NYT’s Floyd Norris Audits The Audit

New York Times columnist Floyd Norris takes issue with my post Friday which noted that his column Friday said the opposite of a page-one WSJ news feature the same day—and asked which was right.

Norris wrote that old-fashioned loans, not fancy pants securitized loans, were doing in banks now.

Most Failing Banks Are Doing It the Old-School Way

The Journal wrote that, indeed, it was securitized product now doing in banks.

In New Phase of Crisis, Securities Sink Banks

I sided with the Journal. Norris took umbrage and yesterday wrote that I had “concluded that I did not know what I was talking about.” Actually, no. I just think he missed something important. Clearly there is room for disagreement among financial journalists.

I’ve written positively about Norris many times. It’s not like he’s, you know, Larry Kudlow. Can’t we all get along?

Indeed, for proof that colleagues can disagree without being disagreeable, we turn to the Times itself, noted haven of collegiality.

Nine days after Norris wrote a column saying “It May Be Outrageous, but Wall Street Pay Didn’t Cause This Crisis,” his colleague, Gretchen Morgenson, wrote one saying that “wrongheaded” pay structures “generated untold millions for aggressive managers and monster losses for unwitting taxpayers.”

I’m sure they amiably hashed out this disagreement at the Dean and Deluca downstairs at 620 Eighth Avenue without coming to blows.

In any case, there’s no doubt that the Journal story and Norris are at odds.


Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.


Banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid.

As I wrote, even if Norris was right about cases of the individual bank failures he cites (Temecula Valley Bank, in Riverside County, Calif., and Security Bank of Bibb County, Ga.), he didn’t
step back to include the fact that securitization and the so-called shadow-banking system to a large degree created the conditions that killed the old-fashioned loans that killed the banks. As I said:

But these regular loans didn’t happen in a vacuum.

The excess lending enabled by shadow banking, which allowed for much more leverage, was the rocket fuel that turned your typical end-of-cycle excess into something much more disastrous and spread crushing losses throughout the system. It in large part created the conditions that sent the economy into the worst funk since the Depression, which is the primary reason non-securitized loans are going bad.

Norris responds to that with this:

If I understand Mr. Chittum correctly, banks would not have made so many bad loans without the “excess lending enabled by shadow banking,” even if the banks in question had nothing to do with the shadow system. I must admit to being unable to understand his logic. But even if such causation were proved, it would still be accurate to say that bad loans are doing in the current crop of failing banks, not bad securities.

The logic is that there were fewer good loans to be made since the shadow system was pouring huge amounts of money into the system, which loosened standards.

The rabid demand for return in a low-interest-rate environment resulted in skyrocketing demand for securitized loans, which in turn drove huge demand for loans to create those securities. There were more loans chasing an ever-dwindling number of credit-worthy borrowers. As a result, lending standards across the board, including for old-fashioned loans, fell into the toilet. Meanwhile, these highly leveraged instruments fueled the debt bubble to unsustainable heights.

Or to put it another way: Securitization was like a booster rocket on the back of the normal banking system, accounting for some 40 percent of all consumer lending at one point. It took what would have been normal over-lending and goosed it to extraordinarily stupid levels, which caused a crash that has dragged everything down with it.

This is not to say that the old-fashioned loans weren’t foolish or that securitization is solely responsible for their woes. I’m just arguing that without the voodoo economics of securitization and the shadow-banking system, more of these old-fashioned loans would have found better customers and asset prices would never have gotten so high.

Disagree? Have at it.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.