Michael Osinski - How One Man Broke the US Economy

[Lurker]

What they did Lurker, is they securitized these mortgages many of which were deregulated MBS's, subprime mortgages, through bond offerings.

You know how securitization works, right? The underwriter buys the raw material (mortgages) from originators using the proceeds from issuing short-term commercial paper (usually 30-days) collateralized by the mortgages. It then builds a security based on the cash flow from the monthly mortgage payments, which they in turn sell to long-term investors, paying back the CP funding from their fee for being the arranger. That process has nothing to do with GS and has been a staple of the I-banking model for a long time.

 

What's a deregulated MBS, BTW?

[DC Tom]

That's not the point. Everything seems to go right over your head.

 

So let me explain to you "the uneducated" what the repeal of GS did,

 

It did allow depository institutions and banks to enter the "deregulated" financial markets. That is a fact.

 

What it prevented the GS was that Securities activities that took place after the result became much more risky than prior to it, leading to enormous losses. These losses threatened the integrity of their customers deposits, which were backstoped by the FDIC, (which btw was originated from the Orignal GS act).

 

These same depository institutions are supposed to be managed to limit risk, which they didn't. The same risk management that was used prior to GS from these depository institutions were not conditioned to operate prudently in more speculative securities businesses.

 

You fail to realize that these Banks or depository institutions possess enormous financial power, why? because they control enormous amounts of other people’s money; the extent of their power must be limited to ensure proper risk management, soundness and competition in the market for funds, whether through loans or investments.

 

I've made my case, with factual data and an argument that makes a lot of sense. You on the other hand, have offered very little to the argument.

 

DC Tom, your sidekick has offered informative Gems such as :

 

Let me rehash this point of argument in terms that you might understand:

 

You: "Glass-Steagall made things 100x worse".

bills_fan: "No, it didn't."

You: "Gramm and Leach are free-market Republicans. So there! "

 

 

That seems like a coherent argument to you?

 

and:

 

He sure showed you

 

Good one's Tom

 

keep em coming.

 

We just keep going around in circles.

 

Actually, your argument has swerved all over the place, not the least of which is because you've taken unrelated data (which you apparently don't understand) and thrown it all together in hopes that something resembling a coherent argument might fall out of it.

 

Which is kind of the point of my "gems". There's no point discussing it with you until you start being coherent. You link to an article about AIG's collapse to demonstrate your contention that Glass-Steagall's repeal increased the rate of subprime lending by lenders such as Fannie and Freddie? That seemed logical to you? All you proved there is that you can emphasize someone else's text.

 

It's not even a question of you not knowing what you're talking about. It's more a question of you not knowing how to talk about it. The prerequisite for having a discussion on a topic, even before having knowledge of the topic, is knowing how to be coherent. You don't; you aren't.

 

 

 

And by the way, I'm not GG's sidekick. He's mine.

[GG]

I agree to some extent. A 'benefit' of GS was supposed to be diversification and dispersion of risk, but in reality it allowed the 'casino' risk-taking mentality of Wall Street to blow back onto the health of the FDIC-insured commercial banking industry. The ability to set up FHC's ultimately increased risk to the banking system. OTOH, there are more than 700 FHCs but only a handful of bad actors caused the problem--is it the structure itself, or the hubris of a few that led to the meltdown?

 

You mean the benefit of the repeal of GS?

 

Yes, risk dispersion was the main tenet of Basel and what Greenspan was talking about being blindsighted that the banks didn't manage their risks properly. Hubris was 90% of the reason, as the loneliest position in the world is being a Wall St. risk manager during a big bull run.

[DC Tom]

What's a deregulated MBS, BTW?

 

I think he meant to say that the MBS's backed by subprime mortgages were deregulated MBS's, because there's no way a regulated MBS could be created from subprime mortgages.

 

And I think by "regulated" he means "backed by Fannie and Freddie". Who he earlier called lenders...that wrote subprimes.

[Lurker]

You mean the benefit of the repeal of GS?

I originally typed "The" but thought I'd hedge my argument a bit...

[Magox]

I agree to some extent. A 'benefit' of GS was supposed to be diversification and dispersion of risk, but in reality it allowed the 'casino' risk-taking mentality of Wall Street to blow back onto the health of the FDIC-insured commercial banking industry. The ability to set up FHC's ultimately increased risk to the banking system. OTOH, there are more than 70 FHCs but only a handful of bad actors caused the problem--is it the structure itself, or the hubris of a few that led to the meltdown?

 

Either way, the credit market meltdown would have occurred anyway, IMO, since the I-banks would have continued to shovel their sh-- out the door to unsuspecting investors looking for yield as long as there were folks willing to lend them ST money via the commercial paper market. Again, something GS didn't have an impact on...

I absolutely agree with you, specially in the first paragraph. The argument for the repeal of GS, is that would provide tremendous liquidity to many of the financial lending markets. This is why Greenspan was pushing for this ever since he had taken office in 87.

 

Just to put things into context, I think its very important to put in place a chronology of events.

 

In 1986, When Paul Volcker was the Fed Chief who was known to be an absolute hawk, fiscal conservative, pushed for the reinterpretation of the GS-act.

 

The interpretation of the GS-act barred commercial banks from being "engaged principally" in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business.

 

In 1987, Paul Volcker was overriden by a vote of 3-2 in favor of easing regulations under Glass-Steagall Act. These easing of regulations came after the Fed Board had heard proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal bonds, and mortgage-backed securities. The Fed also indicated that it would raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The argument for it was that the Board believed the new reading of Section 20 would increase competition and lead to greater convenience and increased efficiency. Liquidity was the name of the game.

 

Volcker who in retrospect had tremendous forsight. Do you know what his argument was? he expressed his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. That is what he said.

 

It was a battle of two cultures. A culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

 

 

Of course Volcker was starting to become unpopular, economy is slow and now steps in our savior Alan Greenspan in 1987

 

Btw for those who didn't know, guess where Greenspan worked before he was Fed Chairmen? That's right, he was formerly a director of J.P. Morgan and a proponent of banking deregulation. That is a fact.

 

He publicly stated that one of the reasons why he wanted deregulation was to is to help U.S. banks compete with big foreign institutions.

 

By 1990 The Fed Board had approved applications by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marked a large expansion of the activities considered permissible under GS.

Guess who the first bank that received permission from the Fed reserve to underwrite securities was? That's right, the same bank where Greenspan was the director. J.P. Morgan

 

In 1996, Guess what decision Greenspan and the rest of the Fed Reserve had decided on? The Federal Reserve Board issues an unprecedented decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting up from 10 percent.

 

Are you starting to see a progression here of further risk taking? We have gone now from 5% to now 25%.

 

Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue now, basically rendering the GS act obsolete.

 

In 1997 The Federal Reserve stated, that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

 

"manageable" theser were their own words. Not mine, but theirs.

 

By 1998 things were really heating up. After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. That is a fact.

 

The deals that took place to get Bi Partisan support was that for the deal to go through, Clinton negotiated with Phil Gramm who was the chairmen of the banking committe at the time, that he wanted to pass along with it the Community Reinvestment Act, which set rules for lending to poor communities.

 

A month later, the repeal of the GS act had occured.

 

There has been a steady progression of risk taking through these institutions. Some of the main players in this whole debacle have been officials either in the treasury or Federal Reserve. These guys are use to risk taking, and the bottom line is that the financial model had broken.

 

Volcker had warned us of exactly this outcome if the repeal of GS had occured. Let me repeat what he had said back in 1986.

he expressed his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. This was his fear of the repeal of the GS. This is why he was against it.

 

In retrospect, he was right.

[Lurker]

he expressed his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. This was his fear of the repeal of the GS. This is why he was against it.

 

In retrospect, he was right.

Boy, that's a lot of typing. The only problem with that argument is that most of the 'bad loans' in the subprime mortgage debacle weren't written by the major banks. They were originated way, way down stream, via independent mortgage bankers/brokers etc. who in turn sold them to the I-bank aggregators.

 

Credit risk is still a pretty important job in the commercial banking world. The Fed, OCC and FDIC are pretty good at what they do to monitor it (we'll leave the OTS out of that group, however). The way around that 'policing' was to buy mortgage assets from non-bank originators who didn't have nearly as diligent regulatory oversight.

[Magox]

Boy, that's a lot of typing. The only problem with that argument is that most of the 'bad loans' in the subprime mortgage debacle weren't written by the major banks. They were originated way, way down stream, via independent mortgage bankers/brokers etc. who in turn sold them to the I-bank aggregators.

 

Credit risk is still a pretty important job in the commercial banking world. The Fed, OCC and FDIC are pretty good at what they do to monitor it (we'll leave the OTS out of that group, however). The way around that 'policing' was to buy mortgage assets from non-bank originators who didn't have nearly as diligent regulatory oversight.

I know

 

But I agree with you for the most part.

 

There was a clear progression of risk taking from these depository institutions through out the years. Never in a million years did they believe it was going to unfold the way it did. Other than Volcker of course. Which is why he was against the repeal of GS. He ended up being right.

 

Bottom line, is that there needed to be much more regulation than what there was. Wall Street and policy makers miscalculated the risks of these investment vehicles and their financial business model broke.

 

Hopefully they will learn from their mistakes. My guess is that they won't fully learn from it.

[GG]

Boy, that's a lot of typing.

 

I think you mean a lot of cutting & pasting. DO a simple Google search and it's amazing to gleam at the insight.

 

Hey, I can copy a Frontline piece with the best of them

[Magox]

I think you mean a lot of cutting & pasting. DO a simple Google search and it's amazing to gleam at the insight.

 

Hey, I can copy a Frontline piece with the best of them

I do use references to back up factual data, which is more than what I can say for you.

 

And so what, even if I did copy excerpts from other sights that provide factual data to prove my point, what is wrong with that?

 

Btw, I did not copy and paste it, I used excerpts from that article to prove my point. The bottom line, which you always seem to try to deviate away from is, that the timeline of events show a progression of risk taking that helped lead us to where we are.

 

You really think I could have all that memorized?

 

I use credibile references, which you seem to discredit.

 

Volcker warned us of this many years ago. He was against the repeal of GS and had the forsight to see this coming.

[DC Tom]

Btw, I did not copy and paste it, I used excerpts from that article to prove my point. The bottom line, which you always seem to try to deviate away from is, that the timeline of events show a progression of risk taking that helped lead us to where we are.

 

No one's disputing that, meathead. What people are disputing is that the repeal of Glass-Steagal truly increased that risk. Go back and read Bills_fan's post - which you clearly didn't read the first time, as I already mentioned - where he points out that the risk-taking that Glass-Steagal was supposed to prevent was already happening before it was repealed. You're the one that keeps deviating from that to argue about things having nothing to do with that.

[bills_fan]

You really think I could have all that memorized?

 

This is your problem right here. You see, none of us actually have anything "memorized." We work in these worlds and understand how they actually operate. So, if someone asks a question, we try to respond with knowledge in our heads. Follow-up questions may involve a bit of research.

 

Memorizing someone else's work is never an issue. It is understanding the various elements, how they interrelate and thinking about the consequences of actions in a logical fashion.

[GG]

I do use references to back up factual data, which is more than what I can say for you.

 

And so what, even if I did copy excerpts from other sights that provide factual data to prove my point, what is wrong with that?

 

Btw, I did not copy and paste it, I used excerpts from that article to prove my point. The bottom line, which you always seem to try to deviate away from is, that the timeline of events show a progression of risk taking that helped lead us to where we are.

 

You really think I could have all that memorized?

 

I use credibile references, which you seem to discredit.

 

Volcker warned us of this many years ago. He was against the repeal of GS and had the forsight to see this coming.

 

I discredit your references because they don't do anything to support your point.

 

Volcker's warnings were correct, except the warnings have nothing to do with the crisis. I don't know how many times the same thing needs to be repeated. Just because the repeal of GS coincided with the build up of the securitization market, doesn't mean that it caused it. GS was in force & effect in the early '90s, yet that didn't prevent a massive real estate driven recession. That recession gave birth to the securitization market, which has been explained to you over and over again was outside regulatory purview of the banks. So if you can follow logical progression, even if GS had stayed in place, this real estate bubble would have still happened because the banks would find ways to fund the securitizations vehicles which would then be sold off to investors. And if you understand anything about bank capital, you would recognize that the commercial banks ended up holding a lot of the securitization paper, which they were allowed to do before GS was repealed. If the securitizations were truly split up and sold off to hedge funds, they wouldn't be sitting on the banks books right now, and we'd be talking about massive hedge fund collapses.

 

So, in a continuing lesson of this board - coincidence in timing does not equal causation.

[Magox]

No one's disputing that, meathead. What people are disputing is that the repeal of Glass-Steagal truly increased that risk. Go back and read Bills_fan's post - which you clearly didn't read the first time, as I already mentioned - where he points out that the risk-taking that Glass-Steagal was supposed to prevent was already happening before it was repealed. You're the one that keeps deviating from that to argue about things having nothing to do with that.

Ok Robin, I did read and understand what he wrote. I am very well informed of the supporting arguments for the repeal of GS.

 

The GS act was not perfect, I never claimed that it was, there will always be loopholes in how to manipulate markets when greed is involved. The argument that BillsFan had was a strong argument that was repeated over and over from Gramm and Leach, which is what I had mentioned in an earlier post, but you discredited that quickly. That argument was a similar argument that was used from lobbyists trying to repeal the act, funded by guess who? that's right, the banking industry. So you have to take that with a grain of salt.

 

Correct?

 

Risk taking was all ready taking place, no one disputes that, I certainly havn't. What I said was that the repeal of GS increased the level of risk taking, and dimished the role of regulation for Depository institutions through many of the "deregulated" Mortgage-Backed-Securities markets.

 

Its very simple, if the repeal of GS had never occured, Citigroup, B&A and many others would of never of had the access to these "deregulated" financial instruments. That is what I am saying. That is a fact.

[GG]

Its very simple, if the repeal of GS had never occured, Citigroup, B&A and many others would of never of had the access to these "deregulated" financial instruments. That is what I am saying. That is a fact.

 

No!@!!

 

Even if GS wasn't repealed, the commercial banks would not be allowed to underwrite and originate securities. But, they certainly could have owned the securitizations in their portfolios as long as it was rated highly, because that was blessed by the applicable bank regulators and BIS. GS did not prevent commercial banks from doing business with the investment banks, so the RMBS model of investment banks getting funding from all over the place to originate structure & sell RMBS would not have changed an iota!

[Magox]

This is your problem right here. You see, none of us actually have anything "memorized." We work in these worlds and understand how they actually operate. So, if someone asks a question, we try to respond with knowledge in our heads. Follow-up questions may involve a bit of research.

 

Memorizing someone else's work is never an issue. It is understanding the various elements, how they interrelate and thinking about the consequences of actions in a logical fashion.

I agree. But what does that have to do with me? I have answered every objection that you four have brought up, in detail and I have provided factual information to back up what I have been saying.

 

If you want to say that the repeal of GS did not make things worse, well, then I don't know what more I can do. I have brought up facts to prove my point, but everything I have mentioned has been discredited.

 

This is obviously something to debate about.

 

I've made my case.

[Magox]

No!@!!

 

Even if GS wasn't repealed, the commercial banks would not be allowed to underwrite and originate securities. But, they certainly could have owned the securitizations in their portfolios as long as it was rated highly, because that was blessed by the applicable bank regulators and BIS. GS did not prevent commercial banks from doing business with the investment banks, so the RMBS model of investment banks getting funding from all over the place to originate structure & sell RMBS would not have changed an iota!

Yes!!!!

 

FYI,

 

the securitizations regarding the subprime MBS's would of never have been rated as high as traditional Mortgage-backed-Securities. Therefore their exposure to subprime lending would of been much less than what it was. But since the repeal of GS, they were able to get much higher exposure because it was "deregulated". That is not to difficult to understand.

 

Remember, housing prices were going through the roof, a large source of that lending came through subprime lending. There was a moral hazard that was introduced, between prudence and risk taking. What you have to remember is that all these financial institutions were in competition with one another, they were all fighting for a peice of the market, and wanting to get some of those huge profits through these investments.

 

This is a fact. The year before the repeal, sub-prime loans were just 5% of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30%. This is factual data. You see, I don't call that a coincidence, like you seem to believe in.

 

Also, it is not just Volcker that believes that the repeal of the GS was a bad idea. Which what he said came to fruition, lets not caste that off as coincidence ok?

 

Elizabeth Warren, one of the five outside experts who constitute the Congressional Oversight Panel of the Troubled Asset Relief Program otherwise known as TARP, that the repeal of this act contributed to the Global financial crisis of 2008–2009.

 

I will take her word and Volckers and my own intuition over yours any day of the week.

[Lurker]

No!@!!

 

Even if GS wasn't repealed, the commercial banks would not be allowed to underwrite and originate securities. But, they certainly could have owned the securitizations in their portfolios as long as it was rated highly, because that was blessed by the applicable bank regulators and BIS. GS did not prevent commercial banks from doing business with the investment banks, so the RMBS model of investment banks getting funding from all over the place to originate structure & sell RMBS would not have changed an iota!

Bingo...

[Lurker]

the securitizations regarding the subprime MBS's would of never have been rated as high as traditional Mortgage-backed-Securities. Therefore their exposure to subprime lending would of been much less than what it was. But since the repeal of GS, they were able to get much higher exposure because it was "deregulated". That is not too difficult to understand.

The rating agencies (Moody's Fitch, S&P) produced the triple-A 'seals of approval' that permitted banks and pension funds to buy these RMBS and CDOs for their investment portfolios. Once the AAA-rating was there, it made it easy to justify buying this paper because it yielded 10-20 basis points more than other securities. Still not a GS story, I'm afraid...

 

This is a fact. The year before the repeal, sub-prime loans were just 5% of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30%. This is factual data. You see, I don't call that a coincidence, like you seem to believe in.

 

A big driver of the subprime boom was declining housing affordability. As home prices skyrocketed in high-priced markets (California, etc.), people were increasingly shut out of the conventional mortgage financing market ($417,000 maximum principal) and were opting for Alt-A, I-O, and yes, sub-prime mortgages as a way to get into a home. Not to beat an expired equine, but this would have occured regardless of GS due to the flood of global capital into the housing finance market...

[bills_fan]

Elizabeth Warren, one of the five outside experts who constitute the Congressional Oversight Panel of the Troubled Asset Relief Program otherwise known as TARP, that the repeal of this act contributed to the Global financial crisis of 2008–2009.

 

And Elizabeth Warren is complete simpleton who knows very little about the financial world.