, are they not?
We wouldn’t want anyone important to be inconvenienced.
gnomedad
The next man who makes a move, the
n****rbank gets it!El Cid
I have zero financial expertise. But by the end of the 1990s, some friends and I had been pretty convinced that the economy was increasingly being built upon a house of cards, and that went from being a depressing suspicion into raging paranoia within the first few years of the Bush Jr. Preznitzy.
It really isn’t so difficult to tell when an economy seems to be going well for clear, easily explainable reasons, and when it all seems to be a giant game which is in imminent danger of falling apart.
Were we excelling in some justifiably profitable industry compared to the world? Were our real products dominating some sustainable demand?
Abe F-ing Lincoln
@gbear:
I’ve read that too, and in particular I’ve heard it as applied to Wells Fargo. They say they were pressured to take the money, but if you read the stories written at the time they received the bailout funds that story doesn’t pan out.
Wells Fargo and Citigroup were in a bidding war for Wachovia, i think during a time people thought Citigroup was still okay. US gives $25 billion in bailout funds to wells fargo, plus a corresponding tax benefit of up to $25 billion triggered by the purchase of another bank. wells fargo then buys wachovia for $13 billion or so.
Now to avoid the executive pay limitations would require that they pay back $25 billion, at least half of which was used to buy wachovia.
With that kind of incentive, up to $50 billion in cash and tax breaks to buy other banks, obviously the gov’t wanted wells fargo to participate. you can say they were "pressured" to participate inasmuch that giving someone loads of money constitutes "pressure". and even with the pay restrictions, it still looks like a sweetheart deal for the bank, just not for the execs individually.
kay
I have to assume that my "expertise" was overwhelmed by the brilliance of Bush, Greenspan,
Greenspan has another piece in the WSJ today. He warns that excessive "micromanagement" by government will stifle innovation in financial markets.
I’m to the point where I feel a personal, visceral dislike for him. Christ. It’s all about him, and defending his stupid dogma. It’s indecent that he keeps yammering on with this unwanted advice. He’s asleep at the switch for 20 years, he hears "regulation" and THAT gets his attention. He should let the people he stuck with this enormous mess get to work, without his second-guessing.
The Moar You Know
@El Cid: Apparently our IOUs sold like gangbusters for a while. Very popular, especially with the Asian folks.
Cat Lady
@Leelee for Obama:
Yes. IOKIYAR
The Moar You Know
@kay: It’s not even his dogma. It’s Ayn Rand’s.
McCarthy was right, the fucking Russians have proven to be the death of us all. It just didn’t go down like he thought it would.
El Cid
Who is it that still wants "innovation" in banking and financial markets?
Dork
I knew something was completely fucked up when I learned two completely disparate things (back in 2003-4): 1) that the Iraq was was costing $100+bill a year, but was left off the budget, and thus never accounted for, and 2) that houses in Cali were doubling in value in less than 9 months.
Especially 2). That was a dead ringer for "hey, HTF is this going to sustain itself?"
Ann B. Nonymous
Economist blogger and administration critic Greg Mankiw wrote a comment attached to Akerlof and Romer’s original paper in 1993:
"According to a view now popular in the media, the 1980s were a decade of unusual, unmitigated greed. The ultimate symbol of this greed was the savings and loan crisis. The root cause, according to the conventional wisdom, was the laissez-faire policies of the Reagan administration.
Although the two authors from Berkeley did not intend this paper to be a defense of Ronald Reagan and his view of government, one can easily interpret it this way. The paper shows that the savings and loan crisis was the result not of unregulated markets, but of overregulated ones (or, at least, poorly regulated ones). After reading the paper, one is left with the impression that the policy mistakes that happened here are probably not isolated, and that the only good solution is to get the government out of this kind of business altogether."
That was a tendentious conclusion for Mankiw to reach in 1993. In 2009, it looks like a failure of home trepanning technique.
El Cid
@Ann B. Nonymous: Anyone who wants to play word games between "unregulated" and "poorly regulated" is part of the problem.
Reagan attacked food inspections not by changing the regulations, but by refusing to add staff and assigning small numbers of inspectors to do physically impossible quantities of food production inspection.
So, is this a lack of regulation, poor regulation, or basically unlawful behavior by an executive intent on undercutting the spirit of the law?
kay
@The Moar You Know:
I’ve been following his defense of himself for months, with increasing horror. He and Phil Gramm launched the PR campaign about the same time, in the pages of the WSJ. I’d be ashamed. They’re both wealthy. Why don’t they shut up and "create" some jobs? Take a little of that fabulous risk? Buy some of this worthless debt and spin it into gold?
Martin
My understanding is that the money was used to make sure the deals went through quickly. Basically it was "Buy this bank tomorrow, and we’ll pay for it." Paulson’s concern was that having teetering banks out there was driving down confidence and the market, and by getting them quickly acquired would be good all around. Also, these were institutions that FDIC would have been challenged to handle.
I’d also like to point out that this is the not the first derivative disaster. Orange County went bankrupt back in 1994 (funny that) based on derivative speculation. Guess where most of the subprime mortgage brokers were located? Yeah, we just don’t learn.
And I’m not usually one to tempt Godwin, but are Glenn Beck’s ‘progressive scientists are leading us into eugenics’, We Surround You, Texas secessionist pondering, anti-Muslim tirades, and other rants starting to sound more than a little Pol Potish?
Church Lady
Like gex, I seem to recall that Wells Fargo was forced to take money. Paulson had some kind of meeting with a bunch of CEOs of the biggest banks and (once again, this is just recollection), the way the story was portrayed, there was much arm twisting and the CEO’s were told they were not leaving the meeting until they signed on the dotted line, agreeing to take money. The reasoning was that if all took TARP funds, no one would know who the ones in real trouble were.
Svensker
We’d be in a heck of a lot better shape if we had had a bit less innovation and a bit more old-fashioned stuffy banking during the Greenspan years.
Walker
@kay:
This is a feature, not a bug.
kay
@Walker:
I don’t know why he isn’t innovating. He’s still benefiting from the lax regulatory environment and Bush tax cuts. I’m starting to think they don’t buy their own bullshit. Starting to suspect they may not be 100% honorable people. Where was Greenspan’s money?
gex
@kay: Yes, and yes.
Mr. Greenspan, please stop helping. We can’t take anymore of your help.
Olliander
Actually, as Fed Chariman, Greenspan continuously disclosed his holdings, which were usually in US Treasuries
Ash Can
@gbear:
@Church Lady:
That was my understanding too. However, as Abe F-ing Lincoln says @16, this story is a little hinky. Well, OK, it may be a lot hinky. I did a Google search just now for "’forced to accept’ bailout," "TARP funds banks required," and "TARP funds banks forced," and came up empty with regard to serious reporting and/or analysis. I was assuming that something this controversial would get some treatment by Barron’s, the Financial Times, or some such publication, but no. There are passing mentions here and there, and an article by someone who starts out by calling Obama a usurper (oh yeah, that’s going to be some serious analysis), but nothing else.
At this point, I’m with Abe FL. This story smells peculiar.
gex
@Olliander: Watch him get out as the treasuries bubble starts to spin out of control. But where, oh where, will he put it?
Still can’t put it into stocks and bonds. Mattresses? Maybe he can buy some infrastructure, create some jobs, and create some demand.
Olliander
Fair point. But as a private citizen, he’s not obligated to disclose anything anymore.
kay
@Olliander:
Great. Maybe he could sink some into financial innovation and job creation. He’s expounding on how wonderfully creative the masters of finance are. Surely he’s not frightened of a little risk. Maybe he could buy Cleveland. Ya know, get in on the ground floor.
Roger Moore
@Dork:
Individual houses may have gone up that quickly, but the market didn’t. Even so, it was easy enough to see that things were getting out of hand. Monthly house payments were much higher than the rent for comparable places, but people continued to buy. Their theory was that double digit price increases would continue and they would make their money back in capital gains when they sold their houses.
Buying an overpriced good in the hopes of selling for even more later sounds like a bubble to me. The California housing bubble was obvious to anyone who applied any critical thinking to the Real Estate section in the paper. That Greenspan and his buddies at the Fed failed to do something about it is an indictment of their intelligence and/or ideology.
Olliander
What would you have recommended they have done? Recommend price controls on real estate? Stop people from engaging in commerce (ie buying, selling houses), because they deemed it too risky for their own good?
Let’s face it…bubbles happen, it’s innate in market environments. As long as there are two people of different opinions, then there will be a market somewhere. As long as their are people who exhibit the innate emotions of greed and fear, there will be bubbles and downturns.
The same thing happened after the tech-bubble burst in 2000. The market had topped long before the lemmings stopped trying to cash in on the next big internet stock. Same with the Enron scandals. Its a never-ending cycle. And then government comes in trying to save the day and pronounce "the era of bubbles is over". That’s what they said after the Crash of 1929, they said it again, after the S&L crisis, after LTCM, after Enron, after etc….etc…
In 10 years, another bubble will occur and that bubble will burst, and then the lemmings will be trying to figure out how this all happened again….
John PM
After the current mess, I now view the phrase "innovation in financial markets" as a synonym for "ponzi scheme."
binzinerator
@Leelee for Obama:
Insurers who think the risk of insuring those kind of people isn’t theirs either.
Because shut up, that’s why.
Leelee for Obama
@binzinerator:
Made me laugh out loud-Thanks!!!!!
On the insurance answer-turns out they were right, eh?
Rick Taylor
There’s no good solutions to our financial problems. But at least taking the insolvent banks into receivership and firing the current management would send the right message, and I support it for that reason if no other.
Rick Taylor
@Olliander:
I don’t think he could have stopped it, but at the very minimum he shouldn’t have encouraged people to take out variable rate mortgages. That was jaw dropping.
And we should never have allowed the banking system to become so completely enmeshed in bets on the housing market. The popping of the housing bubble was inevitable. The resulting collapse of the economy and the banks was not.
argh
Olliander: "That’s what they said after the Crash of 1929, they said it again, after the S&L crisis, after LTCM, after Enron, after etc….etc…"
What happened in that long period between 1929 and the S&L Crisis? That’s almost 60 years, and now the bubbles are just popping up everywhere like mushrooms in a manure pile. S&L Crisis, LTCM, Enron, now … all in a few years. Hmmm.
Well, Right-wing Conservatives did take power in the early 20’s, bringing in Prohibition and a FreeMarket ™ that lead to the Roaring Twenties and ended in said Crash of 1929.
Then America fought the Right in WWII and entered a long liberal era in which there were no epic financial disasters, until the "Conservative Right" once again took power and "set loose" the Market again under Reagan, and now the beast is feeding once more.
I guess it’s like you say, Olliander, these market bubble things are just innate; we are all just hapless yeast without minds. Great analysis.
Original Lee
The funny part about this bank wanting to return the money it was "forced" to take is that last week or so, the new Capital Assistance Plan lets banks that have issued preferred stock under the Capital Purchase Program (part of TARP) to exchange those issues for common equity (I think, if I’m reading this correctly). The new CAP gives the banks 6 months to raise private capital before they have to accept federal assistance.
So either:
1. Signature Bank really never needed the money in the first place and really had to take the money to help screen the banks that were in trouble (and therefore I think they should not be charged interest), which means they got to use some federal money for free in exchange for their help in preventing a run on the other banks, and now their executives want their duly earned outrageous salaries.
– OR –
2. Signature Bank was sort of in trouble, but they’ve been able to get themselves all straightened out thanks to the capital injection, and now they want to pretend that they weren’t in trouble after all so they don’t have to pay interest on the money and so their executives can get their outrageous salaries anyway.
– OR –
3. Signature Bank executives threw a hissy fit about not getting their outrageous salaries and figure there’s no downside to returning the money because the government will bail them out if they need it.
Hmmm. Too bad they don’t allow 3-sided dice in here…
Incertus
The story I remember that referenced the banks being forced to take the TARP money was from Frontline’s story "Inside the Meltdown", which aired a few weeks ago. I don’t know how far into the video it is, but the whole thing is worth watching.
Joe Max
Hey, I did a whole blog post about that!
/blogwhore
mclaren
Hye, Olliander, that’s a GREAT idea for a new bumper sticker.. instead of SH*T HAPPENS, we can paste BUBBLES HAPPEN on the backs of our cars. Uh, those of us who aren’t living out of ’em, that is.
What would you have recommended they have done? Recommend price controls on real estate? Stop people from engaging in commerce (ie buying, selling houses), because they deemed it too risky for their own good?
Absolutely! Because, you know, markets are a part of natural law, they aren’t created and regulated by the government. Nooooooo, regulators could never have said something crazy like "Okay, we’re going to make it illegal to loan money to anyone if the loan payments take up more than 1/3 of their income." Or: "We’re going to make it illegal to loan more than $50,000 to anyone to buy real estate with no money down." Or: "We’re going to make it illegal to get no-money-down 100% valuation loans on second homes."
And then enforce those regulations strictly.
No, no, nooooooo, no regulatory agency could possibly do something like that. Because, you know, that would be, like, regulating the market — and as the senile sociopath Ronald Reagan ("the cruel man with the kindly smile") constantly reminded us, government isn’t the solution, it’s the problem.
Clay Eatter
Why do losers like Greenspan continue to get print space on mainstream papers?
And when are they going to start breaking up the "too big to fail" banks?
Roger Moore
@Olliander:
How about:
*Point out that a bubble is underway in clear and easily understood terms. Alan Greenspan standing up and saying, "Housing prices in many parts of California, Arizona, Nevada, and Florida are out of line with economic fundamentals and continue to rise. Those areas show the classic signs of a speculative bubble," would have done a lot to wake people up.
*Raise interest rates. Some of the bubble was driven by the Fed’s decision to slash interest rates and keep them very low for a long time. Greenspan and Co ignored the growing bubble because it didn’t affect the CPI, even though asset price bubbles are another kind of inflation.
*Tighten regulations on home lending. The Fed is responsible for regulating the mortgage industry and was completely asleep at the switch. They should have used their regulatory power to make sure that banks were only making loans to people who had a reasonable chance of paying them back.
Ricky Bobby
Anyone up for privitizing social security?
Anyone? Anyone?
Buehler?
John PM
@argh: #44
Yes!
@mclaren: #48
Yes! Yes!
@Roger Moore: #50
Yes! Yes! Yes!
I think I just had a logic orgasm.
Olliander
Funny–I thought the Enron scandals took place in the 1990s (they only got busted under laissez-faire Bush regime) during the go-go Clinton years. You know, for violating insider trading and corruption laws that were put in place with the Securities and Exchange Act of the 1930s. Because you know, nobody violates those regulations like insider trading anymore.
Same for the LTCM implosion when again, a rigid and controlling Clinton administration imposed strict, and I mean STRICT regulations, which eventually ended up with the Fed to round up the leading financial institutions of the day to bail out their hedgie friends, lest of course, there would be financial armageddon.
Thanks for clearing that one up.
Mnemosyne
How about not allowing "liar loans" where you didn’t have to have any proof of income before they handed you $300,000?
Oh, sorry, I guess it would be a horrible imposition on the market to insist that banks that make loans should make sure the borrowers can afford to pay it back.
Olliander
I’m all for it. But let’s be clear. Those types of products originated in the 1990s. With a Democrat President and Republican Congress. The easy thing to do at the time, was impose those regulations at a time when the party was just getting started. Again, I don’t remember many Democrats or Republicans saying let’s put a break on these types of loans back then.
thomas
Kay
It’s time for Mr Greenspan to meet Mr Baseball Bat. The splat you hear will be the s**t that was between his ears hitting the wall.
Argh @ 44 YES, YES, YES!!!!
Who could have imagined they would fly planes into tall buildings??
tom p
Just heard of a book on NPR about the Bear Stearns mess: "House of Cards" by William Cohan (yes, spelled with an "a") Just a microcosm of the present mess, but pointing to the larger problem: if "Greed is good." uncontrolled greed must be better, right?
SBW
Olliander,
The fact that these bubbles re-occur so frequently now — especially since the 1980s — is not something innate in markets, or defect of human behavior, or a sign of beautiful constructive freedom. That’s pure nonsense.
It’s just another sign the government actively and preferentially backs the financial industry above all others, both politically, legally, through manipulations such as favorable interest rates, and if all that fails, with naked cash infusions.
If the finance industry was solely responsible for making the investor whole during failure, where oops didn’t count, where financial management’s very own possessions — everything — house, home, cars, could be seized and sold off to make restitution for mismanagement (even if for only pennies on the dollar), we would have a far more stable and professionally run market.
I don’t suspect we’ll ever get that far. Many Democrats and their opposition, the "party of personal responsibility", would whine about how unfair it was to those poor guys, as they are not undeserving, lazy f*cks like the working class.
Bubbles in the present day are possible precisely because the government protects — not regulates — many individuals from responsibility.
But one thing we agree on — that protection is very, very bipartisan.
Thoughtcrime
@Olliander:
That’s "Democratic" President. Obviously you don’t know the difference between a noun and an adjective. Or are you just another silly Republican that thinks juvenile taunts are clever? (Oh, DemocRAT President will make people think of rats! We Republicans are so witty and subtle!)
I’m sure you’re rejoicing in the return of your hero Newt, maker of the official GOP wordlists to apply for Republicans and Democrats:
http://www.propagandacritic.com/articles/examples.newt.html
Oh, and who cares who was President in the 1990’s? The discussion is which ideology has had the upper hand since Reagan. And it has obviously been the "trickle-down" "lassaiz-faire" deregulated market trumpeted by far right ideologues. The fact that many Democrats were cowed and/or corrupted and did not stand up and fight effectively for reason and fairness against this monstrously disasterous ideology has been a betrayal against their base – and America.
Olliander
Hah…ok…I’ll bite. Sorry commissar, don’t report me to the syntax police. I promise to cite poll results only from pollsters that the supports the state’s cause and mock those that don’t, quote from blogs that only favor statism as a means of economic recovery and journalists who are considered "experts" only because nobody bothered to check their veracity.
Please. You’re just being petty…