Tuesday, May 31, 2011

'Inside Job' Tries to Define the Narrative

The award winning documentary Inside Job presents the 2008 financial crisis as basically a bunch of unethical, greedy bankers. There's an interview with a Madame who states 40% of her high-end clients are Wall Streeters, pictures of the Hampton homes highlighting how rich some people are, and a rockin' soundtrack. I'm sure there's an artist's reconstruction of banker baby-eating rituals that didn't make the cut. Comments on YouTube start at angry and get more emotional.

I did like the interviews with economists, such as when they interviewed Fred Mishkin, and he wrote a white paper just before the crisis giving the Icelandic financial system his expert Seal of Approval, titled "Financial Stability in Iceland," which after the crisis was listed on his CV as "Financial Instability in Iceland," something he called a 'typo' (see here). It's bad, and Mishkin should be ashamed for the rewrite, but such lame consulting projects by big names are omnipresent and orthogonal to the mortgage problem.

There's the focus on CDO's, which presumably were responsible for the mess. No mention, zero, of the Community Reinvestment Act, Fannie Mae, underwriting innovation driven by increased homeownership goals for minorities, the Boston Fed bank study and eventual $38MM payout to its sponsor Bill Styron, or Alicia Munnell's exceptional career based on a deeply flawed bit of hack advocacy masquerading as dry econometrics. One would never learn that government, journalists, community activists, and academics were fully behind the mortgage boom because it served their ends too, and they too ignored the warnings because asking for things like substantial down payments and income verification were just outdated, if not racist, homelending criteria.

Robert Gnaizda (see picture above), head of the Greenlining Institute, is given a lot of air time, arguing bankers were singularly responsible via their greedy, unregulated, predatory behavior. This shill for ninja loans is presented as a prescient advocate of sensible lending, when nothing could be further from the truth. The Greenlining Institute has been a lobbying and litigating group for 20 years. Greenlining’s principal aim is to push state and local politicians and the California business community to facilitate “community reinvestment” in low-income and minority neighborhoods.

Here's a description of one of their successes, written in August 2008:

But Greenlining can still play rough. Consider its dealings with Rabobank, an international Netherlands-based “megabank” (assets: $740 billion) that in early 2006 acquired Salinas-based Community Bank of Central California for $371 million.

Earlier, in November 2005, Rabobank had agreed to pay $851 million for another California bank, Mid-State Bancshares. At that time, Greenlining publicly demanded that Rabobank commit $7.5 billion for loan programs to help farmworkers buy their own farms. With only 40-some California branches, Rabobank balked.

Greenlining’s reply was a shot fired across the Dutch institution’s bow: “If Rabobank cannot reach an agreement to commit funding to CRA programs, the institute will oppose any further acquisitions it tries to make in California.” Greenlining then asked the Comptroller of the Currency to hold hearings into Rabobank’s acquisition of Mid-State and to require Rabobank to issue quarterly reports on its compliance with the CRA.

It also announced a protest demonstration. In February 2007, Latino and Southeast Asian farmers and farmworkers joined Greenlining organizers in a demonstration outside Rabobank’s Fresno, California offices. Backed by Mariachi and Hmong bands, the demonstrators waved placards and chanted slogans in English, Dutch, Spanish, and Hmong: “We’re Not a Dutch Colony!”, “Help de armen (Dutch for ‘Help the Poor’)” and “Geen immigranten schoppen (Dutch for ‘Don’t kick the immigrants’).” “Congratulations to everyone,” Greenlining’s Robert Gnaizda told demonstrators through a bullhorn, “Rabobank is totally afraid of you.” Apparently it is. This year, Greenlining proudly announced what it called a “unique agreement” with Rabobank “to turn San Joaquin farmworkers into farmowners.”

The net result of this was to prod mortgage lenders into lending to the easiest area where they could meet these goals: home mortgages. 'Predatory' lending, I suppose, is when a bank gives a loans to someone who can't afford it, and then has the gall to ask for their collateral after 500 days of non-payment. Gnaizda has spent his entire life arguing for lowering underwriting criteria (see here and here), and when he says 'increase regulation' he just means buyers should not have to pay supbrime rates, but rather prime rates, in other words, even easier terms.

It's fun to see history rewritten in real time. Everyone knows the diagnosis influences the cure, and if the zeitgeist is for more regulation the narrative has to be that the crisis was solely the cause of unregulated, greedy bankers, and presume that the selfless bureaucrats would have never let this happen. But bankers have always been greedy, what they didn't have was government not merely telling them that they should lower their underwriting standards, but that if they didn't they would be sued for disparate impact. Any CEO seeing this trend, and asking 'well, what have our losses been on these riskier home loans government wants us to make?', would have been told 'not much', because historically the collateral had always risen. That is, while default may have been high, recoveries were higher, and defaults were also masked by the higher collateral that made refinancing easier. In this environment, it is easy to see how banks slowly eliminated their previous lending criteria.


Jose said...

Showing other people's possessions to generate as much envy as possible in the audience: always the mark of an unbiased documentary.

One has to wonder, though, who the other 60% clients were. Politicos, media execs, lawyers, UN bureaucrats?

Excerpted/reblogged here: http://josecamoessilva.tumblr.com/post/6058892395/predatory-lending-i-suppose-is-when-a-bank


AHWest said...

I started watching it on an airplane, but quit after 15 minutes after it became obvious that this was not a serious documentary, but just another intellectually lazy, leftist advocacy piece. On the same flight, I watched "Waiting for Superman," a better put together documentary that skewered teachers unions.

J said...

'well, what have our losses been on these riskier home loans government wants us to make?', would have been told 'not much'

You are implying that the Government's policy of pressuring the banks to serve underserved (higher risk) customers would have worked in normal times. If so, Gnaizda's tactics were almost justified. But then an unforeseen event like the housing market crash unsettled the whole situation and caused severe damage to all. The Government understood the well-intentioned mistake it had comitted and assumed responsability. Regarding the involuntary damage caused to the banking sector, the Government acted rapidly to limit the crisis and stepped in to rescue the financial sector.

Is this not what happened?

Patrick R. Sullivan said...

The Government understood the well-intentioned mistake it had comitted and assumed responsability.

Ha! The govt has been in full throated denial of its role for several years now. I recently heard the Chair of the Financial Crisis Inquiry Commission deny any causal role of the CRA because, CRA lending was too small, CRA loans had performed well, and the CRA didn't apply to non-bank lenders like Countrywide.

The reality is that he doesn't know how large the CRA lending was, because he refused to ask the banks to document it, almost all loans 'performed' during the bubble run-up for the simple reason that if you couldn't make your monthly payment you could sell the house at a profit and repay the loan, and while technically the CRA didn't apply to non-bank lenders, the HUD Best Practices Initiative did. Which essentially was the same thing.

Not to mention that, as we all should have learned as children--'For want of a nail a shoe was lost...--the cause of a disaster doesn't have to be large. Just crucial.

Patrick R. Sullivan said...

Here's a prediction made in 1998 about what the 'community activists' wanted, Anon:

After the warm and fuzzy glow of "flexible underwriting standards" has worn off, we may discover that they are nothing more than standards that led to bad loans. Certainly, a careful investigation of these underwriting
standards is in order. If the "traditional" bank lending processes were rational, we are likely to find, with the adoption of flexible underwriting standards, that we are merely encouraging banks to make unsound loans. If this is the case, current policy will not have helped its intended beneficiaries if in future years they are dispossessed from their homes due to an inability to make their mortgage payments. It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on badly mangled data.

Pretty prescient, no?

Anonymous said...

This crisis was the perfect storm of government social engineering of the marketplace, having incentives to take foolish risk, loan money that was just too easy, and the right political appointees at Fannie/Freddie getting rich, all while Fannie/Freddie were spreading 200 million dollars in partisan donations.

Good piece Falkenblog. Nicely done.

dmfdmf said...

It makes me laugh when the lefties put out crap like this. Have they not yet gotten the memo? With the invention of the internet they have lost control of the narrative. (See Clay Shirky's article on the magnitude of the social revolution this implies in his article "Thinking the Unthinkable"). The only people who will fall for this are the self-deluded followers and older folks who get their news and analysis only from tv and newspapers. Some of the lefties are smart enough to realize the threat the internet poses to their power which is why they want the power to license and control it, and if that fails, use an internet kill switch.

Anonymous said...

Surely one of the reasons for the crash was that suddenly via securitisation that previously uncorrelated mortgages became correlated and the wholesale reselling meant it was vulnerable to the credit downgrade spiral of death.

Danny Black