Who to Blame for the Financial Crisis
Mortimer B. Zuckerman
Class warfare, American style, is being waged between
Who's really to blame?
It's easy to see why Main Street America is seething at
All this heightens
Americans see a financial world that was saved by taxpayers footing the bill for an unprecedented rescue, after which bankers walked away not only without a scratch but with executives' pockets abulge with bonuses out of all proportion to the way most Americans live and work.
There's plenty of fuel here for the most raw form of populism -- and
the president and the Democratic-controlled
But that's both opportunistic and simplistic. Victory always has a thousand fathers; defeat is always an orphan.
A realistic examination of
the history suggests that a fairer verdict is that our catastrophe has
any number of fathers: homeowners as well as mortgage lenders; borrowers
and consumers as well as bankers; political leaders of both parties as
well as corporations' chief executives; not just a lamentably dozy
And then there are the administrations of
The Bush years saw
unsustainable budget deficits and massive trade deficits, all requiring
huge funding. Bush lowered taxes and waged wars without cutting spending
or raising revenues. The Obama administration understandably loses no
chance to remind us of these eight reckless years. But while it was
swift in its first year to do more to extinguish the flames in the
basement, the current administration failed in rebuilding the economy to
concentrate on jobs, jobs and to focus on energizing the economy. It
Politicians in both parties share blame for long pressuring the banks and mortgage companies to facilitate homeownership for minorities and people who would have difficulty paying.
By 2007, the regulations of the
U.S. home prices grew by an average of 3 percent per year from 1945 to 2001. During the next five years, they rose at an estimated 16 percent annually. That includes homes that took on mortgages to extract equity, helping to reduce the equity content in U.S. housing from nearly 70 percent in 1965 to 43 percent in 2007.
At the same time, Freddie and Fannie wriggled out of tighter regulation by donating thousands of dollars to political action committees.
The disastrous subprime market was thus the creature not so much of
Fannie and Freddie had been buying risky loans since 1993 to meet the
"affordable housing" requirements established by
At the end of 2008, these two agencies held or guaranteed
about 10 million subprime and alt-A mortgages through mortgage-backed
securities. These hazardous loans had a principal balance of
Where were the rating agencies when this house of cards was being built? Most of the loans were rated AAA. But what did that mean?
The raters went merrily along assuming that any losses incurred from defaults would be within the historical range. But the assumptions were false, in part because of irrational exuberance and in part because of the mislabeling of defaults and actual losses after foreclosures exceeded all prior experience. Everybody was incurring unprecedented losses and deficits, but the rating agencies and regulators seemed to have lost touch with reality.
In the meantime, while the party was on, some 75 percent of the interest-only or negative amortization loans that didn't require near-term principal payments were packaged into securities. The banks sold these and other complex financial products as securities worldwide to monetize a lending binge of consumer loans of all flavors: mortgages, home equity lines, credit cards, auto loans, student loans, and commercial real estate. Many mortgages were too large in relation to the real value of the homes, and some were taken out to support lifestyles by drawing down the equity in the homes. When the housing bubble burst and homeowners could no longer service the mortgages, the default rate soared to levels never before experienced or contemplated -- way beyond the 1 percent to 2 percent during good times or even the 6 percent to 7 percent during recessions, to levels of nearly 10 percent for fixed rate mortgages, more than 25 percent for subprime adjustable rate mortgages, and almost 60 percent for option adjustable rate mortgages.
Not surprisingly, investors lost confidence in the ratings; they fled
the market for mortgage-backed securities and ultimately withdrew
entirely from all asset-backed securities. The result was to destroy the
capital of private mortgage lenders like Countrywide,
Their financial assets could no longer be sold, except at seriously discounted prices. This, in turn, undermined the confidence, stability, and even the solvency of some of the world's largest financial institutions. A freeze-up followed in interbank lending as one crisis fed into another, putting many major banks under water. The global credit markets ground to a halt. Interest rates soared and loan availability plummeted, resulting in the implosion of the world's asset markets, including global equity markets. The end result was the Great Recession, which plagues us to this day.
There is, in short, plenty of blame to go around, and it's important to understand the origins of the crisis to judge the fairness and efficacy of the restrictions and taxes that the Obama administration now proposes for the banks.
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Who to Blame for the Financial Crisis | Mortimer B. Zuckerman
(c) 2010 Mortimer B. Zuckerman