One to five fingers are possible with one being the least culpable and five being the most culpable. (Sorry, no amount of tinkering would let me paste the actual graphics into this post.)
I don't completely agree with Mr. Eavis' scale. I feel that appraisers should have had at least another finger as enablers of the scam...and borrowers should have gotten one less finger (the average borrower was not a rabid flipper or speculator looking to make a fortune. The average borrower just wanted to have a place to live and call home)....and the Fed should have gotten a full five fingers...and one big honking middle-finger salute just for Alan Greenspan.
The noise you are hearing is me giving yet another big raspberry **** to old disgusting Al who did what he did and borked us all. Al knew he was gambling with people's lives and homes and God and the devil both know he knew. Personally I would send coal to the devil just for the purpose of making a nice warm "home" for old Al....and then I would hope that the devil would evict him for nonpayment to his servicer!
Sorry, I really, really, REALLY loathe the old fossil for what he did and how he did it; its a personal problem. He lies like a rug in his new book and acts like he had nothing to do with any of it! http://www.alternet.org/story/63055/
Subprime: Let the finger-pointing begin
The crisis brought on by worries about shaky subprime mortgages continues to rattle Wall Street. Even as the storm rages, the blame game has begun.
By Peter Eavis, Fortune writer
The borrowers- Three FINGERS
Let's start at the very end of the credit chain and work up. That means we begin with the borrowers themselves - in other words, with us. Thanks to low interest rates in the wake of the stock market crash, getting rich in real estate, always part of the culture, became a national pastime, with cable-TV shows like Flip This House, Flip That House and The Property Ladder (not to mention newspapers and magazines) stoking everyone's inner Donald Trump. Admit it - how often did you go on the Web to check the prices of homes in your neighborhood, just to see how much you could get for yours?
As prices kept soaring, the urge to get in on the boom became overpowering. Medical students, hairdressers and other amateurs were snapping up multiple condos in hot spots like Miami and Las Vegas, planning to flip them for quick gains. And people for whom home ownership once seemed out of reach took on far more debt than they could ever hope to repay. Don't have enough cash to put down the customary 20 percent? Just put down 10 percent. Better yet, borrow the down payment! If the bank approves, it must be okay, right?
Feckless, naive and pathetically addicted to easy money - sure. But with teaser rates and complicated terms, hopeful homebuyers often had little sense of what they were getting into. Now many will pay dearly for their poor judgment - losing their houses, having their credit ruined. We weigh our belief in individual responsibility against the all-too-human failing of getting caught up in a national frenzy.
Mortgage brokers- Three And one-half fingers
To get these loans they couldn't afford, many borrowers turned to mortgage brokers, who were especially good at enabling borderline borrowers to get their dough. "The brokers have always been a disproportionately large part of subprime origination, so they were well positioned to help fuel the boom in subprime lending," says Guy Cecala, publisher of the newsletter Inside Mortgage Finance.
And let's face it, with their nonstop marketing on the radio and the Internet, they're easy to scorn. They made millions, and as pure middlemen, they will feel relatively little in the way of consequences - aside from a sharp dropoff in business.
Appraisers- TWO Fingers
Let's not forget the brokers' handmaidens, the real estate appraisers, who too often buckled under pressure from lenders to overvalue houses.
Paul Demos, a Chicago-based appraiser, accepts some culpability for his trade. "Lenders would tell appraisers, 'This is the value we need for the loan to work,'" he says. "And appraisers would do it." That's kind of the opposite of how they're supposed to work. But, hey, whatever. It's a judgment call, right? Except nobody is exercising any judgment. In comparison with the other participants, though, the appraisers come across as bit players.
Mortgage lenders- FOUR fingers
Point your finger at mortgage brokers and appraisers, and they will quickly point theirs at the banks and mortgage companies. "Our industry shouldn't take any more blame than lenders and Wall Street," says Peter Ogilvie, president of the California Association of
To hear Ogilvie tell it, his mortgage brokerage, based in Los Baños, Calif., would often refuse to touch loans proposed by well-known banks, because the terms were so disadvantageous. One mortgage he says he declined was to a non-English-speaking, single-parent strawberry-farm worker, who was expected to pay around $12,000 a month.
Once they'd made all the loans they could reasonably make to qualified borrowers, the banks began relaxing the rules and reaching further down the credit scale. No income? No job? No assets? No problem! The industry even came up with a cute acronym for such deals: NINJA loans.
Many lenders are paying a price for such recklessness. Dozens of mortgage companies have gone bankrupt, including American Home Mortgage. And Countrywide Financial, the nation's largest mortgage lender - responsible for nearly one of every five mortgages in the U.S. - has seen its stock crater amid concerns that it will become a victim too.
Senator Barack Obama thinks the industry should pay more: He wants to fund a homeowner relief program by fining lenders "that acted irresponsibly or committed fraud." The mortgage providers made billions from the boom. And judging risk is at the very heart of what they are supposed to do. Otherwise, why not just hand the money out to anyone who asks for it? Oh, wait ... they did.
Wall Street- FOur fingers
The banks and mortgage companies never would have made all those loans if they'd had to keep them on their books. But they didn't have to, thanks to the remarkable mortgage machine Wall Street's investment banks and hedge funds concocted.
Until two months ago U.S. banks were able to package billions of dollars of mortgages as bonds and sell them to investors, which included other banks, pension funds and mutual funds. Foreigners were huge buyers of U.S. mortgage paper. And hedge funds scarfed up some of the lowest-rated, highest-yielding stuff in a cynical bid to boost returns.
The result was seemingly bottomless demand for whatever Wall Street could put on the table. Naturally, the amount of subprime mortgages soared. In 2006, subprime-mortgage origination amounted to $600 billion, 20 percent of total mortgage originations, massively up from 2001, when $160 billion of subprime mortgages were issued, representing 7 percent of total mortgage lending, according to Inside Mortgage Finance.
And they're going bad at a frightening rate. Over 17 percent of all subprime mortgages were more than 60 days past due at the end of June, double the number a year earlier, according to research firm First American Loan Performance.
But Wall Street was hooked on the profits. For example, Bear Stearns, which recently suffered huge subprime losses in two of its hedge funds, earned $2 billion in 2006, a huge jump from the roughly $600 million it made in 2001. It's a safe bet that mortgage products made a big contribution to the gain. The same goes for, say, Goldman Sachs and Lehman Brothers.
With all that money rolling in, no one was going to question whether it was right to be exposed to subprime. Lehman got so caught up in its desire for subprime profits that it bought a subprime-mortgage-origination firm, BNC Mortgage, which it recently shut down.
Rating agencies- Three and one-half fingers
While the wizards of Wall Street could use financial alchemy to turn shoddy mortgages into respectable bonds, they still needed the blessing of rating agencies like Standard & Poor's and Moody's. And the agencies were often all too willing to comply.
In the Wall Street pecking order, rating agencies are seen as worthy but plodding accessories. Analysts at the agencies earn far less than their brokerage counterparts, and decisions are nearly always made by a tedious committee process. As a result, they typically fail to react quickly enough to questionable trends and innovations.
But they are not simply bystanders. They have long played a big role in helping investment banks structure mortgage-backed securities by conferring with the banks on what rating a certain structure might get. It sounds innocuous, but critics say it allows Wall Street to gain too much influence over the rating.
S&P spokesman Chris Atkins replies: "Dialogue helps issuers understand our ratings criteria and helps us understand the securities they are structuring so that we can make informed opinions about creditworthiness."
The shortcomings of the system became blindingly apparent in July, when Standard & Poor's and Moody's abruptly downgraded nearly $6 billion of subprime-mortgage-backed bonds. Many of the subprime mortgages backing the bonds were less than a year old. That means the rating agencies had little idea about the quality of those loans when the bonds were issued.
In a now famous exchange, Steven Eisman, a managing director at hedge fund Frontpoint Partners, spoke out on an S&P conference call. "I'd like to understand why you're making this move today, and why you didn't do this many, many months ago," he said. "It's a good question," responded an S&P analyst. "You need to have a better answer," said Eisman.
Yes, you could argue that bond buyers are sophisticated institutions that can make their own judgments. You could also argue that rating agencies are like stock analysts whose recommendations investors could choose to ignore. But they're not. If a bond carries less than an investment-grade rating, many insurance companies, pension funds and mutual funds are barred from buying it. Once the rating agencies had blessed the mortgage-backed paper, everyone was free to grab some.
They should have been quicker off the mark, and they need to work on some potential conflicts, but they hardly made out big from this boom.
The Federal Reserve- Four and one-half fingers
If we want to talk about one player that certainly had the power to put a stop to the excesses, we have to look at the Federal Reserve, which sets interest rates and therefore heavily influences the amount of lending that takes place in the economy.
The chief charge against the Fed is that former chairman Alan Greenspan kept interest rates at very low levels far longer than necessary, which in turn sparked the bubble in housing prices and mortgage lending. Looking back, the Fed's behavior does seem bizarre. It kept the key Federal funds rate at 2 percent or lower from November 2001 right through to the end of 2004.
Those rate decisions showed that Greenspan had chosen to use the housing market as his main instrument to prop up the economy after the 9/11 attacks. Using monetary policy to encourage a rise in home prices would be a highly unorthodox move for a central bank. But evidence suggests that Greenspan was overly keen to use housing for exactly that.
In 2002 he called mortgage markets a "powerful stabilizing force" because they allowed people to extract equity from their homes, and in 2004 he said that homeowners should consider using adjustable-rate mortgages to save on interest and prepayment costs. In 2005, when a record $625 billion in subprime mortgages were made, Greenspan gave a speech that blessed the creation of new loan products, including subprime home loans.
As a result, Greenspan has lost a lot of favor in Washington. In March, Senator Christopher Dodd, chairman of the Senate Banking Committee, laid much of the blame for the current crisis at the feet of Greenspan's Fed, saying that it "seemed to encourage the development and use of adjustable-rate mortgages that today are defaulting and going into foreclosure at record rates."
Are we being fair? Is the Fed really this culpable? On the subprime issue, a person close to the Fed at the time responds, "It was only when we got to early 2006 that the Fed had any real data on what was going on in subprime. The first time we saw the data, we thought it must have been a mistake because the amount of subprime origination was so high. We then thought about the implications." But why didn't the Fed work harder to find the data?
And was monetary policy too lax for too long? The person adds, "There is a glaring fact, which people who make that criticism do not consider. And that is that interest rates - long-term interest rates - have been going down for 15 years. And it's a worldwide phenomenon."
So is the Fed off the hook? "That's nonsense," says Paul Kasriel, economist at Northern Trust. "The fact is, the Fed should have tightened earlier. That way they probably wouldn't have had this dilemma." So the Fed has to accept a large slab of blame for the current crunch. Perhaps it even deserves the lion's share.