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The Secret Goldman Sachs Tapes
An anonymous reader writes: The radio program "This American Life" has published an extraordinary investigative report on how the U.S. government regulators in charge of keeping an eye on the banks actually interact with powerful financial institutions (podcast here). Financial journalist Michael Lewis describes the report thus: "The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems. Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them. The report quotes Fed employees saying things like, 'until I know what my boss thinks I don't want to tell you,' and 'no one feels individually accountable for financial crisis mistakes because management is through consensus.'"
Carmen Segarra was hired to to clean up the poor oversight of the banks. Instead, she was fired for doing her job. Read the prepublica articles. It's a shame. Contact your senator and tell them to launch an investigation into the retaliation against Carmen!
I happened across this before it got on here and listened to the entire thing. Here's a brief summary:
1. This American Life is a great show. My favorite, you should listen to it often.
2. Managers at the fed seem to be terrified of the banks
3. The lady doing the recordings is aggressive and speaks her mind.
4. There are many "Old Guard" people at the fed that have a cozy, friendly relationship with the banks they work with.
5. The banks actively cultivate this relationship because they realize friendly regulators are less likely to press issues.
6. She uncovered the fact that GS had no formal definition for "Conflict of interest" which is a violation of Fed rules.
7. The fed worked for months gathering evidence and there was consensus that they needed to force GS into creating a policy
8. Suddenly one day her management agreed GS did have a policy just not a good one.
9. She was called in and her boss tried to bully her into changing her report to say they did have a policy.
10. Not too long after she was fired.
11. I believe the suggestion is that GS has control over management and who gets hired/fired at the fed.
"the banks got the money to cover the bad loans (that the government mandated be made)"
The bad loans were not enough to cause the financial crisis. Total mortgage debt was something like $13 trillion, maybe half those were at risk of default. The banks (themselves, not because the government held a gun to their heads) inflated the mortgage debt by a factor of six, into something around $62 trillion. The instruments used to create some $40 trillion were RMBS and their deriviatives such as CDS. When a few defaults happened, as was expected in the high-risk, low tranche RMBSes, market groupthink and emotional overreaction occurred, and even mortgages which had been bundled into high tranche instruments, which hadn't defaulted and were not likely to default, lost value. Banks could no longer use hi tranche RMBS which had not experienced any defaults as collateral to roll over their funding. That's what CDS hedges were for, of course. But the CDS market was brand new and immature. So either banks didn't hedge enough, or the insurers (because they rightly thought there was no risk of default) didn't have enough to pay the insurance.
In conclusion, the "bad loans" were a very small part of the market and could have been absorbed. The banks who made the bad loans had the houses as collateral, right? The bad loans alone did not cause the crash. It was the market mechanisms that inflated house loans into many times their real value through the use of financial insturments, and then market groupthink which saw a few defaults and panicked wildly, spreading the asset price drop to assets that really were still good loans, and then the inabilityt of insurers such as AIG and Bear Stearns to pay on the insurance claims when the RMBSes dropped, that caused the crash.
The Fed should have bailed out individual homeowners instead of the banks.
One of the reasons cited in the SIGTARP Maiden Lane report ("Factors Affecting Efforts to Limit Payments to AIG Counterparties") for intervening in the financial system was: "FRBNY was concerned about the effects of bankruptcy on key sectors of the market, such as retirement accounts and the credit markets." Why doesn't the Fed bail out Detroit then, since retirement accounts are affected there, too?