Humbled By Our Ignorance

Washington Mutual Built an Empire on Shaky Loans ??? an article in NYTimes describing the rise and fall of WaMu on sub-prime mortgages.

http://www.nytimes.com/2008/12/28/business/28wamu.html?_r=1&th=&adxnnl=1&emc=th&adxnnlx=1230487248-1LATGUmigSu+DkPbs1EgWA

To securitize their garbage loans they had to go through the credit rating agencies which changed their policies from watchdog to maximizing profits. The junk/garbage lenders became the credit rating agencies??? customers, paying them large fees ??? a total conflict of interest. Loans that had no way of being paid back were given credit worthy status on the hope and prayer that the real estate market would continue to rise forever ??? violating every responsible principle that the rating agencies had developed over the years.

The SEC, which had the full authority and responsibility to monitor was decimated during the Bush years in terms of staff and funding. The veteran investigators were sent over to Homeland Security and SEC investigations of securities fraud basically hit a brick wall. There would have been no subprime crisis if the SEC had been doing its job because the originators would have had to hold the loans and none of them were stupid enough to sit on a toxic waste dump of loans if they couldn???t sell them to Wall Street. And there is no way in hell that the SEC would have let this garbage pass as credit rated 10 years ago.

In sum, it was total anarchy and nobody was managing the store.

And we haven???t seen the second and third shoes drop with Option ARMS and short term commercial real estate loans coming due.

These are the elements of THE PERFECT STORM in finance.

And now we have the blame game trying to shift the responsibility to the low income borrowers. It is like blaming the chickens for being eaten by the fox when the farmer tied up his watchdog and went on vacation.

The "perfect economic storm" had many interconnected causes. I'm not sure we fully understand them.

Starting at the local level, real estate agents and banks oversold overpriced homes with balloon loans that would predictably default in the future. Why should they care? They get their % off the top and sell the risk upstream.

Then the upstream financial wizards defined a new way to cook the books, renting their liabilities out to inflate their equity status. But why should they care? The Lehman CEO walks out with $450M.

This corruption is widespread. HUD and VA investigators can't prosecute all the thieves they catch; there probably aren't enough courts or jails to do so.

The bottomline is you have to build controls into the system top-to-bottom because the humans in the system will always throw their grandmother in front of the bus for a quarter.

I think the answer will be a revolution of sorts in that people like myself are going to stop buying things, saving for the inevitable 2nd crunch, and what money we do spend will be analyzed and scrutinized by us for the following:

1. Where will the money I spend go? We will favor a local destination to help our local economy.
2. Will what I spend add value to society? We will again favor larger local impacts over global ones.
3. Will my spending money wherever cost jobs here? Walmart and the like's globalization efforts will be hurting them.
4. What effect does this purchase have on the environment? Large corporations have large environmental impacts small ones tend not to.
5. Do I really need to spend this money? This last one scares the large corporations the most. They need a steady inflow of revenues, and with many people like myself who have the resources to go with out (i.e. I can build it, or make it, or will just plain do without it), there is no reason for them to expect the cash flows they saw previously, and we well see shrinkage's that we never dreamed of before in the corporations of America.

The idea that "greed is good" is finally dying the death it should have decades ago.

Although I agree with most of your article, I think you are missing a very important element about the causality of the crash.

The Tech bubble burst has had far reaching consequences and this is just a ripple of that.

You see, around that time, it became okay for companies to outsource all functions, not just menial ones.

That wasn't seen as a bad thing, because the expansion of the global economy was supposed to allow for those being displaced to pick up their careers with another company.

The problem is, the growth in the USA of the "professional" area has been non-existent for almost 7 years now, people (including myself, who was a middle manager in a tech function) are seeing their careers being outsourced, not just their jobs. As a multiple degreed computer professional, if you believe the popular press (conventional wisdom), I should be able to get a job anytime. Problem is, the reality doesn't match that "conventional wisdom". After all, who's going to hire a forty something career computer professional with all the expectations of benefits for 75K a year plus the cost of benefits, when they can hire a V1 or SB1 visa holder for one third that with greatly reduced benefits or even better, out source the whole deal, at one tenth the cost and no costs for benefits.

It's been a long time coming. Most talented people like myself adjusted our expectations and took jobs from those less educated or experienced (I am now a reporting analyst in a bank, earning less than half what I used to, but it took 6 years to get this job). Those people that were displaced by us, in turn took jobs away from those with no education and thus a large section of middle class America (It's in the millions) was pushed down in economic status.

War time expansion of jobs and the real estate bubble forestalled most of this impact, but the credit crisis was a tipping point, and now the corporations are feeling the results of their greed. Just as we suffered (and will continue to suffer) the reduction of our dreams, the outsourcing of our careers and eventually the loss of economic status, so too they are feeling this effect. It was an inevitable effect of the policies of outsourcing the careers of technology professionals, researchers, medical technologists and such. You are talking about the loss of jobs that take years of college to qualify for, that can't easily be changed.

I like many in my position can't afford to go back to school for a different career. My current college degrees mean no financial aid, and my current job doesn't pay enough for me to afford my mortgage and car as well as go back to school for a career change that could just as easily be outsourced while I'm attempting to get that new degree,

I appreciated your humility.
However, I still remember when you argued that the astronomical gas prices that we experienced over the summer were a result of supply and demand, and not the result of speculators. I suppose that since the prices for gas are currently about half the price that they were during their spike that demand for gasoline has decreased by about 50%. Wow, what a recession? The world economy has shrunk in half.
The fluctuations in gas prices, I think, have demonstrated that there was something afoot other than the forces of supply and demand. Since these commodity markets were under regulated, investment firms were able to corner the market and continue to escalate the price of oil.
It is time to return these futures markets to the firms that use them for socially responsible forms of hedging intended to manage corporate risk. It is time to support those who actually produce things rather than the swindlers who perform obfuscating slight of hand magic with paper notes.
R Cole