Aftershock
Last month Jamie Dimon announced that JPMorgan’s chief investment office in London had lost at least $2 billion on the kind of complex derivatives that nearly sank the U.S. economy four years ago. Dimon has been a vocal — and often truculent — opponent of Washington’s efforts to strengthen financial regulation. He’s argued it’s unfair to punish banks like JPMorgan Chase, which emerged from the 2008 financial crisis in good shape, for the mistakes of its rivals. And many Washington lawmakers seem to agree. JPMorgan’s lobbyists have led efforts to delay, scuttle, or water down new regulations that would have prevented JPMorgan from losing so much, so fast on what was supposed to have been a “hedging strategy,” but the lobbyists’ efforts would come to nothing without the sympathy and willful amnesia of those who authorize and write the regulations.
Some have asked, What does it matter to Washington if JPMorgan loses a few billion dollars on bad trades? After all, the bank will still end up turning a nice profit this quarter; and, as Mitt Romney was quick to point out, JPMorgan’s loss was someone else’s gain — that’s how capitalism works. The answer is that the JPMorgan in JPMorgan Chase is gambling with Chase’s federally-insured deposits. Already too big too fail in 2008, the bank has become even bigger since. (It is now the largest bank in the country.) If the losses had been bigger and JPMorgan Chase less able to absorb them, the government would have had to step in with another bailout. Big banks like JPMorgan Chase, whose failure would endanger the entire economy, are still trying to have it both ways: they want the size and security that comes with being a bank-holding company, but they also want the high profits that come from making — and winning — the kind of high-risk bets that hedge funds specialize in. Hence Senator Jeff Merkley’s response when asked if he had a message for Dimon after JPMorgan’s losses were revealed. “Yes. If you want to be the head of a hedge fund, be a hedge fund. Terminate your access to the Fed’s discount window, terminate your access to deposits, and then we have no quarrel.”
Unfortunately, the law no longer requires Dimon to make this choice. Until it was repealed in 1999, the Glass-Steagall Act kept investment banking entirely separate from commercial banking — and it worked: for more than sixty years there were no major financial crises. The so-called Volcker Rule, which is the centerpiece of the Dodd-Frank Act, is designed to have the same effect without actually splitting up the banks. In theory, it would keep a bank like JPMorgan Chase from trading for its own account (which is to say, with its depositors’ money.) The provisions of the Volcker Rule are much more complicated than the Glass-Steagall Act, and are therefore harder to enforce on Wall Street and easier to subvert in Washington. But there is little chance of the Glass-Steagall rule being rehabilitated, and the Volcker Rule, despite its weaknesses, would be a vast improvement over the status quo. As the editorial in the June 15 issue of Commonweal puts it, the “danger now is that Dodd-Frank will suffer the same fate as Glass-Steagall.”
Republican lawmakers and presidential candidate Mitt Romney have vowed to repeal it, and this is one campaign promise they are likely to keep. For them, and for too many Democrats, people like Dimon really are the masters of the universe: not infallible, perhaps, but smarter than politicians, regulators, and the ordinary consumers whose money they gamble with. The GOP is counting on voters either to forget what happened on Wall Street in 2008 or to remember it as a one-off event that no one could have predicted or prevented. But JPMorgan’s recent blunder is yet another sign that there are worse crises to come if Washington continues to let Wall Street write its own rules.
“and, as Mitt Romney was quick to point out, JPMorgan’s loss was someone else’s gain — that’s how capitalism works.”
If this was really just a tidy zero-sum game played by high rollers, we might laugh it all off. But these machinations destroyed substantial amounts of wealth, to say nothing of the hopes, of millions of people who never were in the game. The masters of the universe have blighted the lives of ordinary people with their complicated and reckless gambles, and instead of expressing any contrition, they insist on doing it all again. And we have to let them because “that’s how capitalism works.” Wow.
When Glass-Steagall was bipartisanly consigned to the trash heap, along with common sense, I argued futilely for keeping it. A lot of people, who are driving used cars today, told me then that I was naive and hopelessly retrograde. So discount this for my naivete, but…
Yes, a Romney administration probably would repeal Dodd-Frank, that shadow of Glass-Steagall, just because the Obama administration passed it. But Glass-Steagall was bipartisanly trashed with names like Clinton and Rubin conspicuous in the trashing. And Obama is approaching enforcement — to the extent there is anything in Dodd-Frank that can be enforced — like he is aware it would be a suicide mission.
Whoever is in the White House, the people who are lead JPMorganChase and Goldman Sachs will pretty much have things the way they want them.
In the 1990s the life insurance companies were forced to return money to policy holders because the companies lied to its customers about loans, abbreviation of policies and cash value projections. Action was able to be taken because one could clearly see the errors or fraud that was involved. In the case of derivatives many who sell them do not understand theme let alone the customers. This makes reform difficult. Secondly, Wall St companies, with JP Morgan in the lead, have lobbied intensely for no regulations. This is a scandal of gigantic proportions with few willing to take on the big money boys to initiate reform.
Let’s be clear – President Clinton and his Treasury Secretary Robert Rubin in league with high-dollar Democrats & Republican Wall Street types did away with Glass-Steagall.
Given the current generation of Congress’ inability to hold a thought long enough to pass a decent law (probably long-term brain damage from Woodstock coming home to roost), Glass-Steagall should be put back in place with no changes, word-for-word, as it was from the 1930′s to the mid 90′s.
The editors should examine Jon Huntsman’s proposed financial reform plan – simpler than Dodd-Frank and one that would result in smaller banks, unlike Dodd-Frank.
No, Ken, let’s be clearer. Clinton and Rubin joined Sen. Phil Gramm, who never was right about anything, and Newt Gingrich and, of all people, Jim Leach of Iowa who should have known better, to make a bipartisan hash of “modernizing” bank laws. The idea that one party could, unaided, do that much damage is as ludicrous as it is insulting to whichever hapless bunch of politicians you choose to blame.
The name of the legislation “Gramm-Leach-Bliley” gives you an idea who was leading the charge. But the sellout was definitely bipartisan; NY’s own Chuck Schumer sure did his part in that awful mess.
Matthew – what would really make me worry is if what JP Morgan did was systemic – if major banks all over the world were once again engaging in unregulated, risky and interlocking behavior. Perhaps they are – or perhaps they aren’t. I haven’t seen wide publicity of investment houses all over the world being in trouble, of emergency meetings of central banks and treasury ministries being convened, and so on. So far, one domino has fallen. And not even fallen – it just wobbled a little bit. Banks or rogue trading desks within banks have done dumb things in the past without crashing the entire economy. This one doesn’t seem to have even crashed the bank.
And of course, if JP Morgan’s customers are spooked by this loss, they are free to withdraw their money and put it somewhere else.
Please don’t construe this comment as an argument against Glass-Steagal or the Volcker Rule. I would support something more robust than what Dodd-Frank stipulates. I’m wondering, though, exactly what JP Morgan is a harbinger of. The sound and fury that the loss announcement triggered may just be a harbinger of a presidential election.
@Jim Pauwels (6/4, 4:47 pm) It’s my understanding (Matthew, as well as some other regulars here, would know better) that part of what’s worrisome about the recent JP Morgan news is that JP Morgan has a reputation for being the big bank that best manages risk.
So (the thinking goes) if JP Morgan can lose a couple of billion dollars virtually overnight (and why is it that all these “lone, rogue traders” only place losing bets for their banks?), then everything that would really make you (and many of us) worry is like true—that this type of trading/gambling is, in fact, systemic and endemic.
What’s more, it’s going on less than four years after the banks did, in fact, crash the entire economy—causing a recession (shrinking GDP) and a depression (prolonged period of economic distress) from which we have yet to recover.
But these machinations destroyed substantial amounts of wealth
Anybody who believes that the ‘big banks’ are solely responsible for destroying wealth is sadly naive. Anyone who bought a home, refinanced and took out cash, or any other transaction on the belief ‘house prices wont fall, or only a little’, was a main participant in destroying wealth. Greed and fraud were rampant throughout the country, but this behavior only came into clear sight when the resulting financial transactions were collected up and concentrated in the financial market. Its not a crime to lose money; it is a crime to lie, cheat, and steal. Wall street made it easier to lie, cheat and steal, but wall street did not overstate the borrowers income, lie about the value of a property, or buy too big of a home hoping to flip it for a quick profit.
Finally, Glass-Steagall would not have prevented 2008. Neither Bear, Stearns, nor Lehman Brothers, nor AIG had much, if any, FDIC insured deposits or depositors. They were predominately funded with institutional deposits which are not guaranteed by the government. And that lack of insurance helped precipitate a ‘run’ on each which ultimately resulted in their collapse.
@Bruce (6/4, 5:09 pm) Fortunately, nobody (at least here) is in the “sadly naive” category of those who believe the big banks are *solely* responsible for destroying wealth. I would count myself in the category of those who do think they bear a major responsibility for the 2008 “Great Recession”, and the ongoing economic depression we continue to experience almost four years later.
You may be correct that “Wall Street made it easier to lie, cheat and steal”. However, Wall Street also (e.g. Bank of America’s Countrywide Mortgage division) did, in fact, regularly “overstate the borrowers income” and/or “lie about the value of a property” and/or make loans to borrowers knowing that those borrowers could not afford the property.
“You may be correct that “Wall Street made it easier to lie, cheat and steal”. However, Wall Street also (e.g. Bank of America’s Countrywide Mortgage division) did, in fact, regularly “overstate the borrowers income” and/or “lie about the value of a property” and/or make loans to borrowers knowing that those borrowers could not afford the property.”
There were many complicated factors in the 2008 recession, but Bruce is correct: the primary crisis was NOT that “big banks” gambled with deposits, but the interconnectedness among the hedge funds such that when one was perceived to be cash-strapped (and its stock then shorted to an extensive degree), the other banks pulled their cash reserves and/or required significant amounts of additional collateral to be posted. It was a classic “run on the bank.” This column by Andrew Ross Sorkin succinctly states why a Volcker Rule would NOT prevent 2008: http://dealbook.nytimes.com/2012/05/21/reinstating-an-old-rule-is-not-a-cure-for-crisis/
With respect to your statement about the banks making loans to unqualified borrowers, what many miss is that these loans were made in large part due to government policy (blessedly bipartisan in its origin). Again, I think Gretchen Morgenson’s book “Reckless Endangerment” thoroughly examines how these government policies (some very “social justice” oriented) induced banks to make unacceptably risky mortgages.
One fact I originally intended to mention: the taxpayer money used to backstop the big banks was not used to backstop federally-insured deposits (although the amount insurable was increased); rather, the TARP program was a direct capital infusion program into the banks (technically a “sale” of preferred stock to the Treasury department) that was intended to “bulk up” the capital on the banks’ balance sheets.
@Jeff Landry (6/4, 5:35 pm) Thanks for your comments. Can we agree that JP Morgan, Goldman Sachs, Bank of America, et al, bear a greater share of the economic, legal and moral responsibility than do, for example, the people who bought or refinanced homes based in no small part on the assumption that there would not be a nationwide downturn in the housing market (because there hadn’t been one since the 1930s)?
I don’t know how you could read the book and come away with this idea. Are you saying that government policies forced banks to make poor loans that they did not want to make. Or do you mean “induce” in some other sense?
I guess it needs saying again, however many times we’ve said it here before: The banks did not make so many bad loans because liberal do-gooders in Congress forced (or induced) them to help the undeserving poor, or because the undeserving poor figured out new ways to trick the banks into offering them mortgages. The banks made bad loans because the financial industry had figured out ways to repackage bad loans as complex securities that could be pawned off on investors after receiving a good rating from agencies paid by the banks themselves. If federal regulators had been doing their job — if our elected leaders had equipped them to do their job — this racket would have been detected long before it caused an economic crisis.
To answer Jeff’s last point, only banks that benefited from federal deposit insurance were too big to fail, and it was only because they were too big to fail that the bailout was necessary in the first place. The government does not bail out hedge funds.
unagidon: From Merriam-Webster:
“Definition of INDUCE
transitive verb
1
a : to move by persuasion or influence b : to call forth or bring about by influence or stimulation”
I do not mean to suggest they were “forced.”
@Luke Hill: My comment is not direct in the first instance at “economic, legal and moral responsibility” of various entities in the first place (for one thing, these entities are enormously complex institutions), but rather at the factual scenario occurring. It was intended to raise factors that complicate the “if we had a Volcker-Rule in place it would prevent the Recession.” I don’t think the facts bear that conclusion out (as Sorkin points out, that doesn’t mean we don’t need something like the Volcker Rule – I point you to Jon Huntsman’s plan as an example – only that THIS justification of it doesn’t seem to hold water).
Matthew:
First of all, you’re inserting many adjectives in your first response to come up with a strawman argument that does not at all fairly represent what I said. I said NOTHING about the “undeserving poor” pulling one over on the big banks. I said nothing about “liberal do-gooders forcing” the banks to do anything. Markets require two sets of actors: there would have been no complex financial nuclear bombs created if there had been no market for the loans to be made in the first place. And government policies play a significant (NOT the sole) factor in creating this market. Again, I suggest you at least give Morgenson’s book a fair reading: she is NOT some right-wing free market hack. The ONLY point of comment was to suggest OTHER factors that contributed to the Recession other than the absence of Glass-Steagall. I think we’re both in agreement that we need common sense, effective financial reform, but I think that requires an accurate diagnosis of the various factors rather than snarky strawmen.
With respect to your last point, you are factually incorrect. Again, look at the NY Times column I’ve linked to: the trigger was not the endangerment of FDIC-insured deposits, but of traditional investment houses like Bear, Lehnman, etc. Furthermore, the “acceptance” of TARP was not premised on FDIC insurance at all, otherwise there would have been no such binding requirement on Goldman.
Jeff, Can you names twenty Republican lawmakers who publicly support Huntsman’s plan — or anything remotely like it? It is a legislative nonstarter under this Republican Congress, which is not to say it’s a bad idea. Some of its provisions could be enacted separately, not as a single replacement for Dodd Frank, but as supplements to it. And in fact several (Democratic) lawmakers have proposed legislation that would limit the size of commercial banks and increase their capital requirements. I presume you favor these bills, despite their Democratic sponsorship. Of course, they too have no chance of passing until the Republican Party changes or Congress changes hands.
Having been a CRA advocate for many years I can say with great confidence that if every single CRA-eligible mortgage (the social justice ones) in a bank’s portfolio tanked, it would have had zero impact on the bank’s balance sheet. They were a minuscule portion of the banks’ lending volume. (And they actually performed better on average than the non-CRA loans; it was the FDIC that set the record straight on that pretty quick when cynical people in Congress tried to say the meltdown was because of CRA lending)
And what’s never, ever mentioned is that banking regulators effectively stopped doing any CRA-related enforcement at all a good five years before the housing market collapsed. (Try and find a bank that got an unsatisfactory CRA rating after 2000).
Hard to blame a regulation that both the banks and regulators completely ignored.
Jeff,
The financial crisis became a national emergency because it was a credit crisis. It would not have been a credit crisis if the nation’s major commercial banks had not been involved. Bear Stearns and Lehman Brothers may have triggered it, but the gun was loaded in the first place because of the entanglement of commercial with investment banking. Investors knew that Citigroup and Bank of America were up to their ears in the same toxic securities that brought down Lehman brothers. Because there were no regulatory barriers, everyone knew the rot had spread but no one knew exactly how much of it there was or how long it would take to clean up. This caused a panic, and the panic caused a credit crisis. No one here, or anywhere else, is arguing that the the repeal of Glass-Steagall was the only cause of the financial crisis. But Andrew Ross Sorkin is dodging the issue when he points out that it was the commercial-banking rather than the investment side of JPMorgan Chase that gambled so disastrously on corporate debt. The point of both Glass-Steagall and the Volcker Rule is not just to keep commercial banks nominally separate from investment banks, but to keep commercial banks from doing with their depositors’ money what investment banks do with their clients’ money. The trading that cost JPMorgan billions of dollars was a hedge in name only; it was essentially a bet, no different in kind from the bets hedge funds make.
Matthew:
I’m afraid you’ll be disappointed if you’re waiting for me to disagree with you about the dismal legislative accomplishments of the current House GOP or of the treatment Huntsman in the GOP primary. However, I think you’re deluding yourself if you think the biggest obstacles to financial reform are right wingers like me. Indeed you need look no further than your backyard for the 3 biggest opponents of many of these reforms, namely in Mayor Bloomberg and Sens. Schumer and Gillibrand.
I am aware of the various Democratic proposals for reform and to the extent the leading one incorporates the Basel III accord, I oppose it whatever its provenance. The Basel III capital adequacy requirements would in my opinion have a disastrous effect on the ability of community banks to compete and thereby result in bigger, not smaller, banks.
Finally, the point of my original comment was simply to state that, to the extent support for the Volcker Rule is premised on preventing the 2008 fiscal crisis, I think you are overstating the factual basis for your case. Yes, of course, the fact that large commercial banks with commercial deposits was a significant concern, but I don’t think that the existence of a Volcker Rule would have made a significant dent in the credit crisis in 2008. Again, as Sorkin also says, that doesn’t mean there shouldn’t be a Volcker-type regulation.
“However, I think you’re deluding yourself if you think the biggest obstacles to financial reform are right wingers like me.”
One small edit to this sentence: I think you’re deluding yourself if you think the biggest obstacles to financial reform are ONLY right wingers like me.
I have to go with Jeff on this one. The real estate bubble and the financial instruments associated with it created a great deal of wealth. Certainly when the bubble broke, much of it vanished. But we should consider the amount that is still with us. Millions of people are living in houses that are worth far more than their book value. Some might argue that the market eliminated this excess value. But the whole thrust of our political economy has been to defend the value that was created by the bubble for the holders of assets (i.e. the banks). We are a much wealthier nation than we used to be and if millions are out of jobs right now we should focus on the existence of all this wealth which is, after all, the entire point of our economy.
and/or make loans to borrowers knowing that those borrowers could not afford the property.
Luke,
Those borrowers bear responsibility too. And a larger share IMHO than the lenders. The borrowers know their actual income and expenses and should independently determine what they can afford. The lenders may have aided and abetted the fraud, but the borrowers are the perpetrators. It seems absurd to blame the middlemen and not the principals.
@Bruce (6/5, 12:32am) Thanks for your reply. And thanks for stating clearly your view that that the borrowers bear greater responsibility (moral, legal, economic, etc.) than lenders for causing the Great Recession, and the ongoing depression that has followed.
I strongly disagree with your view, and I don’t see how one arrives at such a view from the starting pointing of scripture and tradition (which says more about my own limitations than it does anything else), but it’s good to have your view stated so clearly. Thank-you.
But the borrowers could afford those houses at the time. They were making their payments and the price of real estate was rising. They were given credit and the rising values of their property made that credit both a bargain and a prudent investment. In fact, the logic that value will somehow produce value was the same logic that fuels the stock market and a lot of the same people invested in the stock market bubble for the same reason. You seem to be asking these amateurs to have had more prescience than the professionals. Or do you believe that in investing in an appreciating asset and treating their houses like capital, they had become defacto professionals?
Chase is still trying to get me to take out a low doc/no doc mortgage.
I can completely see an inexperienced borrower assuming that Chase would want to be repaid and that it would not be relentlessly soliciting me to take out an unneeded mortgage if it weren’t a prudent investment.
Well, Irene, look at it from the bank’s point of view.
You have probably been able to keep your job and pay your current mortgage through the worse recession in decades. The bank still gets to use your house as collateral. It we should move into a full scale depression, the government will probably move in to protect the bank’s assets (and not yours). Your house has a new market value that is post bubble and probably rather stable. But the instability of your house’s price and your ability to repay the loan will be factored into the interest rate. So I don’t see a lot of downside for the bank.
unneeded mortgage if it weren’t a prudent investment.
Three points, one technical. First, the technical, a mortgage is never an investment for the borrower, its always a liability. Second, No one, professional, rank amateur or inexperienced borrower, knows the future. Third, a house is not exclusively an investment; a large part of it is consumption-a place to live that needs regular maintenance and refurbishment. Everyone, from politician to lender to homeowner, forgot that crucial fact as well as the fact that prices can decline.
I’m not saying that some people weren’t seduced into actions that ultimately have cost them dearly. But what I am saying, is that they bear some responsibility. In addition, virtually everyone bears some responsibility because we all got caught up in the ‘house mania’ and singling out any group misses that mark. That is detrimental to us all because it makes it more difficult to recognize and prevent a similar event the next time. And my experience is that these events are always surprises, something most people firmly believe never will happen actually occurs. In this case, it was a severe decline in home prices; in the depression it started with a severe decline in stock prices; and next time it will be something else.
This part of David Brooks commentary today is germane. My only quibble is that his mortgage finance bubble is really a debt aided house price bubble, which I believe was started by the extremely low interest rates available in the aftermath of the dot-com bubble.
Recently, life has become better and more secure. But the aversion to debt has diminished amid the progress. Credit card companies seduced people into borrowing more. Politicians found that they could buy votes with borrowed money. People became more comfortable with red ink.
Today we are living in an era of indebtedness. Over the past several years, society has oscillated ever more wildly though three debt-fueled bubbles. First, there was the dot-com bubble. Then, in 2008, the mortgage-finance bubble. Now, we are living in the fiscal bubble.
‘But what I am saying, is that they bear some responsibility. ”
But only some of us paid the consequences, others of us got bailed out.
“But only some of us paid the consequences, others of us got bailed out.”
But that is not the fault of capitalism, or whoever is being blamed for what happened. The market didn’t make bailout decisions; the government did.
@Bruce (6/5, 9:58 am) Now I’m confused. First (6/5, 12:32 am) you said that home mortgage borrowers bear more responsibility than banks and other financial institutions for the Great Recession and the ongoing depression.
Now (9:58 am) you’re saying only that borrowers bear “some” responsibility. Which is it? And why?
I disagree. A house in a concrete asset that can appreciate and be sold at a profit in the future. In fact, many people see “investing” in their house as part of their retirement insurance. A house is also a unit of consumption, but its condition affects its market value. In theory, its value can go down if it is not improved and up if it is improved just like any other kind of fixed capital. And it is the banks who own houses as much as the consumer does, so is not the house the same kind of asset for the bank as it is for the consumer? Who owns your house?
I would say (without getting into social classes) that there are different kinds of investors as far as capitalism is concerned. The large holders of capital are more protected than the small holders of capital. The “values” that the banks hold is more important than the “values” that the small investor (i.e. the householder) holds. The market exerts its full force against the latter, but not the former.
The “market” is a moral force brought in to explain why some won and others lost. The market as a moral force is blind to the virtues and vices of its participants, in that market values are seen to be an objective reflection of the virtues and vices of the participants. (The good win and the bad lose.)
But our capitalist political economy is structured to support certain kinds of assets (and owners) over others. The market in fact does not operate in its ideological sense at all. People who “believe” in it are expressing a religious sentiment.
I find Bruce’s position as confusing as Luke does. Bruce writes, “virtually everyone bears some responsibility because we all got caught up in the ‘house mania’ and singling out any group misses that mark.” I guess it depends what he means by “got caught up in”: a lot of people rent their homes, and a lot of renters lost their jobs as a consequence of the financial crisis. You could say they got “caught up in” the aftermath of the housing bubble — the way a stalk of corn gets caught up in a combine — but it is not clear to me what responsibility they are supposed to bear for it. Or maybe it depends what Bruce means by “virtually everyone” — maybe he just means a lot of people, borrowers and lenders both. But that brings us to Irene’s point: a lot of the lenders got bailed out. The borrowers didn’t. And the political decisions about which people would get bailed out and which wouldn’t had little to do with how much responsibility each of them bore for the crisis. Those decisions were all about saving the system, that system being a particular kind of capitalism. So Jim is only partially right. The market itself may not have made bailout decisions, but our commitment to a certain vision of the market caused the crisis that made the bailout necessary in the first place and then determined the shape of the bailout.
“I would say (without getting into social classes) that there are different kinds of investors as far as capitalism is concerned. The large holders of capital are more protected than the small holders of capital. The “values” that the banks hold is more important than the “values” that the small investor (i.e. the householder) holds. The market exerts its full force against the latter, but not the former.”
This situation can come about a couple of different ways, and I’m not certain that they call for the same response, from a social-justice point of view. One way, which we shouldn’t countenance, is when the game is rigged to favor the big investor over the smaller investor. There are a number of people who believe this is the case in banking right now; the financial market is being tilted, perhaps by central-bank interest rate policies or by regulations, in favor of the large banks we’re naming in this topic, and against the smaller community banks that don’t pursue investment banking activities but that do lend to small businesses and middle-class consumers.
The second way this can come about is a function of big and small. I have a mortgage on my house, so in one way, the bank and I jointly own my house. But he is big and I am small. The part of the house I own is a pretty big percentage of my total assets – if you looked at my assets as a pie chart, the house would be a really big wedge. I don’t know the specific of my mortgage banker’s portfolio of properties, but I assume it owns many thousands of properties; my house would be such a meager slice on its pie chart that the slice would be invisible to the naked eye. There is absolutely an asymmetry of risk in this situation: if the property market tanks in my area, it’s a catastrophe for me, whereas for the mortgage bank, it’s barely worth the energy of some clerk saying, “bummer”.
“But our capitalist political economy is structured to support certain kinds of assets (and owners) over others. The market in fact does not operate in its ideological sense at all. People who “believe” in it are expressing a religious sentiment.”
I’m not sure what this means, nor that this is the topic to pursue it in, but I don’t see that it addresses my point, which concerns how the government intervened – or didn’t – in the normal functioning of the real estate market in the wake of the popping of the housing bubble. The President and Congress could have come up with a more comprehensive – and just! – plan for bailing out underwater homeowners. The President himself, in the early days, made a very sensible remark to the effect that homeowners and mortgage holders should be able to mutually agree to mark down the property value without going through eviction and all the other awful things that befall homeowners.
“the market itself may not have made bailout decisions, but our commitment to a certain vision of the market caused the crisis that made the bailout necessary in the first place and then determined the shape of the bailout.”
I agree that vision did have something to do with the shape of the bailout – and Bruce is not wrong to point to the moral hazards of letting imprudent borrowers completely off the hook. But the cynical part of me also attributes a large of part of the shape to lobbying activities. I don’t think it would be difficult to learn who lobbies for the financial industry. Who lobbies for a homeowner? To whom should I pay the lobbying fees?
Responsibility
After the Bear Stearns mes, the conclusion “we f—— up”
Jimmy Cayne keeps doing nicely thank you/
Jimmie Dimon goes on what’s a couple of mil foul up?Life goes on and the jonb markeys and the economy are fouled up.
Is it the POTUS?
Congress approval rating – 13% and i predict wil get worse!
I think one leg of the stool we are over-looking is that the “big banks” are all publicly-traded entities, accountable, in the end result in theory at least, to its shareholders. And who are these shareholders? In the end, they are primarily pension funds, university endowments, other “investment vehicles,” including, in some measure, almost anyone owning a 401(k). I raise this point only to suggest that the “neat” categories of big and small, Wall St. versus Main Street, etc. are quite a bit more complicated.
Some prospective homeowners were naive, perhaps avaricious, and certainly way too optimistic about their ability to make mortgage payments, but their responsibility ends with that. It was the lenders that bundled mortgages, some good, some crap, got compromised rating agencies to slap a triple A on the bundles, sold them on to other trusting souls, and then bet on the worthlessness of what they had just sold. That is a whole different kind of culpability.
“virtually everyone” — maybe he just means a lot of people, borrowers and lenders both. But that brings us to Irene’s point: a lot of the lenders got bailed out. The borrowers didn’t.
I think about it this way. If you are a borrower, you benefited from easier access and lower rates provided by bundling loans and selling them as securities. If you have cash in the bank or other interest bearing assets, you also benefited because securitization squeezes the spread between borrower and lender. If you were a homeowner you benefited from rising prices. A number of underwater homeowners just stopped making payments yet continued to occupy the home for months or years until they were ultimately forced out. And if you have rights to a defined benefit pension or 401k, you benefited because you own both debt and equity of even the ‘big banks’.
Perhaps you think the thieves were the employees of the bailed out institutions but most of them suffered substantial losses in equity they were forced to hold in their employers, pay cuts and job losses. In short, virtually everyone is both a borrower and an equity holder in our society.
@Bruce (6/5, 7:10 pm) “In short, virtually everyone is both a borrower and an equity holder in our society.”
A couple of reactions:
1 – From Wikipedia on wealth distribution in the US: “In 2007 the richest 1% of the American population owned 34.6% of the country’s total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country’s wealth and the bottom 80% of the population owned 15%. Financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 42.7%, the next 19% of Americans owning 50.3%, and the bottom 80% owning 7%.[7] However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%. The Great Recession also caused a drop of 36.1% in median household wealth but a drop of only 11.1% for the top 1%.” http://en.wikipedia.org/wiki/Wealth_in_the_United_States#Wealth_Distribution
2 – According to a study last year by the Economic Policy Institute, …”the wealth destruction caused by the Great Recession has led to nearly 25 percent of American households now with a net worth equal to or less than zero.
Net worth, the value of one’s assets minus one’s debts, is an important calculation in determining wealth and financial stability. And unfortunately for millions of Americans, it is a calculation that does not favor them as this number increased from 18.6 percent in 2007 to 24.8 percent in 2009.” http://economyincrisis.org/content/one-four-households-have-no-net-worth
So I guess your statement is accurate if by “virtually everyone” you mean 75% of households, and if the current dramatic wealth inequality in the US is of no relevance to the current discussion.
For some reason, the following statement of Archbishop Desmond Tutu comes to mind: “If you are neutral in situations of injustice, you have chosen the side of the oppressor. If an elephant has its foot on the tail of a mouse and you say that you are neutral, the mouse will not appreciate your neutrality. “
This is an extremely ignorant question, but — when someone can’t pay the mortgage and “loses” the house, does the bank get the house free and clear? I mean does the person who has been paying on the mortgage for years, even many, many years end up with nothing? If the latter, then that is a grossly unfair system.
when someone can’t pay the mortgage and “loses” the house
Ann,
The mortgage holder is roughly entitled to collect the value of the loan plus collection costs. If the house is worth more than that amount, the owner receives it, less and the bank suffers a loss.
Luke,
Most people with a negative net worth were betting on house prices going up. So if you think that kind of ‘injustice’ makes me on the side of the oppressor, then I plead guilty. FYI, I dont think wealth inequality is good or bad; its what the wealthy do with their money that matters.
As an aside, an example of an invention that has created wealth inequality is TV. It allows performers, like actors and sport figures, to reach much greater audiences than would be possible if they were only seen in physical venues. Its also cut the income of all those below the very top echelon. But its allowed many more viewers the opportunity to see the best performances available. So does that make TV good or bad? The answer is certainly unclear to me; but its definitely increased wealth inequality.
Bruce –
Thanks. So if somebody bought a house 10 years ago, paid 9 years mortgage payments, then couldn’t keep them up, the bank would foreclose. If the house was worth less than the money owed (which is likely given the housing bust), how would that amount be determined? By an appraiser? And should the house be worth more, would the bank actually make a cash payment to the purchaser?
Does this imply that both buyer and bank are taking on risks, the buyer that he might lose what he has already paid, and the bank that it will be stuck with a devalued house that *might* not bring in as much money as it had originally hoped?
I’m still not clear in my mind about this. Can the bank ever lose money on a mortgage for a devalued house? Looks to me like the system is stacked in the bank’s favor.
At the non-profit where I work, in 2011,we counselled 448 NYC homeowners struggling with their mortgages. Households were economically diverse: about 25% earned more than 100% of the area median income, another 25% earned less than 50%, the remaining people (about half), were in the middle with income between 51%-99% of AMI.
At this time, most of our clients are struggling, not because of bad mortgages, but because they have experienced a reduction/loss of income. Some of that is related to illness or divorce, but a great many of our clients lost their job or had a business failure due to this bad economy.
I see a lot of clients who have been unemployed/underemployed for two years or more. These are often people who worked their whole lives and owned their homes for many years. After they lose their jobs, they use their savings to pay their mortgage, while they look for work. Once their savings are gone, people then cash in their retirement accounts; once the retirement money is gone and they have no other way to pay the mortgage, people then sometimes come to organizations like my own for assistance.
Part of our work is trying to reach people early- before they’ve exhausted all of their resources trying to keep their homes. People’s stories can be really heartbreaking, but they can also be really inspiring when you hear how hard they work to keep their families together.
Most of the people we try to assist, though they are suffering the consequences, they do not share responsibility for the housing meltdown.
@Bruce (6/6, 12:22 am) Thanks for the reply. Do you have any data on the number or percentage of homebuyers with negative net worth at the time of purchase in recent years? And how that compares with historical trends?
In the absence of any, I suggest we take Irene Baldwin’s figures (6/6, 5:12 am) as a decent baseline. Note that she and her colleagues were working with homeowners who were struggling with their mortgages—a population that likely has lower than average “area median income”. She provides income figures, not wealth figures; but I think it’s reasonable to assume from her experience that the overwhelming majority of individuals who took out mortgages in the past 10 – 15 years were *not* people with negative net worth.
I’m not sure how the socioeconomic impact of television got into the conversation, but from this end it reads more like an attempt to change the subject rather than admit error, than it does an effort to advance the conversation towards greater collective clarity and understanding.
Luke – why do you focus on net worth rather than income? For the majority of homeowners, surely it’s the income stream, more than accumulated assets and debts, that determines how much house they will buy. I’m certainly not an expert on mortgages, despite having one, but those “rule of thumb” ratios that are kicked around state that your mortgage should be x% of income.
Irene’s very valuable comment above seems to illustrate this: it is when the income stream is turned off that the trouble starts. A person with a negative net worth but a steady income stream can stay afloat indefinitely in a stable economic environment. That’s not an argument for irresponsible spending, but it’s been the experience of many millions of Americans during our lifetimes.
I’m not sure if we’re even having an argument :-) – I’ve lost track of where you’re going with this.
@Jim Pauwels (6/6, 9:04 am) Thanks for the comment; sorry for creating confusion.
I was responding to Bruce (6/6, 12:22 am) who seemed to be making an argument that individuals with negative net worth (i.e., wealth) bore a major responsibility for…well…I’m not sure what: the collapse of the housing market, the Great Recession, the ongoing depression, etc. I’d be shocked if the 25% of households with negative net worth played a major role in causing any of those economic problems.
I agree with you about the importance of a steady (and growing) income stream for people with mortgages.
To the extent I’m going anywhere with my comments (always a debatable proposition), it’s towards exploring the (to me) mystifying emphasis by Bruce on the moral/economic/legal culpability of the poor for our current national economic problems.
The mortgage system was both risky and dysfunctional. The risk is just inherent to the instrument; taking out a substantial loan worth a multiple of one’s annual income and with a long payback period is always risky, and in my opinion, we can reasonably expect consumers to have at least a rudimentary understanding of those risks, and to bear at least some of the repercussions if the risk goes bad. Adult consumers have a responsibility to understand these things.
I don’t think we can fault consumers for not understanding the dysfunctionality of the system. My opinion is that the knowledge of this was extremely imperfect. The moral hazard for the dysfunctionality should accrue to the architects and knowing participants of the system.
Will Mr. Dimon enlighten Congess (and us) today or just more anti-regulation PR?