Archives For Credit Crisis

I wanted to share this comment with you from Miguel that was left on my post from yesterday:


I’m surprised to see you go for the cheap shot sound bite. I can get that in the MSM. What I would hope for from you would be a more nuanced analysis of the situation.

The problems on WS are a combination of factors, which include economic policy mistakes (on a global scale), deregulation, lax enforcement of regs, poor risk management decisions on the part of WS management, and ultimately lack of long-term accountability both at the leadership level, as well as in some case at the employee level. Throw on top of that an explosion in new products and financial technology (i.e. derivatives) to amplify the effects of the above.

Wall Street is a mixed bag when it comes to talent. True, you have some dullards (usually the eye candy sales types who are good at sweet talk and following orders) and these people are often simply carried by the tide, but for the most part, you really do have some extraordinarily talented folks. Many of them either don’t really need to work, or have enough put away to sit out this round for a few years, or have enough to go start their own business, or are extremely in demand at other firms that are not handicapped by the current crisis (and yes those do exist) or all of the above.

Additionally, there are many departments at WS firms that did make money the old fashioned way. They are the reason some of these firms didn’t lose even more money. Drive the talent away, and you might as well shut down the bailed out firms (which you might argue is what you would have preferred anyhow).

Lastly, some of the healthier firms were strong-armed into participating. Would you kill off those firms too? I guess our political establishment has done a pretty good job of redirecting attention and anger away from themselves and towards an easy populist target – those guys over there make too much money so they must be stealing it!

I just hope that in the process, we don’t throw the baby out with the bath water.

Rather than add fuel to the fire, how about some serious academic thinking about the source of our present state of affairs? And yes, if that sounded like a challenge – it was.

I like and respect Miguel very much and it was NOT my intent to take a cheap shot. Miguel has been a reader of my blog for several years now—though he is not able to comment as often as he’d like.

Miguel makes some excellent points—points that I did not consider when I wrote yesterday’s post, which was meant to be a humorous piece but went awry.

I don’t have all the answers. I’m frustrated with the situation just like everyone else.

To Miguel’s thoughts, I’d like to add a few of my own as to how I think we got into this situation. There’s plenty of blame to go around:

1. The bulk of the blame has to lie with the people who allowed themselves to get suckered into these toxic mortgages in the first place. Had there not been buyers for these mortgages, there wouldn’t have been a reason to sell them.

2. Mortgage brokers (and banks that originated mortgage loans) were huge instigators of this mess. Why? because they were on the front lines selling people on these mortgages. There was no accountability from the mortgage brokers. They simply wrote the business, got their commission, and went on to the next mortgage. A lot of them made out like bandits.

3. The rating agencies should have NEVER given securities that were backed by subprime loans high ratings. High ratings imply safety and these were not safe securities.

4. Mortgage brokers should have NEVER been paid higher commissions to sell one type of mortgage over another. Brokers were paid higher commissions to sell subprime mortgages than prime mortgages. It creates a huge conflict-of-interest. The broker should be there to help the client get the best mortgage for their needs…not to sell the mortgage that pays the highest commissions. There were prime borrowers who were sold subprime mortgages simply because there was an incentive for the broker to do so.

As far as Miguel’s thoughts on compensation for those firms receiving bailout money: I’m conflicted on this one. Surely there has to be some sort of limit. Market purists will say that the market should take care of this issue. I agree, BUT these same companies shouldn’t have been begging for government assistance either. When things were going great, they wanted the government to stay out of their business. But, as soon as things turned south, they’re at the government’s door looking for a handout.

I realize that these are big companies with lots of different business units. Is it fair for the good business units to forgo bonuses when the losses occured in one or two units? I think it is. Why? Because we are talking about the business as a whole. When the business as a whole loses money, then everyone should suffer. Of course the downside to my line of thinking is that the bonuses are structured differently for different units. Traders can makes tens of millions of dollars in one year while most average employees will make nowhere near that much. Unfortunately, a series of errors by these traders, can ruin a company. The trader of course can lose his job but he can also be the cause of innocent people losing their jobs.

So, maybe the pay structure needs to be changed.

Folks, one of the reasons I blog is so that I can learn too. Believe it or not, I appreciate points of view that don’t agree with mine. There have been numerous times when I have written something and someone will say something in the comments that will make me think, “Hmmm…I never thought of it like that before.” Miguel and Ted made me do just that with their comments.

Thoughts? Weigh-in, weigh-in.

Okay, if my memory serves me correctly, John Thain was brought in to replace Stan O’Neal as Merrill Lynch’s CEO. This occured in late 2007. Thain was hired to clean up Merrill Lynch after they lost lots of money during the mortgage/credit crisis.

So, what does Mr. Thain do after he becomes CEO? He decides to spend $1.2 million renovating his office (emphasis mine):

Mr. Thain said he plans to reimburse Merrill for the $1.2 million spent to renovate his office, saying those expenses were “incurred in a very different environment.” Mr. Thain renovated his office when he first arrived at Merrill in late 2007. Among the items purchased for the office were an area rug for $87,784, Roman shades for $7,315 and four pairs of curtains for $87,784.

Ummm…no they weren’t! True, we didn’t know how bad things were going to get, but we knew things were bad.

My question is: how bad could his office have possibly been in that would require a $1.2 million renovation?

Oh, and don’t even get me started on bonuses:

According to a person familiar with the situation, the merger agreement specified that Merrill pay regular bonuses. Since the company was going to cease to exist at the end of 2008, that meant, by definition, that the bonuses had to be paid before the end of the year.

Why would Bank of America agree to this in the first place? These companies are losing money left and right and they have the audacity to even think about paying out bonuses. COME ON!

Source: Thain Fires Back at Bank of America, Wall Street Journal Tuesday, January 27, 2009

Robert Rubin Disappoints Me

November 29, 2008

A front-page article in today’s Wall Street Journal talked about Robert Rubin’s role ($) during the Citigroup turmoil. From the article:

Mr. Rubin said it is a company’s risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. “The board can’t run the risk book of a company,” he said. “The board as a whole is not going to have a granular knowledge” of operations.

Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup’s competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager. “I knew what a CDO was,” Mr. Rubin said, referring to collateralized debt obligations, instruments tied to mortgages and other debt that led to many of Citigroup’s losses.

Mr. Rubin said the decision to increase risk followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors. “It gave room to do more, assuming you’re doing intelligent risk-reward decisions,” Mr. Rubin said. He said success would have been based on having “the right people, the right oversight, the right technology.”

The decision has been blamed in part for Citigroup’s problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that’s true. “It was not an inflection point,” he said, but “I just don’t know what would have happened” if the decision had been different.

I’d like to hear an executive say, “You know what, we messed up! We packaged crappy mortgages together and sold them as safe investments. For some reason we forgot that you can’t grant mortgages to people with poor credit and little ability to pay them back and expect good things to happen. We messed up bad!”

Instead, we get guys like Rubin saying stuff like, “I just don’t know what would have happened had we done things differently.” What the heck?

This is the real kicker (emphasis mine):

Mr. Rubin said he believed in 2004 and ’05 that while a cyclical downturn such as the 1994 Mexican devaluation or 1997 Asian financial crisis was possible, the losses the bank might suffer wouldn’t come close to wiping out the profits made during the good times.

In the current crisis, “what came together was not only a cyclical undervaluing of risk [but also] a housing bubble, and triple-A ratings were misguided,” he said. “There was virtually nobody who saw that low-probability event as a possibility.”

Maybe Mr. Rubin should go back to stats class and learn the definition of “low-probability.” When you bundle together lots of subprime mortgages, there’s a high probability that they will default. That’s why they are called “subprime mortgages.” I just don’t see how someone with Mr. Rubin’s intelligence can say something like this.

This is just another case where greed trumped “doing the right thing.” And now we have all these executives saying stuff like, “I don’t know what we could have done differently?” Yeah, right…

I like this move. Goldman’s reasoning for giving up the bonuses for top executives:

“While the firm has distinguished itself through many aspects of the crisis, we cannot ignore the fact that we are part of an industry that is directly associated with the ongoing economic distress,” the firm spokesman said late Sunday.

Source: Goldman Chiefs Give Up Bonuses ($), WSJ

If Goldman does this despite having a decent year compared to their peers, imagine the pressure it will put on other investment banks to do the same!

As was proved last week in the bonus discussion here on AFM (this post and this post), it’s a touchy subject. I’m a staunch believer that that bonuses should only be paid on company-wide results. If the company has a bad year, then no bonuses should be paid. If the company has a good year, then bonuses should be paid based on performance. In other words, split the pie when there’s a pie to split.

Anyway, I applaud Goldman’s move. I think it’s the right thing to do and I think it sends the right message. Besides, Goldman’s CEO, Lloyd Blankfein, should still have some of that $68.5 million left over from last year!

The Dow Jones Industrial Average closed at 10,482.85 on October, 2—the day before the announcement that the $700 bailout had been reached. Today the Dow closed 8,282.66 for a total percentage loss of 20.99% since the bailout was announced.

I thought this was supposed to happen IF we didn’t get the bailout!

Let’s face it: times are going to be tough no matter what we do. But, according to an article I read in today’s Wall Street Journal, which Meg already mentioned earlier today, this might be a great time to ease into the market.

Sorry to keep harping on the subject of the housing/mortgage/credit/bailout crisis but I keep reading stuff that just makes cringe. The latest comes from an article I read this morning in the Wall Street Journal about protests at the annual convention for the Mortgage Bankers Association that was held this week in San Francisco.

Here is the part of the article I want to focus on:

“The main point, and the main issue for everyone, is there should be a stop to foreclosures and evictions, and the government should be assisting the victims of the crisis and not the people who created it,” said Richard Becker, spokesman for the Party for Socialism and Liberation. The group picketed outside the convention center on Sunday and Monday.

Mortgage bankers should be punished if it’s found that they knowingly put people into mortgage loans that people couldn’t afford, Mr. Becker said. “Jail them, don’t bail them” was a popular rally cry outside the convention center.

Side note: The Party for Socialism and Liberation? Do those two words belong in the same title? I found their website and they actually have a presidential candidate. But, I digress.

I’m tired of people throwing around the word “victim” to include anyone experiencing the consequences for bad decisions. According to, the definition of victim is:

2: one that is acted on and usu. adversely affected by a force or agent the schools are victims of the social system: as a (1): one that is injured, destroyed, or sacrificed under any of various conditions a victim of cancer; a victim of the auto crash; a murder victim (2): one that is subjected to oppression, hardship, or mistreatment a frequent victim of political attacks b: one that is tricked or duped a con man’s victim

Those who purchased homes they couldn’t afford are not victims of anything other than their own poor decisions. The REAL victims of this crisis are all of us who CHOSE to do things the right way and live within our means and buy houses we could afford and those of us who are STILL saving up for a house.

Finally, I’d like to challenge Mr. Brecker’s comment that mortgage bankers should be jailed if they knowingly put people in loans they couldn’t afford. What about those who took on mortgage loans they KNEW they couldn’t afford? Can we jail them too?

I got this email from a long-time AFM reader earlier this afternoon (modified slightly to protect anonymity):

Through a reliable source, I was told that there is a strong potential for a credit freeze come January 2009. According to this source, absolutely NO loans will be granted…for anything (mortgages, vehicles or otherwise). Although I would appreciate you not listing the bank’s name [which I deleted], I thought this may be an interesting ‘what if’ scenerio for you to write about. I don’t have any other details, but thought you’d get a kick out of the topic and possibly want to dig a little deeper into the idea of a 100% credit freeze.

I followed up with this reader to see if I might be able to interview the source anonymously and this was the reader’s response:

As for the guy I spoke with, he won’t talk to you – nothing personal. It was a social situation when we spoke, but he wasn’t exactly open to comment. I tried (on your behalf, of course). He just said that if anyone needs a loan, they needed to get it within the next 90 days – or they won’t get one at all. I assume he was speaking of things going on with his bank, but you never know.

Interesting. Possible? Maybe so. But, I can’t imagine it lasting for any length of time. But, you never know…

What do you guys think? Anyone with any authority out there want to offer up an opinion?

Oh, and for what it’s worth, I trust the reader who sent me this information.