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Greenspan Tells Congress Bad Data Hurt Wall Street
CWmike writes "Former Reserve Bank chairman Alan Greenspan has long praised technology as a tool to limit risks in financial markets. In 2005, he said better risk scoring by high-performance computing made it possible for lenders to extend credit to subprime borrowers. But today Greenspan told Congress that the data fed into financial systems was often a case of garbage in, garbage out. Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them. Explaining in his testimony what failed, Cox noted a 2004 decision to rely on the computer models for assessing risks — a decision that essentially outsourced regulatory duties to Wall Street firms themselves."
The summary says bad 'code' led the credit rating agencies to give incorrect scores. The article doesn't say anything about code. It says bad data was responsible.
Wikipedia has excellent articles on subprime and the housing bubble and their cause effect.
I still blame the banks and morgage brokers. Including the Sandlers who SNL made fun of.
-Leverage can be evil. The investment banks were highly leveraged. Caused the stock exchange to crash in 1929.http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
The ratings were based on the idea that house prices only ever go up, and that they could always foreclose and get their money back. The model didn't take into consideration that in places like Detroit, you might find that you can't even sell the foreclosed houses in some of the worst areas for $1.
That comment proves your ignorance of this matter.
Libertarians did not 'want' a lowered interest rate or deregulation of the fundamentally corrupt banking system. Libertarians want NO socialized banking which means NO federal reserve which means NO federal control of interest rates.
This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas. The banking system in America is NOT free market and has not been free market since 1913 (The Federal Reserve Act).
But please continue to let ignorance be your guide...
That and the fact that many mortgage-backed securities got their AAA ratings by being insured by the commercial insurance companies.
"This security is backed by a pool of actual mortgages AND it's insured by AIG. You CAN'T lose! In fact, they're so bullet-proof you should even leverage yourself to the max to buy as many of them as you can!"
Any sect, cult, or religion will legislate its creed into law if it acquires the political power to do so.
Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate the Fed charged for money and kept their fingers out of market regulation.
I'm curious as to where you found these Libertarians who support the Federal Reserve.
In a true free market, capital is finite, so high investment leads to higher interest rates (by supply and demand) It is self-regulating, discouraging over-investment.
As you mentioned, the intervention of the Fed caused this boom/bust cycle by keeping interest rates artificially low and supplying endless credit. That's a key reason why most Libertarians and Constitutionalists want to end the Fed.
Cynicism, like dogmatism, can be an excuse for intellectual laziness. - Susan Shirk
Banks were pushed. Banks were even sued to extend home ownership to those who, frankly, can't handle it.
According to the docket in your linked article, the banks were sued for the following reason:
Plaintiffs alleged that the Defendant-bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories.
Your position appears to be that plaintiffs lied -- that in fact loan applications were denied purely based on the financial and credit characteristics of the applicants. Is there any evidence to support and/or disprove this position? I've read your links but I have not been able to find statistics that provide any confirmation of the claim that "Obama Sued Citibank Under CRA to Force it to Make Bad Loans"
Without evidence that the banks were (or were not) denying loan applications based on ethnic origin, I don't see how I -- or anyone else -- can reasonably assess whether lawsuits like this one had a significant impact on the current banking crises.
I have found The Color of Money, a series of articles on lender's avoidance of middle-income black neighborhoods. The article series won the author, Bill Dedman, the Pulitzer Prize[1]. I'll be adding the articles to my reading queue -- my expectation is that the truth behind these loans is quite a bit more complex than has been presented here.
[1] Bill Dedman's MSNBC bio
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Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate
Er, correct me if I'm wrong, but the libertarians don't believe government should hold a monopoly on currency in the first place, and therefore would have the federal reserve abolished. At least I've never heard of one arguing either way ("raise", "lower") for government control and arbitary manipulation of currency.
Greenspan did exactly what all the [...] Libertarians wanted... lowered the interest rate the Fed charged for money
I call bullshit.
When the Federal Reserve prints (or equivalent) and loans out ANY money, the new money gets its value by diluting the value of ALL the money, thus stealing value from the money already out there.
Libertarians explicitly REJECT this sort of theft.
They believe that ALL money should consist of, or be 100% backed by, a valuable commodity. The value of the money would fluctuate ONLY according to the value of the commodity (and, in the case of "backed" tokens, by the perception of the reliability of the commodity warehousing operation). Thus it would be impossible for the government or its proxies to steal the value out of money already out there to give to its cronies.
So, no, libertarians did NOT want the Fed to lower interest rates.
Learn before you talk.
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As Freddie Mac and Fannie Mae, when you are presented with two mortgages for purchase, it is impossible for you to tell if one is good and the other is bad, when the bad one contains totally phony information about the person the mortgage was given to. So you bundle the good mortgages (good data) with the -unbeknownst to you- bad ones (bad data) and you get AIG to insure the lot and rate them as AAA investment grade securities, then sell them off to the Wall Street thieves who 'derivativize' them and start trading them like shares of stock. Then the bad ones (bad data) go 'tits-up' and it spoils the whole 'package' and you're left with a worthless steaming turd. The rest of the story you know.
Sig this!
If what you're telling us is true, then how come...
While I don't mean to suggest that the CRA is perfect, the recent criticism of it is opportunistic, agenda-driven, and not based on actual facts. The reason we have a CRA and non-discrimination laws for mortgage lending is that: (a) for decades, mortgage lenders refused to lend to some people, irrespective of their credit history, based on criteria like their race or the neighborhood they were looking to purchase in (redlining); (b) even today, minority borrowers have a harder time getting loans than white folks, even after you control for income and creditworthiness.
What policies like the CRA aim to achieve is to make lenders lend to minorities on the same terms. A black applicant looking to buy in certain neighborhoods has a lower chance of getting a loan compared to a white applicant with the same income and credit history, looking to buy in a different neighborhood. Policies like the CRA aren't aimed to forcing lenders to lend to that black guy. The point is that if a bank judges the black guy to be an unacceptable risk, then it should reach the same conclusion about the equivalent white guys that it gets applications from.
Not that this is terribly relevant, again, because the recent boom of subprime lending was due to institutions not subject to the CRA. The argument just fails to get off the ground because of this.
Finally, let me challenge this widespread assumption that your whole argument requires: subprime = poor folk = minorities. That just ain't so; being brown, black or poor doesn't automatically make you uncreditworthy (which is the whole damn point of programs like the CRA). To quote a really good blogger on this topic (Tanta from Calculated Risk):
The blog post in question is worth reading.
Which are about as "capitalist' as the post office. Government-created monstrosities exempt from the law, which were leaned on by Barney Frank (see also, Barney's Rubble) and Chris Dodd to lend to poor people with bad credit.
The great irony is that you had an essentially government-forced-lending program created and protected by Democrats, while calls by Republicans to regulate it were opposed and called "ideological". And now the free marketers are being blamed! That's like blaming Slashdotters if voting machines failed to work right.
Slashdot "libertarians": Small government for me, big government for those I disagree with. -1, I disagree with you
Myron Scholes was given a Nobel prize for his formula in 1997. In 1998 the hedge fund he (and Robert Merton) worked for as a partner, Long Term Capital Management, lost 4.6 billion in 4 months. It was bailed out by a group of private banks at the request of the Fed.
This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas. The banking system in America is NOT free market and has not been free market since 1913 (The Federal Reserve Act).
What the hell are you talking about?
Don't blame the CRA, it only prohibited red-lining (denying a loan based on geographic area rather than individual credit rating), and only applied to banks, not independent mortgage companies.
Don't blame Fannie Mae or Freddie Mac either. They weren't the ones making the loans.
The government didn't force these independent mortgage firms to push sub-prime loans, along with predatory rate structures, at high credit risks, nor did anybody force private investment firms to snatch up securitized mortgage bundles made from them.
Nobody forced the financial institutions to horribly over-leverage their assets on incomprehensibly complex securities
Ironically, it was the repeal of the section of the Glass-Steagall Act (passed in response to the depression) which strictly separated banks from securities firms (to help assure the stability of banks) which exacerbated this mess and resulted in such massive failures.
TLDR version:
Deregulation under the notion the "free market" and "competition" would result produce stability allowed financial officers to engage in horrendous risks (pursuing increased revenue like any company should).
The federal reserve and FDIC are the unsung saving grace of this crisis. Without the guarantees on deposits, main street would have long ago run the banks, resulting in economic devastation which would have made the depression look like a quiet, happy picnic.
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If it was a truly free market we would be in the second great depression as people would have no guarantee that there money will still be there when their bank closes. After all there would be no FDIC insurance on their accounts in a truly free market right?
No government bailouts would mean your account would vanish if you used wamu or wachovia. Also no credit to businesses which will cycle to many more lost jobs which in turn means more bank failures and even tighter credit ... etc.
Massive withdrawls and runs on the bank would have happened by now and we would be in a situation much much worse economically than today.
The problem with market purist idealogies is that the assumption is the market is always perfect %100 of the time. It assumes people are rational and educated which includes investors and consumers. The market can not regulate itself unfortunate and this is the third time since 1929 that bad loans and banking failures caused economic recessions. H
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