This is an important read by a guy who writes well and does not pull any punches. However I think he misunderstands some of the pathway to doom.
The stability of our financial system depends on professionals and regulators making sound decisions based on facts, requiring participants to follow the law and sound practices and in holding those who fail to act responsibly or within the law accountable for their actions in a timely manner. We failed, they failed and the economy failed , worse yet , we failed to learn and let ourselves up for an even larger disaster.
By way of background I have spent most of the past 50 years in the development business. I was fortunate to have had a brilliant grad student, Andrew Lahde who a year out of UCLA not only understood why the real estate market was headed for collapse but why, due to the creation and trading in derivatives and other creations would collapse the banking system. Andrew parlayed his knowledge and passion into a startup fund that within a year was recognized as the best performing hedge fund in the world. Like so many others, I understood the coming collapse of the real estate market but could not grasp the incredible and stupid risks taken by the banks in the pursuit of short term profits.
From the want to be homeowner who has never accumulated any savings to the high rolling developer of $500 million superprojects one rule holds true, if someone will loan them all of the money they need to buy or start a project, someone will do it regardless of the financial feasibility. Threats of bankruptcy, lawsuits or jail only work on people who have something to loose. The judgement proof poor family suddenly given a 100% loan to buy a home or the master of the universe given $500 million to buy a vast housing project the motivation is the same, no risk, no capital, immediate benefits and a shot at the moon.
More than four years before the crash President Bush warned of the recklessness at the federal agencies and GSE guarantors of the doomed to fail mortgages. There's also the tape of Barney Frank and others preventing the federal auditors from carefully examinging the books of the GSE's and holding their executives responsible for fraud. Instead of listening to the auditors, Frank and others dismissed their efforts as a racist plot against the head of the GSE who would later plead guilty to have committed fraud in order to generate more than $15 million in bonuses. His chief legal officer at the GSE was Jamie Gorlick, famous for her firewall memo while at the DOJ; the memo that created further blocks to effective investigation and prosecution of terrorists.
When the smoke cleared it was evident that Bush and OTHELLO were right, political appointees and insiders at the GSE's were cooking the books. They were also pursuing doomed to fail loan guarantees on 100% LTV loans to people who had no possible means of repaying the loans. The motivation from the loan broker to the halls of Congress was the vast fees and illusory profits from creating and trading in worthless mortgages, securities based on the mortgages and bets on the quality of the securitized financing vehicles.
Unlike the late 1990's S&L meltdown where authorities perp marched handcuffed banking and wall street executives out of their offices and subjected them to serious criminal prosecution, Geitner and Obama decided that there would be no criminal prosecution of those who committed the crimes leading to the collapse, As Harvard Magazine noted in a planted article prior to the 2008 election, Wall Street was in Obama's pocket., one of Harvard's own. Not only were the past crimes forgiven, but vast illegal operations at the major banks were ignored during the HARP . Only a tiny percentage of the borrowers who started HARP ever got any loan relief. Sworn depositions showed that banks discouraged their staff from allowing any application to be approved. Why, because it gave the banks time to rebuild their capital base, avoid liability for the failed loans.
There's also documentation that the banks knowingly fabricated false documents which were then submitted to the courts to support foreclosure actions. Again there has been no meaningful prosecution, setting us up for even greater failure in the future. In the NFL if the referees never call roughing the passer , illegal hit to the quarterback or other personal fouls, there would be no first class quarterbacks surviving. The same holds true in the financial world. Our administration has continued to reward bad behavior thanks to the efforts of an army of well funded lobbyists and too many close ties between government and those who are in regulated businesses.
Were all of this not bad enough, some highly irregular deals were made for the failed banks including a $100 billion dollar transfer of a failed institution to a group of insiders under terms which assured them of a profit and transferred the losses to the taxpayers. The deal was so good that they only needed to put up 1% of the purchase in cash, probably to pay the fees of attorneys and lobbyists .
I like a lot of what Posner has to say but strongly believe that the current depression and the creation of the conditions which will prolong it and perhaps collapse the economy do not represent a failure of "regulated capitalism" but rather the sellout of government's responsibility to the people in exchange for the vast largesse of donations, bundled contributions, high paying jobs for political insiders etc.
From the White House to DOJ to the regulators we have reversed the role of government from that of a protector of the people to that of a co-predator. One of the first things you teach a 4 year old with a new puppy is don't reward bad behavior. It's just that simple .
Few in the press waved the BS flags when top bankers talked of the moral imperative of homeowners to liquidate their retirement plans to continue making payments on the flawed loans while the same bankers were off to lunch at exclusive private clubs with commercial real estate borrowers who had just walked away from $500 million dollar loans because they could.
Adding fuel to the fire were federal agencies bullying those few banks who were more prudent into making more loans in the inner city.
We often hear the excuse that nobody saw it coming but thanks to youTube 5 minutes of research proves the error.
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Top reviews from other countries
Mihail Iliev
Excellent book about the financial crisis
Reviewed in the United Kingdom 🇬🇧 on February 17, 2013
