Intellectual Dishonesty (again)

Shot in the Dark has one decent writer (Mitch) who, despite engaging in sophistry to start off many of his posts, otherwise tries to argue toward a rational point. I don't always agree with Mitch, but he writes persuasively pretty often. To be clear, I frequently think he short changes decent analysis and seems to go out of his way to attempt to ignore or consider how very important counter-points dramatically impact his claims.

Shot in the Dark also has other authors - one is Johnny Roosh. JR apparently holds some sort of position in financial services, and has described himself as being a "financial planner." We've asked a few times what licensure he holds (Series 7 would be pretty standard) - but he hasn't answered. I'm not sure he is properly licensed, and frequently he makes comments which belie the suspicion that he is not, for he, like our former pest troll KR, claims that it was governmental regulation which caused the recent econimic meltdown/catastrophe.

I can't claim to be a great expert on financial services - I work in investment banking, dealing with large cash movement and the reasons for the appetite (or lack) of banks for deposits and the desires of brokers to make 'spread revenue' with the cash they have on hand. But, I DO work with some people who are VERY experienced in financial services, people reasonably well-known on Wall Street. I talked with them about what happened from 2007 into 2009. In short, what I heard was:

1. Companies, thru lax oversight, were allowed to hide debts (like Enron), and many, many of them did so.
2. People were overly incented to do deals - so they did bad deals when the good deals ran out.

Some of these kinds of deals were:
a. Many companies sold their bad debts off to other companies packaged up into deals with many parts, claiming they were good investments (i.e. derivatives)
b. Other companies effectively sold their debt exposure (insurance against loss) telling the buyer they were good ideas to hold the risk (Credit Default Swaps).
c. Still more companies bet long with what was supposed to be 'low risk' money - namely money market funds. When their bets failed, the underlying money fund collapsed.
d. Still MORE companies wrote mortgages with zero income to debt requirements, or wrote HELOCs with equity percentages above 100%, or agreed upon mortgages with HUGE balloon payments that they should have had zero expectation the customer would be able to pay when the interest rate or the balloon shot up.

Yet - people like KR (and JR, and Mitch), have attempted to claim that in fact it was TOO MUCH governmental regulation which really was the underlying cause of the collapse. Specifically that the 3% of the bank's books dedicated to providing mortgages at normal rates to low-income borrowers instead of jacking the rates or requiring outrageous down-payments (or both) was the underlying reason. Now, make no mistake, CRA loans WERE packaged in CDS's and derivatives, but they didn't cause those CDS's (or derivatives) to collapse by themselves. No, instead they collapsed for what was understood to be the underlying problem, specifically a broad and deep income weakness in a as weighted against increasing fuel and healthcare costs- which combined with ARMS and balloon payments (and some idiotic loans which could never ever have been expected to be repaid) caused MANY MANY MANY mortgages to collapse, MILLIONS more than all of the CRA loans.

Yet, when you want to hate the government, you look for any excuse.

So, to that I offer two comments -

First, my almost universally Republican friends who work(ed) on Wall Street think this line of blame (of the government) is laughably stupid. They know full well it was too many people, and too huge bonuses, causing them to chase too few good investments so they started chasing bad ones, combined with shrinking numbers of decent jobs.

Second - Wall Street knows it full well too. You'd be hard pressed to find anyone worth a damn actually blame CRA - they'd be mocked, they'd be a laughingstock. Consider the independent audit done by Anton Valukas (a court appointed auditor). In his recent report (March 12, 2010) - he found:

"“There are many reasons Lehman failed, and the responsibility is shared,” Mr Valukas wrote in his report, which was made public by the court on Thursday. “Lehman was more the consequence than the cause of a deteriorating economic climate.”

Those of you who have read my prior comment on this know that I've said Lehman bought too much bad paper - e.g. #2a and #2b above... Valukus goes on..

"In his report, Mr Valukas claimed that Lehman’s financial plight “was exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by government agencies, who by their own admission might better have anticipated or mitigated the outcome.” (e.g. #1 above)

By the time Lehman imploded, $25bn in capital was supporting $700bn of assets and liabilities, a leverage ratio that was regarded as extremely high. In an effort to maintain favourable ratings from the rating agencies, Lehman engaged in what was referred to internally as Repo 105, a sort of window dressing which involved getting $50bn of assets off the firm’s balance sheet at the end of both the 2008 first- and second-quarter balance sheets. The examiner quotes a Lehman executive saying, “there was no substance to the transactions”.

As anyone can see, Mr. Valukas was extremely critical of Lehman's leadership, describing them as absent or complicit.

Now, when I confronted my friend Mitch, he claimed the report was work of a 'biased NYT report.' His reaction was knee-jerk ad hominem. He didn't research the report. This was no such thing, it wasn't simply Op Ed - which Berg has no problem quoting when it's conservative spin from the Journal, NO, the report was put together by Anton R. Valukas, a former federal prosecutor and current chairman of the law firm Jenner & Block, who is serving as an examiner for the bank. As JDsupra.com notes - "Examiners in bankruptcy cases are appointed to investigate accusations of wrongdoing or misconduct. Their job is to determine whether creditors can recover more money in these cases, and their findings often serve as guides for more lawsuits and even regulatory action." He is eminently qualified to draw his conclusions, and is certainly far more an expert than my friend Mitch, or his supposed financial expert, John Roosh.

As a further aside, Mr. Valukas gave $3000 to the McCain Victory campaign for President prior to giving $4000 to Rudy Giuliani's campaign, whom he apparently preferred. Yep, Mr. Valukas clearly is a biased liberal.. but even had Mr. Valukas actually BEEN a liberal - what would it matter? He was charged with a task, a legal responsibility - how dare anyone claim he would change the numbers it for simple politics? Apparently it's easier to use baseless personal attack for Mitch than to do actual research. So, he winds up looking foolish (in the extreme) by claiming the report was simply spin. Or maybe, just maybe, Mitch seems utterly unwilling to conduct himself in any regard on his blog without massive spin, and so is equally unwilling to conceive that others are actually upright and honest. Consequently, he attacks a dyed-in-the-wool conservative Republican who did his job professionally, and seemingly well. He attacks him by claiming his report was liberal spin. This kind of knee-jerk truly baffles me, yet I encounter it over and over again from the likes of Mitch, for to consider the alternative, that Valukas' comments were true, would fundamentally indict the idea that capitalism ran amock, greed often has consequences, and most importantly, that the government didn't cause anything due to too much regulation, but may well have enabled it through far, FAR too little. Lax regulation was the watch-word of the Bush Administration and the end of the Clinton Admnistration with the willing agreement of folks like Phil Gramm. Ad hominem is the argument of the weakly justified - and it seems, the poorly researched.

Anyway, back to the point - Today, Michael Lewis, Wall Street 'wunderkind', and author of "Liar's Poker," has published his own analysis...
- Michael Lewis, "Inside the Collapse."


"This was an episode where capitalism was almost destroyed, just by the capitalists. And, in the most sensational way, they were sort of destroyed by their own folly," Lewis told Kroft.

Asked what happened, Lewis said, "The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests."

So, when someone claims the governement was the cause - much like they might claim FDR (and liberalism) caused the Great Depression - laugh, laugh out loud, and let them know, you are laughing at them.

For my friend Mitch and the reader, I would ask whose version do you think is more likely true, the one which pretends to blame 3% of the mortgage market (not to mention doesn't for a moment explain the present danger of a commercial mortgage market collapse), or the one (I'd like to think mine in contrast to "theirs"), which is embraced by Wall Street, hangs together logically, makes sense, and which nearly every analysis points to? When you decide you already know the answer to every question, and that answer is "it's the governments fault," you wind up looking and soundling like an extremist with a tin ear, wearing blinders, which I suppose is best, because that way you don't have to hear the laughter.