Even '60 Minutes' Misses The Real Story Of The Subprime Disaster
On Sunday's "60 Minutes" it was asserted that the September 2008 failure of Lehman Bros. triggered the chain reaction that caused the global financial and economic crisis of the past four years.
While correspondent Steve Croft presented detailed interviews to support this claim, nowhere was it mentioned how the U.S. government, dating back to the Carter administration, mandated banks to make loans to people with poor credit and that this created a glut of subprime mortgages that went toxic when the housing bubble burst in 2006-2007.
The public has the right to understand this, yet the media never touch it.
Hardly a day goes by that we don't hear President Obama demonizing "Wall Street" for causing the financial crisis he "inherited." Wall Street is an easy target, but what is it exactly? Is it the large commercial banks, the small regional hometown banks, the mortgage companies, the mutual funds, hedge funds, investment bankers, retail brokers or wealth managers?
Are they all bad? Were they all complicit in the economic calamity?
Yes, there are bad apples in the barrel, just as you find among doctors, lawyers and politicians. But one thing is for sure: Wall Street is a place in lower Manhattan where for 220 years our stock, bond and commodity markets have created the arena for the phenomenal economic growth of our nation through flourishing young companies. With new products and services, the Fords, the GEs, the IBMs, the Pfizers, the Googles and the Apples, just to mention a few, have improved the lives of us all.
In an update of a piece from last April, "60 Minutes" stated that the bankruptcy of Lehman Brothers in September 2008 "triggered a chain reaction that produced the worst financial crisis and economic downturn in 70 years."
They interviewed the thoughtful Anton Valukas, court-appointed examiner of the Lehman bankruptcy, who gave carefully measured responses to Croft's questions based on his exhaustive 2010 report on the failure. He is an impressive and fair-minded attorney who left little doubt that there was much wrongdoing at Lehman Brothers in the ways they recorded, valued and reported the large inventory of subprime loans and properties on its balance sheet and income statements.
Croft even asked if the government failed the public in not uncovering the wrongdoing ahead of time — to which Valukas responded "yes."
What Croft and "60 Minutes" didn't ask is where all these subprime mortgages came from and were Lehman and Wall Street really the prime culprits in this crisis? Fact is, subprime mortgages permeated all our credit markets, and as long as home prices were rising, there was no crisis. When the housing bubble burst and home prices started falling in 2006 and 2007, the wheels came off.
Bear Sterns, buried by subprime mortgage securities, imploded in April 2008 (five months before Lehman). The Federal Reserve, fearing a public crisis of confidence and a poisoning of credit markets, engineered a firesale buyout by JPMorgan Chase partially funded by billions in taxpayer dollars.
The Fed hoped the bailout of Bear would stem the crisis, but that didn't happen. The glut of subprime loans was a toxic virus that had already infected all corners of our financial markets. Lehman soon collapsed and was forced into bankruptcy followed by the near failure of AIG and many others. The rest is history.
The common thread is the glut of subprime mortgages. So where did they come from?
The subprime mortgage was not invented by Lehman, Bear Sterns or any other Wall Street firm. The Community Reinvestment Act of 1977 instructed banks to lower their credit standards and begin lending in lower-income communities. So the intent — spreading the American Dream of home ownership — was noble.
But in 1994, during the Clinton administration, CRA rules were drastically revised to expand lending mandates on banks and give regulators more power to punish banks for non-compliance. It also gave new power to community organizers and other advocacy groups to file complaints against banks. Banks soon realized that while these risky loans were bad business for them, it was cheaper to comply than to endure long and expensive court battles with government regulators and advocacy groups.
Subprime mortgage activity grew dramatically through the late 1990s and early 2000s, at times outpacing prime mortgages. The easy credit also began to push up demand for homes and started inflating the bubble pricing.
Along the way, banks, worried about the growing inventory of bad mortgages on their books, turned to Wall Street to off-load them. Wall Street, ever entrepreneurial, came up with the idea of packaging these bad loans with prime loans into "bundles" that could be sold to investors craving higher-yielding debt. "Spreading the risk" they called it.
Credit agencies offered generous ratings that did not reflect the actual risks. These collateralized debt obligations (CDOs) yielding 2% to 3% more than similarly rated corporate bonds, sold like hotcakes from 2004 to 2007 as fixed-income nvestors worldwide begged for more.
Home prices soared as speculators fanned demand and flipped homes for quick profits while banks, mortgage initiators, investment houses and insurance companies wracked up huge fees on CDOs and credit default swaps. It was a classic bubble that exploded in all our faces when housing prices tumbled in 2007.
The public needs to understand all this. Certainly, there were many villains in the debacle, Wall Street included. Yet President Obama, having been a community organizer, understands full well the process. In singling out Wall Street and Republicans as the culprits, he is being disingenuous. Many other hands, including his own, were on the steering wheel of the car that was driven into the ditch.
The root problem is still with us. The Department of Justice continues to prosecute banks for failing to lower credit standards for lower-income borrowers. The perfect chance, "60 Minutes" had, to arm its viewers with knowledge that will avoid a repeat. It missed its chance.
• Porpora is a retired career trading professional. He was a member of the NYSE for 31 years — five as a specialist, 26 as an institutional floor broker |
