Felix Salmon — Yes, the SEC was colluding with banks on CDO prosecutions

Not only colluding but also lying about it.

Reuters
Yes, the SEC was colluding with banks on CDO prosecutions
Felix Salmon

(h/t Charles Hayden)

Jeff Cox — It's Back: Shadow Banking Hits Post-Crisis Highs

The move back to some of the less traditional forms of banking comes as regulators and lawmakers push for greater regulation and higher capital requirements....

"The shadow banking market is coming back relatively strongly and it will be a dominating force in the financial markets a couple years from now," said Dick Bove, vice president of equity research at Rafferty Capital Markets.

CNBC NetNet
It's Back: Shadow Banking Hits Post-Crisis Highs
Jeff Cox | Senior Writer

Joshua Holland lambasts John Carney

But before digging into what passes for an “argument” on CNBC's blog, let me again restate that it was not home-mortgages that caused the world-wide recession. Even if Carney weren't completely wrong about regulators forcing lenders to adopt ridiculously lax standards, it would still be the case that the global meltdown was caused by an array of “innovative” financial instruments that were cooked up in the by-then-largely-deregulated financial sector. I wrote:

"The entire subprime mortgage market was worth only $1.4 trillion in the fall of 2007, and that includes loans that were up-to-date. As former Goldman Sachs trader Nomi Prins noted in her book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street, the federal government could have bought up every single residential mortgage in the country – good, bad and in between – and it would have cost a trillion less than the bailouts.

"What brought down the global economy was as much as $140 trillion worth of financial gimmickery built on top of the mortgage industry. It was the alphabet soup of the credit meltdown – the CDOs, default swaps and other derivatives that made less than a trillion dollars of foreclosed loans into an economic weapon of mass destruction that would cost the American economy alone $14 trillion in lost wealth."

In other words, it was the massive pile of paper and heavy “leverage” built on top of those home loans that caused the financial crash. Ignoring a central argument that one can't refute is a sure a sign of intellectual dishonesty, and despite the fact that I begin my piece with this simple reality, Carney doesn't touch it at all in his rant.

Instead, he devotes his post to advancing, yet again, the frequently and decisively debunked fable about how the Community Reinvestment Act (CRA) mandated that banks loosen their standards – a narrative disassembled not only by myself and Nomi Prins, but also by Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman, former FDIC Chair Sheila Bair, the Federal Reserve Board of Governors, and many, many others. I called it a “zombie lie” because no matter how frequently it's stabbed by factual reality, there is always someone like Carney ready to dig up its remains and bring it back to life to divert attention for Big Finance. 

Read it at AlterNet
CNBC Editor Launches Sloppy, Dishonest Attack on AlterNet in Defense of Wall Street

by Joshua Holland

Hollands initial post and Carney's response are linked to in the post above.

Looks like the CRA kerfuffle is going to be with us at least through the '12 general. The left holds it is a "zombie lie," while the right holds it to be obvious fact.

The country is deeply divided over the facts. So what else is new.

What caused the financial crisis?

Home loans didn't bring on the recession; gimmicky financial instruments bloated to 100 times their value are what caused all this pain.

Wall Street turned a few million home-loans into what Warren Buffet called "economic weapons of mass destruction," cratered the global economy and then, when the bubble burst, turned around and insisted on a massive bailout courtesy of the American tax-payer.

That rightly infuriated most Americans, but it has nonetheless become something of an article of faith among conservatives that Wall Street bears little blame for the Great Recession. The dominant narrative on the right today is that "big government" is ultimately responsible for the crash. In the words of one of Andrew Breitbart's bloggers, Democratic lawmakers like Barney Frank and Chris Dodd “brought down the banking industry by forcing banks to give loans to people who couldn’t afford them.”

That such a ludicrous claim could gain such wide traction is a testament to the intellectual debasement of modern conservative discourse. No bank was ever “forced” – or coerced or incentivized by the government in any way – to make a bad loan.

Read the rest at AlterNet
The Absurd Zombie Lie About the Economy Right-Wingers Desperately Cling To -- And Why It's Totally Wrong
by Joshua Holland.

You probably know all this already but it is a good summary and reminder. Holland does fail to mention that the FBI warned about rampant fraud in the housing in 2005, but Alan Greenspan tossed of concerns about a bubble as merely a "frothy" market in some areas.

But in this heated political season, we are sure to see this zombie still wandering around.

Lo and behold:

Washington Post Helps Senator Corker Spread the Big Lie on Fannie and Freddie
by Dean Baker, Center for Economic and Policy Research | Op-Ed at TruthOut

When a newspaper abandons journalistic standards in its news pages one hardly expects to find much commitment to truth on its opinion pages. Therefore it is not surprising that the Washington Post opened its pages to Tennessee Senator Bob Corker to spread the story that government support for homeownership through Fannie Mae and Freddie Mac was the cause of the housing bubble.

UPDATE:

Research from Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw of the NY Fed shows that speculative behavior driven by highly leveraged loans was "much more important in the housing boom and bust during the 2000s than previously thought." Thus, this supports the limits on leverage I and others have been calling for as a means of limiting the fallout from the collapse of asset bubbles:

“Flip This House”: Investor Speculation and the Housing Bubble, by Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw, FRBNY (pdf)....

This is pretty far away from the (false) story that Republicans tell about the crisis being caused by the government forcing banks to make loans to unqualified borrowers.

Investor Speculation and the Housing Bubble
by Mark Thoma at Economist's View

Calculated Risk critiques the FRBNY paper.
Research: New paper on the role of investors in the housing bubble
by CalculatedRisk

But one thing is clear: investor buying did contribute to the bubble, but it wasn't the cause. But - as I noted in 2005:

"Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the "bubble" bursts."

It was no surprise that investors piled in after prices really took off. But the real causes of the bubble were rapid changes in the mortgage lending industry combined with a lack of regulatory oversight. The speculators just added to the fire.