The debate is over: stupid, evil banks gave money away because of how greedy they are
January 17, 2013, 8:06 pm
Filed under: Uncategorized

The funny thing about this Barry Ritholtz post is that because he put some of his comments in a blockquote (just like the thing he was responding to), I had to read the 2nd half of the post 3 times to understand that I actually agreed with him. He’s surely right when he says:

3. It is the banks job to determine credit worthiness. THAT IS WHAT THEY DO. If they do not care to be bother to make this determination, then perhaps they should consider something other than the money lending business as a vocation.

(I think this is him…)

Well, he’s right except for one thing: he doesn’t dig deep enough. After all, in many/most cases, the banks he’s talking about were not the money lenders in the equation. In my book, that’s a misnomer, because the way our system is currently set up, the ultimate mortgage-bond buyer is the money lender, and the bank is just a middle man. So doesn’t he need a #4 (which I won’t put in a blockquote so as to avoid the same confusion):

4. It is a mortgage-bond investor’s job to determine the credit worthiness of the underlying pool of loans. THAT IS WHAT THEY DO. If they do not care to bother to make this determination, then perhaps they should consider something other than investing in mortgage bonds as a vocation.

The problem is, adding this bullet might accidentally lead you to ask and actually think about questions such as:

  • Why are/were there so many mortgage-bond buyers?
  • What created the incentive to mint so many “AAA” assets?
  • Why did banks have an incentive to make loans that ‘were destined to fail’? (Surely all else equal, ‘make loans to people who won’t pay you back’ isn’t a good business strategy. If that’s what we agree banks were doing, what made it so?)

And we don’t want to ask THOSE questions, because (shh don’t tell anyone but) their answers all have to do with government policy. Let’s just chew out banks for randomly, and on the basis of no external incentivizing whatsoever, deciding to make loans that they knew wouldn’t get paid back, and call them greedy for doing so, without examining or explaining how ‘greed’ and ‘giving people money and not getting it back’ could possibly have been part of the same equation, without some other external actor also being in that equation.

Seriously, let’s not talk about any of that, because “the debate is over”. SHUT UP!

3 Comments so far
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I don’t know who I like better: those who declare debates to be over, or those who want to give advice to big banks and business owners while having no relevant experience or knowledge.

Comment by Tim

I’ve left this comment elsewhere, but I’ll bring it up here again.

The whole thing stinks. I made a decent living buying loan portfolios for a few years in the ’90’s. When I bought a portfolio, we always had some piece of recourse back to the seller of the portfolio. There were lots of different negotiated deals, but the seller was always on the hook for something. We wouldn’t do it any other way.

Then, one day, it stopped. There were no more portfolios to buy. Credit was so easy that the entire vendor finance racket disappeared.

It was Bob Rubin and the Clinton Administration. They started with the SBA (most of my business involved very little companies). They went next to ag loans. They touted the Ex-Im bank. It was just a matter of time before they got to Fannie and Freddie. This was the pure political genius of the Clinton administration. They loosened all the credit standards. It was a way to goose the economy without increasing spending. A way to look good without any need to compromise with those evil Republicans that held the majority in Congress.

Bush was either too stupid to recognize, too weak to take on the real estate people (my choice). or just as evil as the Clinton Administration (a strong possibility too, he is a politician).

So Ritholz is correct, the banks made stupid loans. But government policies were behind all of it.

Comment by Mike

My sense is that Bush thought he would benefit from the same political dynamic as Clinton (=easy credit/making people flush with cash, without doing anything on the government’s ‘balance sheet’, so voters would approve – I guess it ‘worked’ for 2004), so they’re basically equally to blame for this.

Oh wait, I forgot, at all times government policy has absolutely nothing to do with how many loans are being made and under what conditions. It’s all just a question of whether banks are feeling greedy or not. That debate is over, Barry Ritholtz told me so. So I guess Bush is off the hook.

Comment by The Crimson Reach

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