Thursday, May 07, 2009

Who's behind the financial meltdown?

The Center for Public Integrity, an organization I support, has just published the results of an investigation into the roots of the recent economic crisis and the major players involved:
The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or backed by giant banks now collecting billions of dollars in bailout money — including several that have paid huge fines to settle predatory lending charges. The banks that funded the subprime industry were not victims of an unforeseen financial collapse, as they have sometimes portrayed themselves, but enablers that bankrolled the type of lending threatening the financial system.

According to the analysis:

  • At least 21 of the top 25 subprime lenders were financed by banks that received bailout money — through direct ownership, credit agreements, or huge purchases of loans for securitization.
  • Nine of the top 10 lenders were based in California, including all of the top five — Countrywide Financial Corp., Ameriquest Mortgage Co., New Century Financial Corp., First Franklin Corp., and Long Beach Mortgage Co.
  • Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were non-bank lenders.
  • Eleven of the lenders on the list, including four recipients of bank bailout funds, have made payments to settle claims of widespread lending abuses.
Check out the full report.


Ktisophilos said...

Fund manager Cliff Asness defended his industry from the president's "backwards and libelous" charges:“Managers have a fiduciary obligation to look after their clients' money as best they can, not to support the president, nor to oppose him, nor otherwise advance their political views. …

“The president's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes.”

Well, good luck in recovering from this meltdown if future investors know that presidential politics will trump bankruptcy laws. They already know that both parties in Congress are willing to slap an ex post facto bill of attainder, the latter of which is almost certainly anti-Constitutional to assuage popular rage over AIG bonuses that Congress had agreed to.

Jim Lippard said...

I agree completely with Asness's argument.

Ktisophilos said...

And surely someone like Larry Summers would too ...

Ktisophilos said...

Thanks for alerting me to the Volokh site elsewhere. I normally avoid anything that sounds conspiratorial, but this one had an instructive post:

The Financial Crisis, Free Markets, and the Nirvana FallacyDavid Bernstein, 27 May 2009

I'm sure everyone has seen various op-eds, blog posts, and so forth proclaiming that the financial crisis shows that capitalism can't be left "unregulated", and that the end of "free market ideology" is nigh.

It seems obvious to me, though, that critics are comparing markets (which were far from unregulated) to a hypothetical, rational, efficient, regulatory system, which is a classic nirvana fallacy.


Sure, if you compare actual market actors to imaginary perfect government officials, government is going to come out looking like a mighty good alternative. But if you compare actual market actors to actual government actors, it hardly seems that the financial crisis shows the latter's superiority to the former, nor does it support the idea that turning over more and more of the economy to the tender mercies of government regulation is likely to benefit the public.