I’ve praised Bloomberg News a couple of times this week for digging up years-old muck on the financial crisis, so here’s some for Nicholas Kristof of The New York Times for doing the same (extra points for namechecking one of those Bloomberg reports and linking to it).
Kristof talks to James Theckston, a former regional executive for press favorite Jamie Dimon’s JPMorgan Chase, and he’s got regrets:
Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.
How refreshing it is to see a banker who admits error—who mostly blames the bankers, not the borrowers. It’s reminiscent of Jesse Eisinger’s column yesterday on the Wall Street dissenters.
Eisinger noted these dissenters tend to be on the periphery, and it’s worth noting that Theckston isn’t in Manhattan. He was at ground zero of the housing fiasco: In South Florida, where his team made $2 billion in loans in 2007 alone, Kristof reports.
Importantly, Theckston says responsibility for the fiasco goes up the chain of command, where the pressure to churn out predatory loans originated:
One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.
These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.
Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.
So the year the bubble burst, Chase based more than half of his performance review on how fast he was creating toxic waste loans to be sent to Manhattan where they could be bundled, sliced up, and sold to suckers. I’m not surprised, but I don’t think I’ve seen the pressure from on high so explicitly spelled out. Can somebody follow this up Chase’s organizational flowchart?
And what about the senior executives who “frantically tried to cover it up”? Who were they? What did they do?
It’s good that Kristof, like Bloomberg and folks like Michael Hudson, hasn’t put this scandal behind us yet.
A good companion piece to this:
http://www.iwatchnews.org/2011/11/17/7440/worst-may-be-yet-come-foreclosure-crisis-study-says
"Among mortgages made between 2004 and 2008, 2.7 million households ended up in foreclosure while 3.6 million more are at “immediate, serious risk” of default, according to the study, released by the Center for Responsible Lending Thursday.
Minorities are particularly at risk, according to the study. Although the majority of borrowers who have lost their homes or who are seriously delinquent are white, foreclosure rates for minority borrowers are twice as high.
Approximately one quarter of all black and Hispanic borrowers are in trouble compared with about 12 percent of white borrowers.
These disparities cannot be explained away by income. Ten percent of higher-income African-American borrowers and 15 percent of higher-income Hispanic borrowers have lost their homes to foreclosure, compared with 4.6 percent of higher-income white borrowers.
Minority borrowers were also much more likely to receive high-cost, subprime loans than other borrowers, even those with similarly good credit histories. For example, among borrowers with a credit score of more than 660, black and Hispanic borrowers received a high-interest-rate loan more than three times as often as white borrowers.
The study – “Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures” – concludes with a plea for stronger government measures to prevent foreclosures and to reform the lending market in ways that don’t close doors for low-income and minority borrowers."
#1 Posted by Thimbles, CJR on Thu 1 Dec 2011 at 12:16 PM
Yes, too many lenders acted unethically.
Nice story, but let's get to the actual root.
1. Where do the banks get the money to lend?
2. Who shields the banks from risk, default, and bankruptcy?
3. Who institutionalizes and, indeed, enforces the bad behavior?
Hint: 1, 2, and 3 have the same answer, give or take a few revolving doors.
#2 Posted by Dan A., CJR on Fri 2 Dec 2011 at 05:32 AM
Nobody forced anyone to make these crappy loans. Banks made these products all by themselves with some help of out of work Texas physicists who managed to convince people the world of risk management had changed.
http://m.wired.com/techbiz/it/magazine/17-03/wp_quant
The problem being is that once investors began to believe that math governed the system, so they could trust the math and disregard the quality of product in the system, securitizers began to game the system in ways that broke the math.
Before we assumed markets are run by rational actors who know what they are doing. Now we know they are run by people who are 2 parts greedy, 3 parts stupid.
What we saw during the financial crisis is what happens when crime and fraud become low risk opportunities to making lots of money - if people are paid to burn their houses down, they burn it down.
No orders, no force required.
#3 Posted by Thimbles, CJR on Fri 2 Dec 2011 at 10:36 AM
Speaking of interesting confessions:
http://mobile.bloomberg.com/news/2011-12-01/raise-taxes-on-the-rich-to-reward-job-creators-commentary-by-nick-hanauer.html
"I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. (MSFT) in 2007 for $6.4 billion. I was also the first non-family investor in Amazon.com Inc. (AMZN)
Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.
That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be...
Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.
One reason this policy is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men."
Which leads to some other interesting reading:
http://www.project-syndicate.org/commentary/delong120/English
#4 Posted by Thimbles, CJR on Fri 2 Dec 2011 at 11:13 AM
Wrong answer.
Risk doesn't just vanish on its own.
Piles of money and credit originate somewhere.
Greed and stupidity are constants, while bubbles come and go.
Here's another hint: It's not the "animal spirits" of the [non-existent] free-market capitalist system.
#5 Posted by Dan A., CJR on Fri 2 Dec 2011 at 07:46 PM