Forget the middlemen – the real criminals are those who betray their oaths of office.
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Via the Motley Fool, here is an email from someone inside John Paulson’s hedge fund:
It is true that the market is not pricing the subprime RMBS [residential mortgage-backed securities] wipeout scenario. In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based [on] the ‘news’ available everywhere are actually realized.
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This guy was on the right track. Incentives are everything when you’re looking for explanations. The only things this guy left out were the role of government and the fact that managers did have the tools (google, for one) to figure out that there was a housing bubble.
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Government provided low-interest credit through Fannie and Freddie, which passed off much of the risk here to the taxpayer through their implied (later realized) guarantee. There was also the tremendous moral hazard of “too-big-to-fail,” which was always just a cover story to justify whatever taxpayer theivery the banks wanted to undertake. FDIC is also another massive risk-transfer scheme that encourages reckless lending by both bankers and depositors.
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Also key is the fact that the incompetent rating agencies, Moody’s, S&P and Fitch, only got that way after the government made them a cartel and removed market forces from their industry. If all rating agencies were paid by investors (rather than issuers) and had to compete on the basis of their performance, like Egan Jones, they would actually do some analysis.
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Goldman is a scapegoat. In the final analysis, they may be untrustworthy (who didn’t know that anyway), but they are just middlemen, and they didn’t force anyone to buy their bonds. They didn’t create the demand for junk credit — interest rates and spreads were very low during the bubble years, and huge institutional buyers with very highly paid managers simply failed to do their job of understanding what they were buying. Without their demand for junk mortgages, there could be no giant bubble. In the case of public pension funds like Calpers, this demand was partly the result of unrealistic promises made to unions which required very high annualized rates of return.
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For anyone who had read any economic history, the situation was plain as day (houses were selling for record multiples of incomes and rent, prices were way above trendline, credit was ridiculously easy, and speculation was rampant). If I saw it as a 20-something kid using google, how could the big shots miss it? The reasons are similar those in any mania, with heavy doses of moral hazard, group-think and extreme optimism. It’s all clear in retrospect, but back then only the weirdos, historians and Austrians were removed enough from the zeitgeist to see it.
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If you want to single out firms and individuals for retribution, look at those who betrayed their oaths of public service during the bubble and the Heist of ’08: Tim Geithner, Hank Paulson, Ben Bernanke, Alan Greenspan, Chris Dodd, Barnie Frank, Nancy Pelosi, Chris Cox, etc. Forget the middlemen – these are the real criminals, the people who lie into cameras for a living and deploy force against the citizenry (as a taxpayer you are forced under threat of imprisonment to absorb the losses on bad mortgages you neither bought nor created).
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The bankers can buy this power, but only because it’s for sale. Bankers don’t even have to violate the law to lock savers into their paper money cartel and pass off risks to the taxpayer — their lackeys have fixed it all for them.
