Stephen Schwarzman on How We Got Where We Are

September 27, 2008

I saw this in Thursday’s Wall Street Journal and thought it worth sharing. It’s Stephen Schwarzman, chairman of Blackstone Group, talking about how we got into this credit crisis ($):

“It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.

Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

When they started defaulting, out of bad luck or bad judgment, we implemented fair-value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system.

In the face of those losses…you needed to raise new equity…which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system….It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. …Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.”

That pretty much sums it up. It’s just ironic to me how Wall Street has always talked down to average Americans and now they (Wall Street) are reeling from some very poor decision making. What the hell were they thinking?

5 responses to Stephen Schwarzman on How We Got Where We Are

  1. That’s surprising about the increase in subprime loans. I wonder what the percentage will be in 2009.

    From what I have read about the crisis, the problem started with the Bush Administration initiating the deregulation of the financial industry in Dec 2000 to help stimulate the economy.

    The other issues are that banks use “appraisers” to determine the value of homes based on the most recently purchased home in the neighborhood. Then offering zero down subprime loans to people who really can’t afford the home. The real estate market then tanks and the banks have no equity in the property. But the bsnkers were sleeping soundly at night because they had AIG insurance covering these subprime loans. Oh yeah, the insurance company didn’t have any credit history of the borrowers, only the banks credit rating. How dumb is that?

  2. Yup, it wasll all the lenders and administrations fault forcing people to get into mortgages they couldn’t afford. Since 1991, “affordable housing” policy has been in place. Since Reagan, the policy of the subsequent administrations has been to stimulate the economy in order to continue to expand GDP. Mainstreet to wallstreet people loved the expansion. People could get into homes they couldn’t normally afford through subprime, alt-a, interst only, arm, option arms; people could get into cars they couldn’t normally afford through leases; people could get all sorts of credit cards and max them out, pay late, pay minimums even with high interest rates and high fees; people could over draft their checking accounts even with punishingly high fees; people could continue to spend more than they made and not save to the point of negative savings. Yup, the devil tempted us so much that it wasn’t our fault, it was the government’s, those greedy bastards on wallstreet, and the bush adminsitration’s fault.

  3. It was the failure to verify incomes, and qualify borrowers on fully adjusted rates, combined with a lot of leverage. The problem with poor people is you run out of them when running the ponzi scheme from hell.

  4. Most of it is true, but that “lending encouraged to poor people” stuff is bogus. Like Jeff Saut and others talking down about the CRA, that’s racial pandering and class warfare B.S.

    Yes, people without the financial means to buy houses bought houses, and yes, they were offered credit. But Barry Ritholtz showed recently that CRA and similar programs did not change the underwriting guidelines for mortgages.

    Everyone is responsible for this one. Poor people, with no means to carry the debt, were encouraged to take out mortgages they couldn’t afford. It is disingenuous to say “Congress did it!” however, because, as Barry showed a few days ago, nothing in the CRA told lenders, underwriters, appraisers, or anyone else in the chain to change standards. CRA was designed to level the playing field for communities that did not have ACCESS to credit. Access, however, DOES NOT MEAN that people have to be approved if they don’t have the means. ACCESS just means that people should be able to apply and be given an equal chance to receive credit if their financial situation can support it. (Credit for all types of purposes – mortgages, consumer credit, business lending.) The mortgage industry was approving people at various levels of socioeconomic status who should not have been getting the loans they were getting. CRA did not require that, or even ask for it.

    See (points to

    So calling poor people and Congress complicity is absolutely true. Saying that the CRA was the cause of their complicity is lying. I make 6 figures and I could not have afforded to get a mortgage in 2006 when I was briefly looking for a house. What Wells Fargo offered me, through a broker (and encouraged by my Realtor), was some 5/1 ARM type foolishness with stupid rates to begin with. Some typical “affordability product” that I never would have agreed to. That’s how I knew the loan was bad. (We’re talking almost 800 credit scores, low six figure income, no debt at the time, and other factors that should have gotten me a decent 30 year fixed product.) That fact, and the price of the house I was looking at, are what kept me from signing. Otherwise, I’d be starting down the barrel of this problem.

    CRA has nothing to do with irresponsible and fraudulent behavior on the part of individuals.

    As for “affordable housing”, that term encompasses rental housing too. Affordable housing has nothing to do with putting people into houses they can’t afford. It means that people have some place to live, whether an apartment, condo, house, co-op, or whatever, that they CAN afford BASED ON THEIR INCOME.

    It was the “Ownership Society” that really pushed home the point; the Bush administration started encouraging house ownership as opposed to renting, even though some people who were renters were far too income deprived, irresponsible, or whatever to become homeowners. 63 – 64% ownership rates on houses was the average for a reason. The other 36 – 37% of people, for whatever reason, should not have been owners, or even chose not to. (Like me.)

    So, catch yourself JLP. Its not about “low income” people having access to credit. It was about low income people being offered bad products by an industry that didn’t keep the loans on their books but sold them off, thereby dropping underwriting standards across the board. It was also about those low income people being improperly uninformed, and not having the character to say “no” if they felt they were taking on too much debt. It was about fraud and other malfeasance. But it was not because of CRA.