Why won't the GOP's financial-crisis report follow the money?

Commentary about business and finance.
Dec. 16 2010 6:22 PM

Take a Load Off Fannie

Why won't the GOP's financial-crisis report follow the money?

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The GOP report—oops, primer—provides a calculatedly incomplete account of how bad mortgages found their way onto the balance sheets of financial firms. There's an interesting dissection of the kinds of risk that banks took—but no mention of the reason they took those risks: They were making piles of money! As for the ways the risky mortgages were packaged into supposedly safe securities, all readers get is a whitewash. Collateralized debt obligations, or CDOs, which provided Wall Street with another way to launder bad mortgages into supposedly safe securities (and thereby keep the fee machine humming), are described as having "diversification benefits" that were simply "overwhelmed by the rising tide of foreclosures." No mention—zero—of "synthetic CDOs," which essentially allowed Wall Street to replicate the same bad mortgages over and over again, causing billions in losses. Nor is there any mention of the Street's failure to investigate the underlying mortgages, despite its promises to investors that it was doing so.

Oh, and here's the line about the credit-rating agencies like Moody's and Standard and Poor's, which made fortunes by stamping triple-A ratings on bundles of bad mortgages: "The credit rating agencies made many of the same mistakes as mortgage investors, and ratings on MBS proved to be severely inflated." Er, the mortgage investors were relying on the credit-rating agencies to do their job by assessing risk accurately. Anyone with even a rudimentary understanding of the 2008 crisis knows that. But apparently it never came up in those "hundreds of interviews" financed by taxpayer dollars.

Now, get ready for a few of the primer's breathtaking conclusions. "Put simply, the risk of a housing collapse was simply not appreciated." Shit happens. ("Bubbles happen" is, in fact, the first sentence in the report.) How about some exploration of why consumer advocates—who in the 1990s began warning the Federal Reserve and members of Congress that people were getting loans they couldn't pay back—were ignored? Here's another genius insight: "The panic ended when confidence returned." That one inspired me to check the definition of panic (a "sudden overwhelming fear") to make sure I wasn't wrong to find this a bit redundant. Daylight appeared when the sun rose. War ended when the armies stopped fighting. Hurt went away when the pain subsided.

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In fairness, the authors do attempt to address some important points, such as why it is that the subprime-mortgage market, which was small relative to the size of the global financial system, caused such enormous losses. But the explanation—that in essence, what happened to Wall Street was simply a "run on a bank"—ignores the active role Wall Street itself played in causing the run. If you sell hundreds of billions of dollars in bad securities to investors, and then those investors start to realize that you also own some of those same securities, well, there might just be a run. And a justified one at that.

Why did the crisis have such a devastating effect on the economy? "Given the wealth loss that households faced with the diminished value of their homes and the plunging of the stock market, consumers were scared, and they decreased their spending," the authors write. But there's more to the story than that. People had been spending by withdrawing equity from their homes. Now they couldn't do that anymore, and so they had no money to spend. They may not for a long time. Had the authors observed this chain of causation, they would have had to concede that the subprime-mortgage market was never really about homeownership. It was about what Wall Street is always about: money.

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