How Wall Street KNOWINGLY Created The Crisis

[kpete]

Francis Fukuyama on the Financial Crisis

What I thought was most interesting about Michael Lewis's book, "The Big Short," was that there is, to this day, a view about the whole pathology of collateralised debt obligations (CDOs) – these highly complex, packaged mortgage securities – as well as the credit default swaps – the insurance contracts written on those securities – that Wall Street created them and they simply got out of hand. They didn’t anticipate it would be hard to value them, how they would be misused, and so forth. What Michael Lewis points out very forcefully is that they were deliberately created by Wall Street banks in order to produce non-transparent securities that could not be adequately evaluated by the rating agencies, which then could be sold to less sophisticated investors, who would buy the idea that this junk debt actually had triple A ratings. So what this book does quite brilliantly is show that there was actually a high degree of intentionality in creating the crisis.

The worst of all these securities are the so-called synthetic CDOs. A CDO is a bond that represents maybe a couple of thousand mortgages; a synthetic CDO is a group of hundreds of CDOs, all packaged into a single security. When you get to that level of complexity, no one can evaluate what this thing is worth. You can come up with sophisticated rationales for why this might actually follow some kind of market logic, but I think Lewis shows that the reason this happened is that they didn’t want anyone to be able to rate it.

http://thebrowser.com/interviews/francis-fukuyama-on-financial-crisis
via: http://andrewsullivan.thedailybeast.com/2012/01/how-wall-street-knowingly-created-the-crisis.html

[Duer 157099]

1. In other words, FRAUD n/t

[peacebird]

2. Is there any hope Obama's new guy will take action? He is charged with going after mortgage fraud.

[Hotler]

14. Not a chance. No one has gone to jail in the last 3-yrs. and....

no one will go to jail in the future. It's time we all got over it and move on. I have no hope.

[jwirr]

17. Even more important - any chance that the congress will make some laws to stop this from happening.

[pnorman]

3. Bookmarked!

Thanks!

[gopiscrap]

4. Not a surprise

Like I've said a million times: ALL BUSINESS IS EVIL it is designed by nature to fuck you out of your money!!!

[Mosaic]

5. Good point

Americans are finally waking up.

[usrname]

8. Businesses are intrinsically not evil

It would be the opposite: the point of a business is to provide someone with goods that is needed or desired. In return that someone offers something fungible, like money. Trade is a win-win.

What they're doing here is not win-win, but WIN-lose. They're performing outright fraud and all legitimate businesses should take note and denounce how this action smears the good name of business and delegitimizes other well-meaning businesses.

[JayhawkSD]

12. Some businesses are, repeat are intrinsically evil

"the point of a business is to provide someone with goods that is needed or desired."

That is not the purpose of financial houses. They are business that have as their sole purpose the extraction of cash fom the economy of the communities in which they operate.

[jonthebru]

10. Its all about exploiting someone else.

[patrice]

6. I have speculated this for a while now. Q. HOW could they NOT have known??? A. They knew.

It seems obvious that they did it anyway for money, but I sometimes wonder if some did it for other reasons.

[Maynar]

7. Some men rob you

with a gun, some rob you with a pen.

[Zippydo77]

9. So true

From Chaos, Order.

The cost: Control.

They create the Chaos, They wait for the reaction, They have the solution.

You? You get fleeced....again.

[jmowreader]

11. Synthetic CDOs don't have CDOs underlying...

A synthetic CDO is tranched credit default swaps. Tranching CDOs produces a CDO-plus.

Derivatives are so fucking complex not even the people selling them know what the hell they are, so the error is forgivable.

[bemildred]

13. In 1929 it was "watered stock", but it's the same thing at bottom, fraud. nt

[elleng]

15. 'But they weren't intending to cause a big crisis . . .

and recession – they were just making money by selling dodgy stuff. They were just being used-car salesmen, in a sense.(?)

Yes, but it raises this issue of intentional fraud, which has been at the root of a lot of the charges against banks like Goldman. The book is a story about these five or six weird individuals that realise what’s going on – that this housing bubble was expanding and then eventually would burst – and the other thing it makes very clear is that it undermines any kind of notion that the crisis was not foreseeable. In fact, you can see that a lot of the big banks began to understand that it was not going to be sustained, and did a lot to promote it, hoping that they would be able to get out before the whole thing collapsed. . .

I also know quite a few people who have worked there, and I find the idea of systematic fraud hard to buy.(?)

It depends what you mean by systematic. Lloyd Blankfein doesn’t get up in the morning and say, “OK. How are we going to defraud people today?” but I do think the relationship of these banks to social rules is fairly dodgy. Rules are viewed as potential obstacles that you try to get around if that maximises your profit. This is a deeper social issue that I think has to do with the economisation of a lot of thinking. Economists have this model of rational utility maximisation – that social benefit comes out of everybody pursuing their private rational self-interest. This has shaded over – imperceptibly over the past couple of generations – to a downplaying of social norms as constraints on behaviour. You see this in a number of places. In business schools, for example. Back in the 1960s and 70s, business schools regarded themselves as professional schools along the lines of law schools or architecture schools. They were meant to inculcate a certain sense of professional responsibility, that you have obligations to society at large. But as a result of the economisation of a lot of what was taught in these schools, individual profit maximisation began to displace this normative sense, and this spilled over into the behaviour of the people who went on from these programmes into the financial sector. In their minds, they weren’t deliberately trying to defraud people, but if they saw an opportunity to take advantage of less sophisticated buyers of subprime mortgages, they would go ahead and do it. . .

A lot of people on Wall Street itself say that the norms were quite different 30 years ago. When everyone was part of a partnership, there was more of a normative sense that you had a responsibility to customers and that your long-term reputation mattered a great deal. This shorter-term trading mentality has really displaced that in many firms. Whether you can get that back or not is another big social challenge in the future. . .

As the industry has got bigger and more competitive, and involved more money, the kind of clubby, elite-run brokerages and investment banks that existed a generation or two ago have just disappeared. More competition, more participation and less elite control don’t always lead to the best outcomes.'

He's nailed it.

[yurbud]

16. this is impressive coming from a righty like Fukuyama. He's the Torquemada Alberto Gonzales

of historians.

[elleng]

20. Seems like he's gotten over that,

and is now good and clear. John Reed on Bill Moyers new show, PBS now, also has come over to the 'good' side.
re: Glass/Steigel
Also Byron Dorgan, who knew and warned.

[Odin2005]

18. Capitalism is a giant ponzi scheme.

[elleng]

19. Bill Moyers new show, on PBS now,

has discussion of this stuff, w John Reed, former citigroup, who now recognizes awfulness.
'We created a monster.'

Also Byron Dorgan, who KNEW, and warned.
Glass/Steigel discussion.