James K. Galbraith: Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy

[swag]

http://www.ritholtz.com/blog/2010/06/james-k-galbraith-why-the-experts-failed-to-see-how-financial-fraud-collapsed-the-economy/

excerpt:

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

more:

http://www.ritholtz.com/blog/2010/06/james-k-galbraith-why-the-experts-failed-to-see-how-financial-fraud-collapsed-the-economy/

[kimmerspixelated]

1. JFM!

Jeepers Fucking McGillicutty! I think it was about time someone finally said it. Okay, carry on...


The money mongers are in kahootz with the overseers, best explanation...

[KansDem]

2. Yet, right-wingers still insist it was all brought on by folks buying houses they couldn't afford.

As if the strawberry picker in California who made $15,000 a year and who couldn't speak English, could walk into a bank and demand and receive a $720,000 mortgage, took advantage of the poor loan officer! :eyes:

How did a strawberry picker earning $15,000 a year qualify for a loan of $720,000? The answer, say the experts, lies in a lending industry that got too innovative for its own good.

Last week, a coalition of civil rights groups, including the National Council of La Raza, the Center for Responsible Lending and the NAACP, called for a national six-month moratorium on foreclosures -- after observing that the subprime crisis disproportionately affected minorities. "The point is to just take time out and provide services to families who might be vulnerable as a result of payment shock," says Janice Bowdler, senior policy analyst for housing for the National Council of La Raza, referring to the hybrid loans that begin with low fixed rates, then jump to adjustable-rate mortgages. Bowdler adds that they are hoping many homeowners can avoid foreclosure by taking advantage of such financial tools as changing their current loan terms or refinancing.

According to NCLR, "orty percent of Latino families and over half of African Americans who receive home loans get higher-cost mortgages, predominately subprime loans." In a study released last month, an analysis of 2005 federal mortgage lending data of large subprime originators in six metropolitan areas, African American borrowers were 3.8 times and Latino borrowers were 3.6 times more likely to receive a higher-cost home purchase loan than white borrowers. One argument is that these groups naturally get subprime loans because they have bad credit or are buying in riskier neighborhoods. But according Fannie Mae, there is an enormous lending disparity across the nation: One study found that 50 percent of all borrowers qualified for a cheaper loan than the one they eventually got. They even discovered that female buyers tend to get higher-cost loans than male counterparts.

But for Rosa and Alberto Ramirez and many others like them, a foreclosure moratorium won't help. It's not that a better loan would have remedied their situation -- it's that they can't afford the home they bought. "Many of my clients can't afford their homes in any circumstance," says Simmons. "I have a dishwasher who bought a house and never even moved in. The moment he saw the first payment, he knew he couldn't afford it."

Strawberry Picker Buys $720,000 House on $15,000/yr Income

Give me a fucking break...!!!

[nichomachus]

4. People had the right to ask for any size loan to buy any kind of house

However, the bankers -- as the gatekeepers of the system -- had the responsibility and the duty to refuse them. The bankers, loan originators, mortgage companies, etc are 100 percent to blame for this mess.

[MisterP]

9. this accusation shows several typical conservative/loyalist traits: racism and victim-blaming masked

with objectivity--"it's not ME saying that Blacks/Latinos/Asians/women are inferior and irresponsible, it's the neutral foreclosure numbers/genetics/physical strength"; libertarianism--"making those poor, beneficient financiers give loans to those Untermenschen"; and a steadfast dedication to exclude at least half the facts (i.e., the tremendous, well-documented and -recorded mendacity of the bankers; this is the same thought process that lets them literally say that most Muslims despise the US and Israel for their freedom and out of a fanatical, genocidal desire to create a Caliphate so as to defeat Murka, and never for what those countries have repeatedly done)

[pscot]

3. Why doesn't JKG have a job

in this government. Nothing will change until new people are brought in to clean up the mess.

[chill_wind]

7. It's unfortunate.There's no room for thinkers like him even the outer circle of advisors.

http://en.wikipedia.org/wiki/President%27s_Economic_Recovery_Advisory_Board

"The PERAB is supposed to provide that ground-level sense, and Obama said that this mission will be reflected in the board's diverse membership, which will be announced over the next few weeks.(2) Paul Krugman, a Nobel laureate in economics and a noted progressive columnist, has argued that, given the centrist makeup of Obama's economic inner circle, the new board could be used to "give progressive economists a voice." He mentioned James K. Galbraith, Larry Mishel of the Economic Policy Institute, Dean Baker, and Jared Bernstein as progressive economists who might be suitable for the board.(3) Bernstein, however, was subsequently named to a full-time administration position as chief economist and economic policy adviser to Vice President Joe Biden.(4)"

----------------------------------------

Instead...

* Jeffrey Immelt, General Electric chief executive
* James W. Owens, head of Caterpillar
* Robert Wolf, chairman and CEO of UBS Group Americas
* Mark Gallogly,<9><10> founder and managing partner at Centerbridge Partners L.P.<11><12>
* Penny Pritzker, chair and founder of Pritzker Realty Group and Classic Residence by Hyatt
* John Doerr, partner at Kleiner, Perkins, Caufield & Byers
* Monica C. Lozano,<13><14> Director of Bank of America
* Charles E. Phillips, Jr., president of Oracle Corporation.
* Richard L. Trumka, president of the AFL-CIO
* Austan Goolsbee, PERAB Staff Director and Chief Economist
* William H. Donaldson, former Securities and Exchange Commission chairman
* Laura D'Andrea Tyson, Member
* Martin Feldstein, former chief economic advisor to President Ronald Reagan,
* Roger W. Ferguson, Jr., Member
* David F. Swensen, CIO at Yale University<15>

[pscot]

8. That list

is a truely depressing indicator of good intentions run off the rails. Or maybe it's just the difference between campaign rhetoric and what Mr. Obama really believes.

[yurbud]

10. because their job isn't cleaning up, it's aiding and abetting

some middle level execs will be prosecuted

[depakid]

11. Because he believes in restoring accountability and the rule of law

This administration has shown through its repeated actions- that it doesn't. Sometimes things really are just as simple as that.

[indepat]

5. Wonder how many of the seemingly thousands involved in massive fraud will ever

by prosecuted, convicted, and spend a day in jail? Six or eight or a dozen or two. How many? :shrug:

[Nickleye]

6. I have a have a guess or two.

Absolutely none, zero, zilch, nada, not a one.