Elizabeth Warren wants to know why the FBI "failed to hold the individuals and companies most responsible for the financial crisis and the Great Recession accountable."
She has posted letters to the FBI and to the DOJ Inspector General, citing potential illegal activities at 14 corporations from the FCIC report, which the DOJ has declined to prosecute.
My question is, how can you place responsibility for the crisis on banks that were either trying to place mortgages in a declining market or trying to sell securities whose values were collapsing? Clearly the collapse happened before these activities were happening. The causation here is backwards.
I'm sure a common reaction to this is that malfeasance was happening before 2006, but that, in the words of Warren Buffett, you don't know who is swimming without trunks until the tide goes out. That's all well and good as a presumption, but this is simply question begging.
I say that it was the collapse of credit that caused the crisis, not a boom in credit. That may seem wrong, but referring to a bunch of desperation moves during the collapse does nothing to address this question. The rise in prices is frequently taken as proof itself that credit expansion created an unsustainable market. But, at this point, there is plenty of academic work showing that credit was a passive factor. This requires more than a presumption. It requires evidence.
The other 2 of Warren's 11 points refer to activities at the GSEs. Citing the FCIC: "Fannie Mae may have
overstated assets, earnings and capital through various accounting improprieties. . . [and] a
failure to disclose accurate information about the state of risk management at Fannie
Fannie and Freddie were actually very conservative during the boom. LTVs and FICO scores were becoming less aggressive and the GSEs lost a significant amount of market share, which they only began to regain as private lenders were reeling during the early part of the housing contraction.
But the greatest irony here is that the first round of pressure coming from housing boom angst was directed at the GSEs in 2004. They were accused of managing earnings at the time. Among their sins was overstating their loss reserves and underreporting their earnings so that they would have more room to take losses without it affecting future stated profits. The CEOs were driven out during that round of pressure. It took until 2007 and early 2008 for the CEOs to settle their cases. Both of them agreed to make donations to funds meant to help suffering home owners.
Now, their successors are being blamed for understating loss reserves literally at the same time that they were paying fines for overstating previous loss reserves. It's kind of like the joke, if your price is too high it's gouging, if it's too low, it's predatory pricing, and if it's the same, it's collusion. I think we can safely say that there was no functional way to be the CEO of a GSE from 1998 to 2008 without being accused of criminality.
I think there is something here regarding the problem we continue to have with mortgage markets that continue to be inaccessible to middle class homebuyers. There aren't any hard and fast rules directing banks to lock them out of credit. But, there are a lot of vague liabilities attached to it. There is so much profit to be made making mortgages to owner-occupiers in the bottom half of the housing market. It is perplexing to me that we haven't seen more activity in the market, even if it would have to be outside the securitization market and outside commercial banking. Yet, it doesn't seem to be developing.
But, the limits keeping marginally credit-worthy households from getting mortgages may not be quantifiable. If you were an analyst at a bank, and you presented a report to the head of the mortgage division about how much money there is to be made in middle income mortgages, he's going to take it to the CEO, who will have it on his desk, next to a letter from a US Senator asking pointedly why he isn't in jail. That's a market that's not about to clear.
I think this is another aspect of the issue that fits in the North, Wallis, and Weingast limited access order framework. There is a lot of risk being imposed here through the discretion of powerful people. And, it's got the economy tied up in knots, hurting the most vulnerable households the most, as limited access orders and discretion of power brokers usually does.
I suggest writing in "dart throwing monkey" in November. It's not optimal, but it would be a huge step in the right direction. It works for portfolio management. Why wouldn't the same be true of governance, especially when discretion, grudge-bearing, and liquidationism are the order of the day.