Do bankers seriously expect us to believe that they had no way of knowing the depth of the looming financial crisis or that others were entirely to blame?
It's tough to head off the next disaster if you don't understand why the last one happened -- an insight that's apparently lost on Wall Street.
Instead, as I watch banker after banker grilled on how the mortgage mess happened, they seem to repeat a lot of the excuses I've heard for more than a year. Such as "No one knew." Or "It was everyone else's fault."
How the meltdown unfolded
The excuses also muddy the waters at a critical time. The nation is just starting to recover from the meltdown. Financial reform has finally taken center stage in Washington. We need to know what truly went wrong to keep this from happening again.
So here are five big lies we need to stop hearing from Wall Street: Big lie No. 1: No one could have known Consider this scenario: You work at the top of a key bank on Wall Street. You hire the smartest guys from the best schools. You get paid big bucks to know your business better than anyone else. And warning signs are everywhere. When it goes bad, can you really say you didn't know?
Yet time and again, we've heard something similar to this from top bankers.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=70256022-90fa-42a4-bcaa-94fabd25f903,baaa8322-3ced-4032-96e7-c10f6e7284e3,251e3377-b2c7-4287-84db-e139e75c8126,01eecfdd-9d71-4bf3-9a51-32089ae2e6f6,e48e83d2-8349-488e-b8e5-51b7fef04439,4e3d93d6-925d-43c0-b83b-4e6f5e1f99c5,ec7ee637-8079-4ef3-a7d4-6a82d89b77cf,f318fe99-01ec-4b77-91e3-0dcad87ce98b", "player.fr": "iv2_en-us_money_article_Investing-CompanyFocus-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=70256022-90fa-42a4-bcaa-94fabd25f903,baaa8322-3ced-4032-96e7-c10f6e7284e3,251e3377-b2c7-4287-84db-e139e75c8126,01eecfdd-9d71-4bf3-9a51-32089ae2e6f6,e48e83d2-8349-488e-b8e5-51b7fef04439,4e3d93d6-925d-43c0-b83b-4e6f5e1f99c5,ec7ee637-8079-4ef3-a7d4-6a82d89b77cf,f318fe99-01ec-4b77-91e3-0dcad87ce98b;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');In January, Goldman Sachs (GS, news, msgs) CEO Lloyd Blankfein asserted while testifying at an inquiry commission hearing that he and other top managers at the bank "did not know at any minute what would happen next."
Former Citigroup (C, news, msgs) CEO Charles Prince and former senior board member Robert Rubin told the commission earlier this month that they're really sorry but didn't know what was coming. "There isn't a way in an institution that has hundreds of thousands of transactions a day that you're going to know what's in those position books," testified Rubin, a former Treasury secretary.
Dick Fuld, who was head of the failed Lehman Brothers, has said he had no idea his company was using accounting gimmicks to cover up exposure to risky debt instruments.
Now, I can't tell you which executive knew what or when, or what they believed they were seeing. But their institutions spotted trouble early on:
At Citigroup, a former executive, Richard Bowen, says he warned top managers as early as 2006 about problems with bad mortgages. "I witnessed business risk practices which made a mockery of Citigroup credit policy," Bowen told the commission this month. E-mails disclosed last weekend reveal Blankfein gloating, "We lost money, then made more than we lost because of shorts," in November 2007 -- when the banks' problem had just started to surface. With the crisis looming, the bank had placed big bets against, or shorted, the mortgage-backed securities it was selling to customers, a maneuver Angelides says is akin to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars." Another e-mail has a Goldman bond trader telling his girlfriend in March 2007 that the subprime business "is totally dead, and the poor little subprime borrowers will not last so long!!!" (Goldman Sachs responded that the Senate Permanent Subcommittee on Investigations, which released the e-mails, had "cherry-picked" them from millions of pages of documents and that the bank lost money on residential-mortgage-related products during 2007 and 2008.) At Lehman Brothers, former executive Matthew Lee says he was fired in May 2008 after raising concerns about accounting practices.A lot of people outside the banks saw something coming, too. In September 2004, the FBI publicly warned that a potential epidemic of rampant mortgage fraud could cause "the next S&L crisis," referring to the huge savings-and-loan meltdown of the 1980s. In early 2005, The Wall Street Journal and The New York Times began running articles warning that relaxed lending standards and a speculative housing market bubble were dangerous.
Directors have little excuse for missing such signs because they have a legal obligation to understand the risks inside companies, says Michael Garland of CtW Investment Group, which lobbies companies on shareholder issues for union pension funds. "They didn't have to know that the mortgage market was going to collapse to know that the risk equation in the mortgage market had changed dramatically," he says.
And the CEOs? Well, it's possible some of them really didn't recognize the risk early on, but there were enough warnings to say they could have and, given the size of their paychecks, to think they should have.
Continued: It's someone else's faultMore from MSN Money
Goldman-deal gamblers knew the scoreHe got rich -- and they lost their homesThe fight we need over Wall Street reformWhy the housing market is about to turn5 of the worst corporate boards1 | 2 | 3 | next >
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Two factors obscured the thinking of those that should have known: (1) Senior bank executives were just concerned about making money for their firms and themselves; and (2) Those sub-prime mortgage rates were sky high, so on paper the MBS or synthetic products looked good as a cash investment, especially to "sophisticated" investors in Europe who had no idea what they were doing.
What I don't understand is why the originators of all this bad debt are not under more scrutiny. Wall Street is a symptom, not the source of this problem. If every state had "Texas" mortgage rules (20% down), there would be less mess to clean up.
ReplyReport AbuseRaj_London #5Wednesday, April 28, 2010 5:11:22 AMGreat article, Michael. How is it that everyone (especially the maintstream media) wants to put their heads in the sand and not see the truth that is in front of them? There was a crisis heading our way and there was major manipulation of the markets (i.e. what I would call "gambling"), and there was of course lots of money flying all over the place. And, our very highly paid financial experts claim that it was all a surprise.
Finally, here is an article that dispells all the myths and lies and tells it the way it is. The law enforcement people should take this up and pursue the lies that defrauded the public.
ReplyReport AbuseRoadhouse Blues #6Wednesday, April 28, 2010 5:49:17 AMGood point, Fleckenstein could call it because he wasn't on the Wall Street money making side of it. Unfortunately, Fleckenstein is somewhat of the "boy who cried wolf", and so many people may have dismissed his warnings as just another doom and gloom story.ReplyReport AbuseRoadhouse Blues #7Wednesday, April 28, 2010 5:52:52 AMGood point about Fleckenstein, he could call it because he wasn't inside Wall Street making money off of it. Unfortunately, Fleckenstein suffers somewhat from the "boy who cried wolf" syndrome, so many people may have dismissed his warnings as just another doom and gloom story.ReplyReport AbuseTexas retired #8Wednesday, April 28, 2010 6:02:38 AMWall Street and bankers have been allowed for years to get creative with financial instruments and sell them for huge profits with no one questioning the instruments. It was obvious yesterday during the Goldman hearing that the Congressmen doing the questioning do not really understand derivatives nor how Goldman Sachs works. That in itself makes me question why have people been allowed to get so creative with derivatives that few understand them and they have such an obvious appearance of gambling. Those kinds of instruments do not belong on Wall Street. Let people gamble with their own money but stop the gambling with other people's money. I do not think the Wall Street firms doing the derivatives plays around housing had any conscience around what they were doing....they just saw how easy it was to take people for millions of dollars and I am not sure they really cared about the consequences. They have never had to pay for any of their sins in the past so why would they think they would have to now. Dick Fuld should be in jail yet he is walking around free and very rich while investors with Lehman lost millions.ReplyReport AbuseDavenport5080 #9Wednesday, April 28, 2010 6:24:12 AMAll these problems were apparent long ago. The bailout of Long Term Capital Management in "98" was the warning signal to the bank executives and government regulators(the most recent in a string of commercial paper fiasco's in the last quarter of a century). The complex formula that LTCM was using was exposed as flawed, yet after their bailout all the banks went right back to the folly that almost brought them down a decade ago. Charles Gasparino's latest book highlights the reckless behavior and an enabling government. In one passage of his book he talks about the banks and the 99% rule. With their complex formula, 99 percent of the time everything would be alright, but watch out for that 1%. He asks the question "If you knew that 1 out of every 100 planes would crash, would you ever step on a plane?" This is the mentality of the money brokers, and it certainly looks like odds making in a casino to me! Their formula's should have been based on a 99.9999% formula. That would have been true risk assessment!ReplyReport Abusestraightstock #10Wednesday, April 28, 2010 6:24:36 AMthis is the fourth or fifth breakdown (depending on what you count) in the financial system since 1985. as long as we bail out the institutions, it will not be the last. and notice that after each failure, the federal solution is to give the remants to the then remaining large institutions. we now have the largest concentration of deposits ever, in the 10 or 12 biggest institutions. the problem has not been solved.ReplyReport Abuse1 - 10 of 37PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/CompanyFocus/5-lies-the-big-banks-keep-telling-us.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*Former Citigroup (C, news, msgs) CEO Charles Prince and former senior board member Robert Rubin told the commission earlier this month that they're really sorry but didn't know what was coming. "There isn't a way in an institution that has hundreds of thousands of transactions a day that you're going to know what's in those position books," testified Rubin, a former Treasury secretary.
Dick Fuld, who was head of the failed Lehman Brothers, has said he had no idea his company was using accounting gimmicks to cover up exposure to risky debt instruments.
Now, I can't tell you which executive knew what or when, or what they believed they were seeing. But their institutions spotted trouble early on:
A lot of people outside the banks saw something coming, too. In September 2004, the FBI publicly warned that a potential epidemic of rampant mortgage fraud could cause "the next S&L crisis," referring to the huge savings-and-loan meltdown of the 1980s. In early 2005, The Wall Street Journal and The New York Times began running articles warning that relaxed lending standards and a speculative housing market bubble were dangerous.
Directors have little excuse for missing such signs because they have a legal obligation to understand the risks inside companies, says Michael Garland of CtW Investment Group, which lobbies companies on shareholder issues for union pension funds. "They didn't have to know that the mortgage market was going to collapse to know that the risk equation in the mortgage market had changed dramatically," he says.
And the CEOs? Well, it's possible some of them really didn't recognize the risk early on, but there were enough warnings to say they could have and, given the size of their paychecks, to think they should have.
Continued: It's someone else's faultMore from MSN Money
1 | 2 | 3 | next >
I agree with kilikid! Bill F. was way ahead of his time. It was easy to confirm his suspicious. Just asking your real estate broker acquaintances would give you the answer. It was obvious.
Two factors obscured the thinking of those that should have known: (1) Senior bank executives were just concerned about making money for their firms and themselves; and (2) Those sub-prime mortgage rates were sky high, so on paper the MBS or synthetic products looked good as a cash investment, especially to "sophisticated" investors in Europe who had no idea what they were doing.
What I don't understand is why the originators of all this bad debt are not under more scrutiny. Wall Street is a symptom, not the source of this problem. If every state had "Texas" mortgage rules (20% down), there would be less mess to clean up.
Great article, Michael. How is it that everyone (especially the maintstream media) wants to put their heads in the sand and not see the truth that is in front of them? There was a crisis heading our way and there was major manipulation of the markets (i.e. what I would call "gambling"), and there was of course lots of money flying all over the place. And, our very highly paid financial experts claim that it was all a surprise.
Finally, here is an article that dispells all the myths and lies and tells it the way it is. The law enforcement people should take this up and pursue the lies that defrauded the public.
Read Full Article »