Thursday, October 15, 2009

Linkfest on sub-prime crisis

Been thinking about listing this out for sometime and will keep adding to it as I come across more. This is a list of links on how the cozy relationships between Wall Street and the decisions makers in the US Fed and Treasury contributed to both inflating the sub-prime bubbles, designing the bailout to protect their interests, and diluting efforts to bring in more stringent regulation.

1. NYT chronicles Tim Geithner's role as Wall Street's man at the Treasury. And the Times also obtained the details of Geithner's daily schedule at NY Fed in the 2007-09 period.

2. About James Dimon (of JP Morgan Chase) and Lloyd Blankfein (of Goldman Sachs), being along with President Obama, as those most contacted by Treasury Secretary Tim Geithner in the week when the bailouts were announced, Yahoo writes, "Along with executives at Citigroup Inc., they are among a cadre of Wall Street executives who have known Geithner for years, whose multibillion-dollar companies survived the economic crisis with his help, and who can pick up the phone and reach the nation's most powerful economic official... More than any other company or any of their rival banks, Goldman, Citi and JPMorgan can get Geithner on the phone several times a day if necessary, giving them an unmatched opportunity to influence policy."

And Simon Johnson has this to say about these extensive telephone contacts, "The list of phone calls is not the largest banks, because some of the biggest are hardly represented (e.g., Wells Fargo), it’s not the most troubled banks (e.g., Bank of America had little contact), and it’s not even investment banker-types who were central to the most stressed markets (Morgan Stanley was not in the inner loop). And small and medium-sized banks (and others) always bristle at the suggestion that their interests are in alignment with those of, say, Goldman Sachs.

Geithner’s phone calls were primarily to and from people he knew well already - who had cultivated a relationship with him over the years, shared nonprofit board memberships, and participated in the same social activities. These are close professional colleagues and in some cases, presumably, friends."

3. In an excellent article, James Kwak describes Tim Geithner's cultural capital thius, "Just like an education in art history is a marker of class distinction that is used to perpetuate class distinction, an education in modern finance is a marker of distinction that sets off those who understand the true importance of Wall Street for the American economy. As long the powerful people in Washington, including the regulators who oversee the financial industry, share that worldview, Wall Street’s power and ability to make money will be secure."

4. Matt Taibi has a revealing article, here and here about how the bailout was used to promote the interests of a few firms and how Wall Street effectively infiltrated the highest echelons of decision making in the US Government.

5. Matt Taibi explores the enduring influence of Goldman Sachs and how it has engineered every major market manipulation since the Great Depression.

6. Matt Taibi and Bruce Feirstein profiles those responsible for the sub-prime mortgage crash induced financial market crisis. Michall Lewis profiles Joseph Cassano, the head of AIG's Financial Products division, whose dalliance with CDS products brought down AIG.

7. Micheal Lewis and Andrew Ross Sorokin chronicles Wall Street's age of greed. Simon Johnson feels that the US political economy is closer to the crony capitalism of many emerging economies than is popularly imagined. And these two articles, here and here, in Vanity Fair by Joesph Stiglitz brilliantly exposes the wheelings and dealings that brought capitalism to its knees.

Stiglitz has a list of five mistakes that led to the crisis - removal of Paul Volcker and appointment of Alan Greenspan in 1987; deregulation, including the repeal of the Glass Steagall Act in 1999; Bush tax cuts since 2001; series of major accounting scandals in 2001-02 and the inaction in its aftermath; leaving action on the bailout till the end.

8. Daron Acemoglu hits the nail on its head in describing the regulatory challenge with financial institutions, "many financial institutions are now sufficiently politically powerful and connected that they are, and expect to be, able to obtain bail-outs once problems appear on the horizon. Given these incentives, it's not surprising that there are forces pushing towards a bail-out cycle".

As Simon Johnson writes, "We now have some financial institutions (and perhaps nonfinancial firms also) that have such strong and deep political connections, they will not be allowed to go bankrupt. This is a reality we must face. Assuming that we can address such a deep political problem with a tweak of our regulatory arrangements is a dangerous illusion. And it is less than convincing to assert that central bank 'independence' offers either a model for regulators or even something that works well at present on its own terms."

9. Vanity Fair has a series of articles on the recession, with "all the juicy details of fortunes lost, egos crushed, and epic plans gone awry".

10. Henry Blodget analyzes Wall Street's psychology and claims in this essay wall street will always get it wrong in the end.

11. Kevin Hall has this excellent account of how even the gatekeepers - credit rating agencies - got sold out, and in the process short-changed their unsuspecting clients to benefit their payment masters.

12. Time has this list of 25 people who caused the sub-prime crisis.

13. Mark Thoma has this excellent summary of the reasons that caused the sub-prime crisis and suggests the way ahead in terms of financial market reforms - regulating shadow banking system, plans to deal with insolvent TBTF financial institutions, limiting leverage ratios, fixing individual and firm level incentive distortions, better regulatory oversight, limiting to exchange based transactions on all financial products etc

14. The Times has this nice account of the failed small bank, Haven Trust Bank, whose financial autopsy conducted by US federal investigators reveal lax lending standards, poor risk controls and a buildup of potentially dangerous mortgage loans, most of which were already in the knowledge of regulators. Foresight Analytics, a banking research firm, has estimated that of the nation’s 8,100 banks, about 2,200 — ranging from community lenders in the Rust Belt to midsize regional players — far exceed the risk thresholds that would ordinarily call for greater scrutiny from management and regulators.

15. Auditors have found fault with the New York Fed's judgement during the high-pressure negotiations with AIG's clients (whose CDs etc were insured) and its decision to reimburse them 100% of the insured sums. The auditors have found that the NY Fed "refused to use its considerable leverage" to force the clients to take a haircut even as the people not even remotely connected to the financial markets were bearing the brunt of the tumult. It even sugegests that the Fed bargained weakly to engineer a "backdoor bailout" of AIG's banks.

This comes in the face of evidence that UBS, of Switzerland, offered to give a break (discount of 2 cents for a dollar insured) to the New York Fed in the negotiations last November over how to keep AIG from toppling and taking other banks down with it. The biggest beneficiary of the deal was Goldman Sachs, and the deal was administered under the overall supervision of the previous CEO of GOldman, Hank Paulson! See Krugman on the report.

16. James Hamilton on what went wrong and how to fix it.

17. Times has this nice story of how banks like Goldman placed unusually heavy bets against mortgage securities (shorting them), even as it was packaging and peddling securities based on them, like CDOs, to its clients.

It writes about the possibility of "firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded. Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s... Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities. But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests."

18. Menzie Chinn's superb reading list on the Great Recession.

19. Superb interactive graphic on how the giants of finance first shrank and then grew as the cisis unfolded and bailouts started.

20. Times article on executive compensation debate.

21. Simon Johnson compares the difference in approaches in bailouts between the sub-prime crisis and the East Asian currency crisis.

22. Obama administration has employed many people from the finance sector in prominent policy positions, especially in advising it about various financial market reforms and regulatory changes. See Matt Taibi's stinging indictment of the administration on this here. Simon Johnson calls for independent financial regulators and development of independent professional institutions that research on the financial markets.

23. List of those who got it wrong on the housing bubble.

24. Barry Eichengreen and Kevin O'Rourke have this comparative feature of the Great Recession and Great Depression. Stephen Cecchetti has this and this set of FAQs on the sub-prime crisis.

25. Stirring attack on the greed and mendacity of Wall Street bankers and the eco-system that supports such practices by Maxine Udall.

"Higher returns means higher risk and if the returns are high and sustained, you’re in a Ponzi scheme or a bubble. We and our elected representatives have a choice to make. We can continue to compensate clueless victims way beyond the value of their marginal product in any domain of productivity you care to name and we can continue to allow them to cluelessly manage financial institutions for their own short-term short-sighted gains until they plunge the rest of us into serfdom or we can change how they are compensated and maybe even who is compensated (as in throw the bums out) and we can change the rules by which they are allowed to "play" with our money."

26. Dan Geldon has an impressive article that seek to highlight the fact that 'industry interests' and 'free-market interests' are not the same, and that they are more like oil and water - the industry profits most in the absence of true market competition. It also dwells on how complexity of markets and instruments enabled financial market actors to make money out of the unsuspecting investors.

27. Excellent article by Peter Temin that examines the causes and the spread of the sub-prime crisis and the prospects of economic recovery.

28. Nice summary of how financial risk got ahead of the world's ability to manage it, thereby building up the sub-prime bubble and its final bursting.

29. David Leonhardt makes the case for financial market regulation in this excellent essay, calling regulaiton a important public good.

30. Luigi Zingales and Oliver Hart find that at the "heart of the meltdown were the financial industry's distorted incentives — created in large part by decades of misguided government policy — which caused bankers and investors to take enormous risks without due regard for their consequences".

31. Robert Barro explains his critique of the Obama administration's stimulus spending and his five books on such recessions.

32 Walter Russel Mead on the ten lessons from the financial crisis.

33. Greg Mankiw has this essay summarizing the challenge facing government economists as they prepare policies to address the Great Recession.

34. Paul Krugman and Robin Wells examines the possible causes of Great Recession - The Global Savings Glut; Low Interest Rate Policy of the Federal Reserve; Out of Control Financial Innovation; and Moral Hazard Created by Government Programs. While arguing that the bubble got started largely thanks to the global savings glut, but that it developed a momentum of its own and got amplified due to the other three factors.

35. Mike Konczal has this primer on the foreclosure fraud in the US here, here, here, here, and here.

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