Matt Taibbi: Why the Banks Should Be Broken Up

[eridani]

http://www.rollingstone.com/politics/news/why-the-banks-should-be-broken-up-20160408

This is Krugman's assessment of who was responsible:

"Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on 'shadow banks' like Lehman Brothers that weren't necessarily that big."

Forget about the Sanders-Clinton race, because it's irrelevant to the issue. Krugman is just wrong about this.

The root problem of the '08 crisis lay in a broad criminal fraud scheme in the mortgage markets. Real-estate agents fanned out into middle- and low-income neighborhoods in huge numbers and coaxed as many people as possible into loans, whether they could afford them or not.

Those loans in turn were bought up by giant financial companies on Wall Street, who chopped them up into a kind of mortgage hamburger. Out of this hamburger, they made securities. These securities were then sold to institutional investors like pension funds, unions, insurance companies and hedge funds.

In the typical scenario, the investors buying these toxic mortgage securities weren't told how risky the merchandise was. Many thought they were investing in AAA-rated real estate, when in fact they were buying up the flimsy home loans of part-time janitors, manicurists, strawberry pickers, people without ID or immigration status, and so on.

[EdwardBernays]

1. Krugman isn't trying to be right

He's trying to protect the status quo.

[snot]

2. HOLD IT--NO--THAT'S NOT IT; IT'S MUCH WORSE

The biggest problem wasn't the mortgages, or even the MBS's.
If that were all it were, we could still have dealt with it the way we dealt with the S&L crisis in the 80's, a mere hiccup compared to what the world faces now.

The biggest problem was the credit derivatives sold by entities like AIG to entities like Goldman. These multiplied the potential losses a hundred-fold. If entities like Goldman, who bought those derivatives, had been left to suffer the losses they should have been left to suffer, they would have lost the relatively small amount of the bets they placed (fraudulently – they were betting against their own customers' interests) that MBS's would fail.

Instead, taxpayers bailed AIG out, so it could make good on those bets, ensuring a huge windfall to Goldman and gigantic losses to the rest of us, for no good reason.

See http://c-cyte.blogspot.com/2009/05/credit-derivatives-for-dummies.html , and related posts.

Credit derivatives are still not adequately regulated; and the amounts in play are bigger than ever.

[eridani]

3. Yes--credit derivatives are where the biggies stepped in n/t