Makes my blood boil

[glassgowkiss]

what an asshole!

and now we have to pay for it.

[jared_j]

Don't get your panties in a bunch - you (the taxpayer) didn't bail them out. It got seized by the FDIC at basically no cost to them. Investors with Wamu got wiped out. JP Morgan Chase bought them at a fire sale price. So cheap, in fact, that they'll probably turn a profit on the deal on paper soon (if not already). They bought $180bn of mortgages plus all of Wamu's checking / credit card business for only $8 billion. Anyone with money invested in Wamu got wiped out, however. Businesses in downtown Seattle that benefitted from their 5,000 employees down there got hurt. As did homeowners who got sucked in by the coke rap of their mortgage brokers (or their own greed) who are losing their homes, and driving down the prices of homes surrounding them. There's barely any of these in the Pacific Northwest, it should be noted - mostly Southern California, Central Valley (Merced / Stockton), southern Florida, and Michigan.

 

I used to work in risk management there (my first job outta grad school).

 

Every risk management leader who pointed out that these were bad ideas was more or less asked to leave.

 

For a critical period (2005 - 2006) the chief risk officer (person who's supposed to put a reality check on the urge to do risky lending) was a musical chairs position held by people who were smart and talented businesspersons, but not experts in mortgage credit risk. By the time this role was filled by an individual with the experience and expertise to recognize things were bad, it was too late (late '07 / early '08).

 

Wamu was 'late to the game' in a sense, and made up for it by targeting this Option ARM niche and purchasing subprime originator Long Beach Mortgage Comapany (Long Beach in the article) was the only way to barge in on the mortgage market. It was Kerry's vision primarily to drive the business in the direction it went. In that sense, it probably didn't matter if there were risk management folk who took strong stances.

 

It is really disappointing to hear about mortgage fraud at the customer level. If employees at that level can circumvent bank lending rules, it means the rules suck. It all hangs together in a sad greedy story.

 

 

 

 

 

 

 

 

Edited April 14, 2010 by jared_j

[Off_White]

what an asshole!

and now we have to pay for it.

 

Careful there cupcake, you're not a young man anymore. If you boil too much blood you're gonna blow a gasket.

 

Thanks for the inside scoop Jared.

[JayB]

I suspect the folks who peered into the WAMU balance sheet well before the merde hit the fan and shorted the bejezus out of the stock didn't get hurt too badly.

 

 

 

 

[glassgowkiss]

Don't get your panties in a bunch - you (the taxpayer) didn't bail them out. It got seized by the FDIC at basically no cost to them. Investors with Wamu got wiped out. JP Morgan Chase bought them at a fire sale price. So cheap, in fact, that they'll probably turn a profit on the deal on paper soon (if not already). They bought $180bn of mortgages plus all of Wamu's checking / credit card business for only $8 billion. Anyone with money invested in Wamu got wiped out, however. Businesses in downtown Seattle that benefitted from their 5,000 employees down there got hurt. As did homeowners who got sucked in by the coke rap of their mortgage brokers (or their own greed) who are losing their homes, and driving down the prices of homes surrounding them. There's barely any of these in the Pacific Northwest, it should be noted - mostly Southern California, Central Valley (Merced / Stockton), southern Florida, and Michigan.

 

I used to work in risk management there (my first job outta grad school).

 

Every risk management leader who pointed out that these were bad ideas was more or less asked to leave.

 

For a critical period (2005 - 2006) the chief risk officer (person who's supposed to put a reality check on the urge to do risky lending) was a musical chairs position held by people who were smart and talented businesspersons, but not experts in mortgage credit risk. By the time this role was filled by an individual with the experience and expertise to recognize things were bad, it was too late (late '07 / early '08).

 

Wamu was 'late to the game' in a sense, and made up for it by targeting this Option ARM niche and purchasing subprime originator Long Beach Mortgage Comapany (Long Beach in the article) was the only way to barge in on the mortgage market. It was Kerry's vision primarily to drive the business in the direction it went. In that sense, it probably didn't matter if there were risk management folk who took strong stances.

 

It is really disappointing to hear about mortgage fraud at the customer level. If employees at that level can circumvent bank lending rules, it means the rules suck. It all hangs together in a sad greedy story.

 

This is not entirely true. These loans were subsequently neatly packaged and sold as securities. There were companies like Magnatar, (and other similar hedge funds, but this one invented the system- hence the name Magnatar trade), who were even further exploiting the situation.

Here is the link to the story:

http://www.thisamericanlife.org/radio-archives/episode/405/inside-job

[JayB]

A fool and his money are soon parted. Anyone who bought anything having to do with mortages other than credit-default swaps covering the default risk on the repacked toxic sludge was a 'tard.

 

This entire "no one saw this coming" business concerning the housing bubble in general, and the MBS fiasco in particular, is an astonishing claim. That is, its astonishing that anyone gives it any credence. There were thousands of average joes, asset managers, and even a few prominent economists - most notably Robert "Irrational Exhuberance" Shiller who saw what was happening clearly and were shouting warnings to anyone that would listen. There were even a few non-tard, plain vanilla investment companies like T. Rowe Price saw the trainwreck coming and did a pretty good job of shielding their clients from the damage.

 

The folks who bought the toxic waste were either 'tards, morons, or gamblers who got stuck without a greater fool to hand their hot potato to. Ditto for 90% of the folks who bought with non-traditional mortgages and find themselves underwater.

 

One aspect of this fiasco that no one thinks about much is the extent to which it was driven by pension fund managers trying to cover the promises made to future retirees. When you are desperate for the yield necessary to cover the gap between what can actually be funded with sound investments, and what they're legally obliged to pay out, apparently you do silly things. Like buying billions of dollars of repackaged no-doc, neg-AM, Alt-A or subprime mortgage paper.

 

Tards.

[JayB]

what an asshole!

and now we have to pay for it.

 

Maybe a "Honk if I'm paying your mortgage!" bumper sticker will take the edge off.

[jared_j]

Yeah, that was an interesting show. It really glossed over a lot of details of the market for asset-backed securities, but hit the important points.

 

Both the securitizer (Wamu) and the purchaser (hedge funds, other folks) are "bad guys" in the sense that they both needed to exist to execute the sale. At the end of the day, 'bailouts' took place to provide assistance to people who purchased and held these securities. This took place in different ways, whether via direct 'bailouts' to specific institutions, or the Federal Reserve's purchase of highly deteriorated asset-backed securities.

 

I in no way mean to diminish from the bigger picture of a pervasively flawed beliefs (that house prices will continue to rise, allowing even shaky borrowers to eventually build enough equity to somehow 'afford' the home) being held across almost the entire system leading to overinvestment in real estate and house price levels that were out of whack from economic fundamentals. I just want to point out that Wamu, at the time of its failure, cost you, the taxpayer, nothing.

 

 

Incidentally, Wamu didn't actually fail directly due to mortgage losses. That probably would have happened eventually. In the days following the collapse of Lehman Brothers, many news stories were published along the lines of "What's the next domino to fall?". Many of these stories highlighted Wamu's bad balance sheet of Option ARMs, Subprime, and home equity loans. In the 9 business days following the collapse of Lehman, $17 billion was withdrawn from Wamu checking accounts. They were siezed by the FDIC because they became insolvent; an old fashioned bank run like "It's a Wonderful Life". They likely would have limped along for a few more months if this hadn't happened, and would have had a shotgun marriage with JP Morgan Chase anyway. Except JP Morgan might have had to pay a couple of dollars per share instead of pennies.

 

Wamu was complicity the problem in that it was creating securities that were demanded by the marketplace. If you listen to other NPR stories or "Planet Money" reporting from early on in the crisis, you will hear other narratives of extreme pressure put on mortgage brokers to originate loans to bundle into securities. This is what likely drove the fraud discovered by Wamu employees cited in the OP's article.

 

I think an appropriate analogy here is to a cigarette manufacturer. There was significant demand in the marketplace, and Wamu chose to fulfill that demand even though they knew what they were doing was not good for the long - term health of the purchaser. The problem is that the "Surgeon General" in this case was a set of independent firms who rate the riskiness of bonds (S&P, Moodys, Fitch). Instead of posting signs on the packages stating "Don't smooke these if you're preggers" (like a B rating), they posted labels saying "These will make you look cool, get rich, and get laid" (a AAA rating).

 

Those ratings agencies did that because they had garbage models that they believed. Subprime mortgages, Option ARMs, etc, weren't something that had been done much in the past. These guys estimated statistical model parameters from samples of prime loans - the only data they had. Surprise, surprise, risky loans have distributions that are different, and the models completely incorrectly forecasted the losses.

 

Finally, let's say Kerry Killinger (former CEO) gets a clue, and announces that Wamu is doing a 180. The stock price tumbles, earnings fall for a few quarters, and shareholders / boards get antsy. They fire him for 'running the company into the ground', and hire someone who will do what they demand - maximize short run profits. It's hard to make good decisions if you're greedy like their former CEO. It's still hard if you know it isn't a good idea, but it's the only way to keep your job.

 

 

Sorry for the ramble. Things aren't simple. There's lots of bad guys. Former CEO. Greedy mortgage originators trying to make a quick buck. Greedy wall street that wants a piece of that sweet mortgage action that's been lining the bankers pockets for years, ratings agencies and regulators who drink the kool-aid that prices are going up forever, greedy borrowers who want more house than they can afford, our debt lifestyle / culture, blah blah blah.

 

Ramble done.

Edited April 14, 2010 by jared_j

[JayB]

Yeah, that was an interesting show. It really glossed over a lot of details of the market for asset-backed securities, but hit the important points.

 

Both the securitizer (Wamu) and the purchaser (hedge funds, other folks) are "bad guys" in the sense that they both needed to exist to execute the sale. At the end of the day, 'bailouts' took place to provide assistance to people who purchased and held these securities. This took place in different ways, whether via direct 'bailouts' to specific institutions, or the Federal Reserve's purchase of highly deteriorated asset-backed securities.

 

I in no way mean to diminish from the bigger picture of a pervasively flawed beliefs (that house prices will continue to rise, allowing even shaky borrowers to eventually build enough equity to somehow 'afford' the home) being held across almost the entire system leading to overinvestment in real estate and house price levels that were out of whack from economic fundamentals. I just want to point out that Wamu, at the time of its failure, cost you, the taxpayer, nothing.

 

 

Incidentally, Wamu didn't actually fail directly due to mortgage losses. That probably would have happened eventually. In the days following the collapse of Lehman Brothers, many news stories were published along the lines of "What's the next domino to fall?". Many of these stories highlighted Wamu's bad balance sheet of Option ARMs, Subprime, and home equity loans. In the 9 business days following the collapse of Lehman, $17 billion was withdrawn from Wamu checking accounts. They were siezed by the FDIC because they became insolvent; an old fashioned bank run like "It's a Wonderful Life". They likely would have limped along for a few more months if this hadn't happened, and would have had a shotgun marriage with JP Morgan Chase anyway. Except JP Morgan might have had to pay a couple of dollars per share instead of pennies.

 

Wamu was complicity the problem in that it was creating securities that were demanded by the marketplace. If you listen to other NPR stories or "Planet Money" reporting from early on in the crisis, you will hear other narratives of extreme pressure put on mortgage brokers to originate loans to bundle into securities. This is what likely drove the fraud discovered by Wamu employees cited in the OP's article.

 

I think an appropriate analogy here is to a cigarette manufacturer. There was significant demand in the marketplace, and Wamu chose to fulfill that demand even though they knew what they were doing was not good for the long - term health of the purchaser. The problem is that the "Surgeon General" in this case was a set of independent firms who rate the riskiness of bonds (S&P, Moodys, Fitch). Instead of posting signs on the packages stating "Don't smooke these if you're preggers" (like a B rating), they posted labels saying "These will make you look cool, get rich, and get laid" (a AAA rating).

 

Those ratings agencies did that because they had garbage models that they believed. Subprime mortgages, Option ARMs, etc, weren't something that had been done much in the past. These guys estimated statistical model parameters from samples of prime loans - the only data they had. Surprise, surprise, risky loans have distributions that are different, and the models completely incorrectly forecasted the losses.

 

Finally, let's say Kerry Killinger (former CEO) gets a clue, and announces that Wamu is doing a 180. The stock price tumbles, earnings fall for a few quarters, and shareholders / boards get antsy. They fire him for 'running the company into the ground', and hire someone who will do what they demand - maximize short run profits. It's hard to make good decisions if you're greedy like their former CEO. It's still hard if you know it isn't a good idea, but it's the only way to keep your job.

 

 

Sorry for the ramble. Things aren't simple. There's lots of bad guys. Former CEO. Greedy mortgage originators trying to make a quick buck. Greedy wall street that wants a piece of that sweet mortgage action that's been lining the bankers pockets for years, ratings agencies and regulators who drink the kool-aid that prices are going up forever, greedy borrowers who want more house than they can afford, our debt lifestyle / culture, blah blah blah.

 

Ramble done.

 

That "ramble" is way more on the money than the vast majority of commentary out there.

 

My hunch is that the losses on their MBS portfolio would have ultimately put them under even without the bank loan, but that's just speculation on my part.

[jared_j]

A fool and his money are soon parted. Anyone who bought anything having to do with mortages other than credit-default swaps covering the default risk on the repacked toxic sludge was a 'tard.

 

This entire "no one saw this coming" business concerning the housing bubble in general, and the MBS fiasco in particular, is an astonishing claim. That is, its astonishing that anyone gives it any credence. There were thousands of average joes, asset managers, and even a few prominent economists - most notably Robert "Irrational Exhuberance" Shiller who saw what was happening clearly and were shouting warnings to anyone that would listen. There were even a few non-tard, plain vanilla investment companies like T. Rowe Price saw the trainwreck coming and did a pretty good job of shielding their clients from the damage.

 

The folks who bought the toxic waste were either 'tards, morons, or gamblers who got stuck without a greater fool to hand their hot potato to. Ditto for 90% of the folks who bought with non-traditional mortgages and find themselves underwater.

 

One aspect of this fiasco that no one thinks about much is the extent to which it was driven by pension fund managers trying to cover the promises made to future retirees. When you are desperate for the yield necessary to cover the gap between what can actually be funded with sound investments, and what they're legally obliged to pay out, apparently you do silly things. Like buying billions of dollars of repackaged no-doc, neg-AM, Alt-A or subprime mortgage paper.

 

Tards.

 

There was a "Planet Money" about a year ago where some former pension fund employees advance a very similar line of reasoning. The pension fund managers would have never been left holding the bag if the securities' risk ratings weren't so completely bogus.

 

I don't have a great answer as to how this problem could have been solved ex ante (e.g. how to build a model to rate securities for which there is no historic data sample during a huge housing boom).

 

I think you'd find some reading on the field of behavioral economics really interesting. I also think you'd come to different conclusions about decision making if you considered the incentives that existed for important decision makers in this crisis. Almost everyone was incentivized to make decisions that yielded some short run profit gain, even if it was not in the long term interest of the organization they represented. Like Chuck Prince, former CEO of Citigroup said, you gotta keep dancing as long as the music is playing.

[JayB]

Agree about the perverse incentives for everyone except the ultimate bag-holders, at least those that weren't bailed out by the taxpayers - which might be the most important of the perverse incentives in the whole game.

 

If you haven't checked them out already, there's a series of about ~ 15 conversations about the financial crisis over at Econtalk. Very good conversation about risk-modeling with Ricardo Rebonatto, and I think you'd particularly enjoy the conversations with Nassim Taleb as well.

 

http://www.econtalk.org/archives/financial_crisi/

 

FWIW I respect the host, Russ Roberts' conclusions on the whole thing quite a bit, and from what I gather your take on this thing is pretty consistent with his.

[j_b]

I am sure Bob will like this story too:

 

How Wall Street Made a Fortune off Alabama Sewers

 

Matt Taibbi writes, quote, “On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt. The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens.”

 

What did the banks do?

 

MATT TAIBBI: Well, basically, it’s a very long story, but what happened was the—Birmingham, the city of Birmingham in Jefferson County, they were sued by the EPA back in the early ’90s. They had a faulty sewer system. They were forced to build a new sewer system, and so they borrowed a ton of money to build this new sewer system. All the local politicians used about $3 billion of this money. They funneled it to all their buddies who were contractors. And then, when the rent came due on all of this, when they had to start paying for this, they didn’t want to do it, because raising rates would have been politically unpopular. So they went to Wall Street, and they basically refinanced their debt. And that’s what this is all about.

 

And these deals for refinancing the debt were so lucrative that the banks basically fought over who would get these contracts. And the method for getting the contracts was to funnel millions of dollars to buddies of the county commissioners, who would then, in turn, follow the county commissioner around with charge cards and paid for their Ferragamo suits and Rolex watches. And that’s how Jefferson County ended up getting into a situation where they had $5 billion in debt on a $250 million sewer project.

 

JUAN GONZALEZ: And the actual project was about $3 billion to build, or was it—

 

MATT TAIBBI: Yeah, the initial estimate for this project was $250 million. They ended up spending about $3 billion on this. And they ended up owing about $5 billion in the end, after you look at all the refinancing and the interest rate swaps and everything.

 

JUAN GONZALEZ: And you go through the various schemes that the banks came up with. Credit default swaps, was it? Or—

 

MATT TAIBBI: Yeah, interest rate swaps.

 

JUAN GONZALEZ: Interest rate swaps.

 

MATT TAIBBI: Right. These are also derivatives. Again, there’s this whole galaxy of financial instruments that are basically unregulated, thanks to a law that was passed in 2000 called the Commodity Futures Modernization Act—credit default swaps, collateralized debt obligations, interest rate swaps. These are all derivatives. They’re all totally unregulated. So there’s no SEC or CFTC that’s really looking at these things. And so, as a result of this, a lot of these deals fly under the radar completely, and there’s no way to really enforce or prevent fraud in any of this stuff.

 

JUAN GONZALEZ: And then the people who live in the county ended up paying sewer bills that, what, quadrupled in price?

 

MATT TAIBBI: Right, and that was only one part of the cost. You know, the average sewer bill in the mid-’90s for a Jefferson County resident was between ten and fourteen dollars. The bill, by the time I got there a couple of months ago, was at least 400 percent of that. But I met people who had sewer bills that were as high as $200 when I went down to Jefferson County. And that’s—again, that’s one small part of the cost, because what happened was when Jefferson County failed to pay off some of this debt, their credit rating was downgraded, and their cost of borrowing across the board skyrocketed. So, as a result, their taxes went up, and they had to lay off lots of county employees. And so, it’s a—even beyond the sewer bill, it was a major catastrophe.

 

AMY GOODMAN: Tell us the story of Lisa Pack, Matt.

 

MATT TAIBBI: Well, she was a county employee. Again, she was a person who had a small, you know, sewer bill. But she was laid off. She was put on forced leave last summer, along with thousands of other county employees, and ended up basically living on, you know, $250 a week, along with thousands of other people. They canceled her, you know, health insurance. She had to pay for that now. And she is now so disgusted by the fact that there were so many people indicted in this scheme that she’s now running for county commissioner herself. And that’s something that’s a consistent theme of the financial crisis. People are so fed up that they have to run for public office themselves just to get the government that they want.

 

AMY GOODMAN: And as many as twenty people have been convicted, public officials, involved in taking bribes in one form or another?

 

MATT TAIBBI: Public officials and contractors. There’s a whole list of county commissioners. Almost everybody who has served in county government in the last decade got indicted or investigated in one way or another. But nobody—here’s the key part—nobody from any of the banks has been criminally prosecuted [inaudible].

 

AMY GOODMAN: Name the banks.

 

MATT TAIBBI: Well, JPMorgan was the big one. The big player in this was a JPMorgan banker named Charles LeCroy. And there’s a hilarious record of—JPMorgan was taping their own phone conversations, and we actually hear this guy LeCroy talking about how he went to the county commissioner and said, “Just tell us how much you want, you know, for us to get this deal.” But he hasn’t been prosecuted for this. Nobody at JPMorgan has. They had to pay a fine, and they had to forgo a $647 million bill that they presented to the county, but nobody’s going to jail. And that’s—again, that’s another consistent theme of the financial crisis.

 

AMY GOODMAN: They paid off Goldman Sachs to stay away?

 

MATT TAIBBI: This is one of the—this is my favorite detail of this whole thing. When the county commissioner, Larry Langford, was first elected, he kind of put the word out that anybody who wanted to do business with the county had to go, quote-unquote, “see” his buddy Bill Blount, who was a local investment banker. Well, Goldman Sachs already had a relationship with this Blount. And JPMorgan wanted this deal so badly that they paid Goldman Sachs $3 million to disassociate itself from Bill Blount and leave the deal. And so, that was—you know, it’s obvious open-and-shut, anti-competitive behavior, but again, that hasn’t been prosecuted either.

 

more: Wall Street Made a Fortune off Alabama Sewers

[Hugh Conway]

Agree about the perverse incentives for everyone except the ultimate bag-holders, at least those that weren't bailed out by the taxpayers

 

erm, darling, the taxpayers were the only, and ultimate bag holders.

 

Everyone else was either betting they wouldn't get caught standing when the music stopped, betting on who would get caught, or betting that the taxpayer would bail everyone out when it was revealed that there weren't actually any chairs left.

 

Perhaps I shouldn't be surprised that nobody seems to be pissed at how the WAMU owners got screwed, and that the FDIC et al are so fucking scared about what they did they'll fight tooth and nail to keep from the documentation coming out.