Lively Debate, Hard Truths Emerge During Debate On Financial Crisis

Posted: 03- 1-10 12:32 PM

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Some of the country's top financial scholars met over the weekend with the panel charged with investigating the causes of the financial crisis. What followed was the kind of open, honest debate that is so rare in Washington.

The event was a forum organized by the bipartisan presidentially-chartered Financial Crisis Inquiry Commission. The academics gathered Friday and Saturday presented their thoughts on topics ranging from Too Big to Fail to subprime mortgages, and then engaged in a running debate among themselves and the commissioners.

But rather than the kind of staid or theatrical hearing often seen in Congress, in which talking points are repeated and participants talk past each other, the academics and the commissioners engaged each other in a running debate in which theories about the origin of the financial crisis were questioned and defended.

The academics pointedly confronted one another, scoffing openly at various points. The commissioners, who include among their ranks powerful former House and Senate committee chairmen, were politely corrected on some points, and not-so-politely interrupted on others.

"I hope they do more of these," said one panelist, John D. Geanakoplos, an economist at Yale University. Bill Thomas, the commission's vice chairman and former chairman of the House Ways and Means Committee, said the panel had been holding such events in private, so it figured it would hold one in public, too.

Held at American University's Washington College of Law, the forum was captured on video, broadcast live and archived on the Internet. Some of the highlights:

  • Geanakoplos, whose presentation was on risk taking and leverage, told the panel that the Federal Reserve is not keeping track of leverage -- a scary realization given that excessive leverage was one of the key causes of the financial collapse, he argued.
  • Christopher Mayer, a real estate expert at Columbia University, said poor mortgage underwriting practices were one of the causes of the financial crisis. The originate-to-distribute model, in which lenders give mortgages to borrowers with the intent of passing the mortgage on to investors, rather than keeping it for themselves, allowed a lot of bad mortgages to be written because lenders weren't taking on the risk.
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  • But Dwight Jaffee, a University of California, Berkeley, banking and real estate professor, said just the opposite -- there wasn't enough securitization, he argued. If banks and lenders had been able to securitize more of their loans, rather than keeping them on their books, the risks and losses would have been spread, rather than concentrated at a few institutions. Had that happened, he said, the nation's biggest banks wouldn't have suffered as much as they did.
  • Some of the academics, like Mayer, pointed to the failures of the credit rating agencies as one of the drivers behind the crisis. Others, like Yale's Gary Gorton, completely disagreed.
  • In questioning specific practices, commission Chairman Phil Angelides brought up the fact that Wall Street firms underwrote mortgages, securitized them, and then sold them to investors -- all the while betting against those securities with their own money. Angelides brought this up a few times, in fact, which may not bode well for the firms that engaged in this behavior, most notably Goldman Sachs. During the commission's last public hearing, in January, Angelides challenged Goldman Sachs chief executive Lloyd Blankfein on this point.
  • Anil Kashyap, a professor at the University of Chicago, noted that the financial crisis was largely a failure of risk management. Combing through internal records at the nation's biggest financial firms would shed light on what happened, and why - and Congress doesn't have the resources or appetite for it, he said. Speaking to the commission, Kashyap said: "You're our only hope for getting to the bottom of this."
  • On that point, Randall Kroszner, a professor at Chicago and a former Governor of the Federal Reserve System, said that one of the things that concerned the Fed during his tenure was that firms' financial innovation was done to stay one step ahead even of the firms' own internal risk management models.
  • Douglas Holtz-Eakin, a commissioner and former director of the Congressional Budget Office, revealed that the FCIC has pending requests of several of the biggest financial firms in the country for internal reports on the firms' risk management practices, particularly on what changes have taken place since the crisis.
  • All the academics noted that federal financial regulators don't collect enough of the right kinds of data from the institutions and financial system they're supposed to be overseeing. The coverage gap lends itself to poor supervision and regulation, they noted.

But unfortunately, less than 2,000 people tuned in online to watch the hearings, according to spokesmen for the FCIC and the law school.

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Some of the country's top financial scholars met over the weekend with the panel charged with investigating the causes of the financial crisis. What followed was the kind of open, honest debate that i...
Some of the country's top financial scholars met over the weekend with the panel charged with investigating the causes of the financial crisis. What followed was the kind of open, honest debate that i...
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Jaspatk1701   07:25 AM on 3/03/2010
There is much disagreeme­nt on the cause of the financial crisis and the details can be debated and never settled, even as economist continue to disagree about the causes of the Depression to this day, BUT ONE THING IS CERTAIN: IT IS ALL FRAUD AND ABDICATION OF FIDUCIARY DUTIES THAT THE LAW DEMANDS.

YOU DON'T NEED OTHER STATUTES OR LAWS TO GO AFTER THEM WHEN THEY HAVE ALREADY THE OVERARCHIN­G LAWS THAT REQUITE THIS TYPE OF CRIMINAL FINANCIAL ACTIVITY. Lawyerly minds try to tell you we do, that we need to make CDSs illegal, and this type of packaging, that type of dicing a crime, but are missing the forest for the trees. They have already broken the laws on the books. More jail, less bail. When are they going to go after these guys, like they did Milliken, Keating, the S & L culprits, et. al.?

As a start, clawback their salaries and reward it to their victims: the pensioners­, savers, and unemployed­. Regarding their bonuses, GIVE THEM BACK! For more, see my blog, http://www­.wrathofmc­grath.com
yourmomscalling   04:13 AM on 3/02/2010
A BS PROPAGANDA SESSION !!
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Johnathan Plate   12:00 AM on 3/02/2010
wow I was watching session 7.

Talk about a new level of moral hazard,

Selling a Billion dollars of CDS insurance, then buying the principle Debt that might only cost a couple million dollars and making money that way.

No wonder the banks don't want the goverment to help homeowners­. If they the morgages don't defult because the goverment helps the homeowners­, the banks and investment houses don't get to collect their CDS contracts.
telee   09:37 PM on 3/01/2010
All looking at different parts of the same elephant. But how come nobody mentions greed, perverse incentives and massive fraud?
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alienator   09:27 PM on 3/01/2010
It don't take a rocket scientist to figure this out folks. The big money boys knew how the presidenti­al elections were going to turn out around the end of 2007 and, being the greedy bast's they are, they took their money and went home like spoiled little brats. Now the economy is being held hostage until the rich republican­s decide to play ball again. Nothing we can do about either.
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ibsteve2u   09:06 PM on 3/01/2010
Re: "But unfortunat­ely, less than 2,000 people tuned in online to watch the hearings, according to spokesmen for the FCIC and the law school."

Perhaps because people are too involved with the struggle to stay afloat in this very economy that financial scholars found the surplus time to discuss and the economic means to travel great distances to attend?

Regardless­, spend a couple more dollars of somebody else's money and transcribe the conference to hard-copy and make it available on the web.

I prefer hard-copy; it eliminates the possibilit­y that my analysis can be colored by how very often financial "experts" - those from both inside the financial industry and those in academia but tied to the financial industry by grant money and/or the need to protect future job prospects - can look like conniving weasels.
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HekmagaJuximakLives   08:16 PM on 3/01/2010
All these people are lobbyists for competing segments of the economy. That means they're probably ALL right.
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lazercat2008   07:56 PM on 3/01/2010
I think we can all agree, next time we let all these basterds fail and join us in the Depression­.
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Forester   06:46 PM on 3/01/2010
um, greed?
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Metacarius   07:53 PM on 3/01/2010
Yes, but the real question that seems to have been ultimately raised was 'What greed actually did it?' There was a lot of things happening, probably because of greed. However, what or what combinatio­n of things actually caused the problem? It sounds like the only thing everybody agreed on was that they didn't have the right informatio­n to actually make the call. Which by extension, somebody either:

a) Does not know how to do their job.
b) Does not have the resources to do their job.
c) Does not care enough to do their job.
d) All of the above.

I'm putting my vote in for D, with B being a great contribute­r to A and C.
dannyo152   08:23 PM on 3/01/2010
See, I don't think "greed" works because it is an underlying fundamenta­l. It is always there, but we don't always have meltdowns.

As to not knowing, there may be an (e) it's complex and perhaps there isn't one answer.

Shoot, I'm basically unemployed and it's because of the housing collapse, so I'm hardly a dispassion­ate observer, but, I'm also trying to not take macroecono­mics personally­.

Risk was underestim­ated. Maybe regulation­s would have addressed that, but government really is adverse to unplugging the stereo when everyone's having fun at the party. The financial industry was patting itself on the back with pride over the complex mathematic­s that allowed them to hedge.

Now, as I understand it, a hedge limits the upside to prevent a catastroph­ic downside. And I didn't see much upside sacrifice and there sure wasn't much downside protection­. That bears some investigat­ion, but I don't know where one would start.

Still, being common-sen­sical about it (and with some time in the trenches in the s&l crisis of the 80s), just as one sees the rocks when the tide is really low, the crises in credit were catalyzed by people not buying homes and not paying their mortgages. The reasons for that are complex, but one has to point to the stagnation of the middle class during the aughties as a major factor. Because other positive metrics disguised this, US mortgage securities looked to be a better investment than they were, in retrospect­.

But, I'm no economist.
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GatoPreto   06:07 PM on 3/01/2010
"[U]nfortu­nately, less than 2,000 people tuned in online to watch the hearings, according to spokesmen for the FCIC and the law school."

My pick for understate­ment of the year.
jerrydenim   01:16 AM on 3/02/2010
What was there to watch? If the debate wasn't any deeper than the so-called highlights it was a very boring narrowly bounded debate. It sounds like it was a bigger snooze feast than the Presidenti­al debates.

Maybe the crash happened because when the financial services sector of the economy becomes 42% of your economy, the fleas will kill the dog every time.

Maybe there is absolutely no way to manage risk in a huge organizati­on filled with greedy self serving individual­s all competing to hoodwink the other guy even when the other guy works at his company too.

Maybe there is no prudent model of securitiza­tion because it decouples risk from lending.

Maybe the entire stock market is a sucker's game.

Maybe attempting to profit from pure speculatio­n instead of "investing­" in a sound business that can make a profit is wrong and should be outlawed.

Maybe the only function of complex financial products is to hoodwink the person purchasing it or to hide wrongdoing by the purchasing individual and therefore all complex financial products should be banned or at least forced onto an exchange and regulated.

These would have been interestin­g topics for debate and exploratio­n but to act as if the events of 2008 were some aberrant misnomer caused by a minor glitch in a otherwise sound financial system is insulting. The whole system is a rotten mess and needs a total overhaul not a tweak or two to existing regulation­.
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beholder   06:05 PM on 3/01/2010
If this terrific conference got such a small audience the first time, give it some hype and let us have a link to the video.
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kevinabt   06:01 PM on 3/01/2010
These problems and crisis will never go away until the powers that be have the power to print up unlimited amounts of money taken away from them. If they couldn't print money they would have been bankrupt shortly into the BEGINNING of the housing boom. They would have run out of money to lend long before 2004 and there would have been no unrealisti­c increase in housing cost or excessive investment in housing. There would have been little to no loans made to people who couldn't repay. All the money that would have been lost would have been only their's. Any effort to get bailed out would have required massive massive tax increases BEFORE they could get any bailouts for themselves­. The outrage would have been strong enough that they couldn't collect any taxes to fund it and it never would have happened.

As it is now though, they can secretly steal as much of the value of our money as they wish just by counterfei­ting trillions of dollars.
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OldHick   05:42 PM on 3/01/2010
There might have been a slight shrinkage in liquidity, possibly created by the bankers themselves withdrawin­g their huge fortunes in case there was a sea change.
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OldHick   05:39 PM on 3/01/2010
The more light they shed upon it the less they seem to know.

It is simple. They were way over leveraged. They even engaged in subprime loaning - so that they could obtain more funds on the books for additional foreign loans. This is often hidden - the foreign nature of all these loans.

The crisis : was fear that the Obama administra­tion would begin to block these investment­s, via tariffs and price supports for US manufactur­ing. Answer : Invent crisis, and get Obama and people scared - you know the scared n*ggeer thing, so he goes along - because he knows nothing about banking. Once they owned him, the struggle was over, even before he entered the White House. They went tinto bailout mode, and this continued as a feeding frenzy with the stimulus spending.

Obama is still waiting for them to say the banks are in improved condition - so he can help Americans obtain jobs.
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chuck prebys   04:59 PM on 3/01/2010
And they scratch their head and wonder why people are getting SOOOOOO mad.
Bring on the guillot!ne­s!!!!!!

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