give WaMu and CFC a break...
Everyone is dumping on Countrywide Financial and Washington Mutual these days for helping to drive the real-estate bubble. The recent New York Attourney General lawsuit against WaMu is a case in point.
However, when you look at how the real-estate bubble formed, you just can't blame CFC or WaMu for it. They were faced with a really hard decision: let other lenders dominate and exit the mortgage business or play ball. If WaMu didn't pressure appraisers to meet the price then some other lender (and appraiser) would have underwritten the loan instead. When there are ravenous investors just waiting to buy any high-yield mortgage security that can be cranked out (no questions asked) WaMu would have been irresponsible to have let some other lender take the commission fees for doing the loan. What else was WaMu supposed to do, just go out of business and let other lenders own mortgage underwriting?
Likewise, we can't blame appraisers for doing faulty work either: they didn't have a choice. Refusing to issue rosy appraisals was tantamount to quitting the appraisal business (i.e. since no one would come to you for appraisals). The ONLY option was to give the lenders the appraisals they demanded.
We can't even really blame the home buyers for driving up prices. If you weren't willing to bid even higher prices than the other rabid buyers, and take on exotic financing, your only option was to be shut out of home-ownership altogther.
All the sniveling recriminations under-way now are self-serving and risible. Sure, we are in for a major housing depression (with massive collapses in prices), but we can do without the finger pointing. When you have an asset mania there is nothing anyone can do about it, and the participants are all caught up by forces of a mob mentality that are beyond your control.
However, when you look at how the real-estate bubble formed, you just can't blame CFC or WaMu for it. They were faced with a really hard decision: let other lenders dominate and exit the mortgage business or play ball. If WaMu didn't pressure appraisers to meet the price then some other lender (and appraiser) would have underwritten the loan instead. When there are ravenous investors just waiting to buy any high-yield mortgage security that can be cranked out (no questions asked) WaMu would have been irresponsible to have let some other lender take the commission fees for doing the loan. What else was WaMu supposed to do, just go out of business and let other lenders own mortgage underwriting?
Likewise, we can't blame appraisers for doing faulty work either: they didn't have a choice. Refusing to issue rosy appraisals was tantamount to quitting the appraisal business (i.e. since no one would come to you for appraisals). The ONLY option was to give the lenders the appraisals they demanded.
We can't even really blame the home buyers for driving up prices. If you weren't willing to bid even higher prices than the other rabid buyers, and take on exotic financing, your only option was to be shut out of home-ownership altogther.
All the sniveling recriminations under-way now are self-serving and risible. Sure, we are in for a major housing depression (with massive collapses in prices), but we can do without the finger pointing. When you have an asset mania there is nothing anyone can do about it, and the participants are all caught up by forces of a mob mentality that are beyond your control.
Comments
What will likely come from this is a revelation that both WM and CFC had some serious problems with their business models that either predated or coincided with the bubble. This condition caused them to pursue increasingly risky strategies in order to keep up the appearance of prosperity.
Your premise that "someone had to take the business" is false. These were bad business decisions and nobody should have been "taking this business" because it wasn't profitable for the companies involved.
If we learned anything from Enron, it was that once the top brass realized business growth was unsustainable they did whatever they could to hide it for as long as possible. As long as the executives in charge avoid jail time or hefty civil penalties there's really not much to discourage this behavior.
Could you give some examples of the banks that continued using prudent standards, or found other safe areas to invest? Citigroup? Bank of America? Sure, they found Structured Investment Vehicles and CDOs, but look how well those are doing.
The banks that moved to commercial real-estate will be feeling the pain in very short order too.
Heck, even the credit unions have pushed massively into real-estate, with big pushes encouraging people to do cash-out refis.
The simple fact is that the profit potential for issuing ANY debt was pushed to puny levels in the last 10 years. The interest rates that could be had for ANY loans were incredible bargains for the borrowers but terrible for the profitability of lenders. This is precisely why so many lenders moved into riskier areas (i.e. because the profit to be had from "safe" loans was almost non-existant).
Let's put it another way: you simply couldn't lend money over the last 10 years without accepting inadequate payments for the risk involved. Interest rates were just too low. You show me a prudent lender from the last 10 years and I'll show you an institution that kept most of it's money in cash (i.e. they never leant it out).
I'm with you in spirit, but I completely disagree with your premise that finger pointing is bad. Here's a corollary example of no-finger-pointing: two people are sitting at a table, one is drinking milk, the other hits the glass of milk with a hand on accident, and the milk falls on the floor spilling all over (I know, the famous spilt milk example is way over done).
In the milk example, pointing fingers does nothing to clean up the mess already made. The same is true of economic messes (probably, psychology does effect economics, so it may be that pointing fingers actually helps or hurts the mess cleanup project). However, pointing fingers may help reduce the likelihood of spilling further milk tomorrow night. Person A shouldn't have set their milk so close to the edge or so close to Person B. Person B shouldn't have been waving their hands around like a maniac.
In short, if lessons are learned via finger pointing and we enact laws that prevent similar behavior in the future, then finger pointing is beneficial. If people just use it as a way to complain and pass blame, then I agree with you.
You can make a similar case in almost every industry where competition drives companies to take risks or adjust pricing. The smart companies avoid disaster by sticking to sound business models and don't get caught up in the mania.
With the NY case they are just going after Al Capone's book keeper right now, after the book keeper fully rolls, then they will be going after WaMu.
There are a lot of business people that suffer by making the ethical and legal decisions, and sometime they do not come out a head in the end, but life is not always fair.
...."We make all the same mistakes," he says. "These past two years show it again: we never learn, we don't price for risk, we think that it's going to be different this time."......
Telling the knuckleheads from the geniuses in the banking business
When times are good, it's awfully hard to tell the knuckleheads from the geniuses in the financial-services business. That's because bad loans and bad investments tend to look just as profitable as good ones--and sometimes even more so--until trouble hits.
Lots of trouble has been hitting lately, with private-equity loans turning sour, AAA-rated subprime mortgage securities turning into junk, and all manner of other bets going bad. This ought to make it easier to figure out just who in the money business knows what he's doing. Which explains why the just-completed earnings-reporting season for banks and other financial firms was the most informative in years. Not to mention entertaining, especially during the usually soporific conference calls with analysts in which executives discuss their results......
........Still, some will end up less scathed than others. The banker with the most impressive record of avoiding scathings is Dick Kovacevich, chairman of Wells Fargo. Wells not only had an O.K. quarter but also has the best long-run stock performance of the country's big-five banks. So what does Kovacevich, who took over as president of Wells predecessor Norwest in 1989 and just stepped down as CEO in June, think of the current troubles? "We make all the same mistakes," he says. "These past two years show it again: we never learn, we don't price for risk, we think that it's going to be different this time."......
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This is innacurate. In "good" times prudent managers are the knuckleheads and get fired. Which board of directors, or set of investors, will accept a cautious CEO who's company is under-performing competitors for year after year? In other words, good times lead to the pruning of anyone who has a prudent, level-headed, attitude.
"Bad" times, by contrast, do the exact opposite. Huge risk takers and dreamers are toast in bad times, and investors won't give their companies the time of day.
I heard on the radio tonight that the CEO of Citi is going to resign at a board meeting this coming Sunday.
I think this is all just beginning to unravel.
It would be interesting to take a look at the US Federal Sentencing Guidelines for corporations to see what kind of punishment standards are already in place for what's happened at the high corporate level.
If I get to point a finger, it would be at the entire system of mortgage lending. It is structurally unsound and is in the process of collapsing. After the dust has settled, people will be better able to talk and listen to ideas about how to rebuild it.
How fickle investors are... A few years ago bank CEOs would have been fired if their companies were under-performing their peers who were gorging on mortgage under-writing fees. Today, investors want to string these executives from a tree.
Like I said earlier, don't blame the lenders (or their managers) for the idiotic risky financial schemes they undertook: they were only giving investors exactly what they demanded, and if they weren't willing to do so they were unceremoniously fired.
If I'm a bank CEO, and I can't explain to my board why 0% down Option ARMs are inherently riskier than a conforming loan with 20% down, there's something wrong. My job as a bank executive is to evaluate risk.
I actually don't remember any high-profile execs being ousted at mortgage lenders because they were too cautious. Can you think of any Sniglet?
There are companies in investing that set higher standards (Vanguard comes to mind) and take a long-term perspective. Unfortunately, I can't name any major mortgage lenders that fall into that category.
Let's say I am CEO of a company with stock symbol XYZ. Our stock is selling at $20 a share right now. The board would like our stock to sell higher, because then they are all making a profit. So, they grant me a stock options that expire 2 years from now with a strike price of $25 a share.
I decide I need to profit from those options, but they are underwater to me right now. If I can increase the share price $6, I make a killing, but the stock loses $6 a share I'm no worst off than if it gained $3. I, as CEO, make no more money if our shares rise slightly than if they drop precipitously. This is a strong motivation to gamble the companies future on large gains.
Basically, we will continue seeing this behavior in all sectors forever unless legislation is passed outlawing pay commensurate to stock prices. Of course, don't hold your breath for that to happen, because such legislation sounds anti-capitalism, even though it would make for a stronger economy with less semi-criminal behavior at the top of corporations.
Actually, I think the point of the linked article was that during good times everybody does well. During bad times the managers who haven't taken proper consideration of "risk" are identified as the "knuckleheads".
In the case of subprime MBS's, I think they out-clevered themselves into thinking they had massaged all of the risk out of these type securities with their tranched CDO's and credit default swap games. Now it's becoming very evident that they were wrong!