Krugman, Morgenson Nail Wall St. Jobless Lies, Mortgage Fraud, Daily Kos, September 26, 2010, by Bob Swern, used with permission, quoted verbatim:
IMHO, there are two must-read pieces in Monday’s New York Times concerning unemployment and the Great Recession, Wall Street mortgage fraud, and our economy, in general.The first article of note is the paper’s Monday business lede, by Pulitzer Prize-winning journalist Gretchen Morgenson, “Raters Ignored Proof of Unsafe Loans, Panel Is Told,” which publicizes testimony that occurred last week before the Financial Crisis Inquiry Commission, wherein we learn of the truly astonishing extent of rampant, institutionalized, mortgage-investment-related fraud which was pervasive throughout Wall Street in the run-up to our economy’s crash and burn in September 2008.
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The second piece is an op-ed by Nobel Prize-winning economist Paul Krugman, entitled, “Structure of Excuses,” which continues a theme upon which I’ve posted multiple diaries of late: the concept of “structural unemployment” as the cause of our society’s extended joblessness problem is little more than a grossly-misleading myth perpetuated by our status quo via the MSM.
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In what might very well become a historical milestone concerning coverage of the events that ultimately led up to the 2008 implosion of Wall Street, NY Times Pultizer Prize-winning business journalist Gretchen Morgenson, on the front page of Monday’s NY Times’ business section, reports on testimony and events over the past week at the Financial Crisis Inquiry Commission, in “Raters Ignored Proof of Unsafe Loans, Panel Is Told.”
Quite clearly, based upon Ms. Morgenson’s report, it’s now obvious that the FCIC has been provided with an arsenal of smoking guns which collectively scream that–the credit ratings agencies were clearly complicit and directly enabling Wall Street’s misrepresentations to the investing public of the quality of their mortgage-backed securities throughout much of 2006, 2007 and 2008, but–virtually every major Wall Street firm was aware of the fraud they were committing at the time, as well.
The article tells us of last week’s testimony of D. Keith Johnson before the FCIC…
…D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors.
However, as Morgenson states it, “…until Mr. Johnson’s testimony last week, it was largely unknown that the ratings agencies had been told that vast numbers of loans were being packaged as securities even though they failed to meet underwriting standards.”
Of critical importance here, however, as far as this latest FCIC testimony is concerned, is the now-formally-recognized reality — a truth which has been widely known among Wall Street insiders all along, by the way — that while the Wall Street spin on all of this fraud for the past couple of years has been to blame the credit ratings agencies for Wall Street’s fraudulent transgressions, the reality is that these same Wall Street firms were also contracting out due diligence services on these very same mortgage portfolios, directly, with the same firms that were providing similar services to the ratings agencies.
Essentially, as we’re now hearing it in Morgenson’s report regarding recent FCIC testimony, these Wall Street firms were fully aware of their misrepresentations to the investment community and to the public. And, as Morgenson also tells us, the Wall Street purveyors of these fraudulent mortgage-backed investment vehicles merely used these due diligence reports on their portfolios to negotiate better pricing with the mortgage firms that were bundling them!
As the article notes, in some instances, almost half of all of the mortgage loans initially bundled in certain mortgage-backed securitization (MBS) deals did not meet underwriting standards.
(Diarist’s Note: IMHO, the NYT article headline is somewhat misleading; perhaps perpetuating the Wall Street meme that attempts to pass along full blame for rampant mortgage fraud to the credit ratings agencies. Obviously, Morgenson’s article points out that my comment regarding Wall Street’s missteps rings true.)
Raters Ignored Proof of Unsafe Loans, Panel Is Told
By GRETCHEN MORGENSON
New York Times
September 27, 2010…The results of the Clayton analyses were not disclosed to investors buying the loan pools. Instead, Wall Street firms used the information to pressure the lenders issuing the most troubled loans to accept a lower price for them, according to prosecutors who have investigated these cases.
A more proper procedure, analysts said, would have been for lenders like these — New Century Financial and Fremont Investment and Loan among them — to buy back the problem loans and replace them with higher-quality mortgages. But because these companies did not have enough capital to do that, they were happy to sell the troubled mortgages cheaply to the brokerage firms.
Since Wall Street firms were paying lower prices for the troubled loans, they could have passed along those discounts to customers, reducing investor risk. But Wall Street charged investors the same high prices associated with better-quality loans, thereby increasing their own profits on the problematic securities, according to a law enforcement official and executives with Wall Street companies. To be sure, the prospectuses detailing the types of loans in these pools contained brief warnings that some of the mortgages might not meet stated underwriting standards. But few investors probably realized that huge portions of the pools had failed to meet the benchmarks…
Bold type is diarist’s emphasis.
First, in referencing two of my posts over the past week, here are the first couple of paragraphs from my diary from Sunday (yesterday) morning: “‘Structural Unemployment’ & ‘Deleveraging,’ My Ass!”
“Structural Unemployment” & “Deleveraging,” My Ass!
by bobswern
Daily Kos
Sun Sep 26, 2010 at 07:37:06 AM EDTOver the past couple of years, many have been sucked-in by a lot of bullsh*t economic pseudo-analysis from GOPers and misdirected Dems parroting totally false, Wall Street-centric memes and baseless “conventional wisdom” about our Great Recession. Gradually, the obfuscated truths are finally coming to the fore.
This morning, Yves Smith picks up where respected economist and NetRoots Nation guest Mike Konczal left off a week ago, explaining that the widely-accepted, Orwellian theme of “structural unemployment“ is completely bogus.
(Konczal irrefutably demonstrates, via his just-released study, that the statistical facts tell us that the jobless downturn–which is significantly and adversely affecting all business sectors, not just construction–was a direct byproduct of Wall Street’s stripmining of Main Street’s mortgage marketplace, and is/was due to a general lack of demand that is still extremely pervasive throughout our society. However, there is no “skills mismatch” in the marketplace [i.e.: the basic concept behind the structural unemployment meme]; and that’s just another Wall Street excuse for offshoring jobs and/or cutting pay/hours on Main Street among those who’ve been able to hold onto their jobs until now.)
For more detail on the bogus structural unemployment meme, here are links to other diaries I’ve posted on the subject in the past few days: “‘Proofiness’ and ‘Disestimation’,” (9/25/10), and “Konczal Study: Lack of Demand, Not Skills, Is Jobless Problem,” (9/20/10).
Now, onto the maestro’s take on Wall Street’s propaganda concerning joblessness amongst us little folk…
Structure of Excuses
By PAUL KRUGMAN
New York Times
September 27, 2010What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve.
But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act.
In other words, structural unemployment is a fake problem, which mainly serves as an excuse for not pursuing real solutions…
In Sunday’s diary, I went into fairly extensive detail on one of those quite “real” solutions towards the end of my post: a small ($1 billion program) but extremely successful jobs program praised by Dems and GOP’ers, alike…one which is about to come to a grinding halt due to a lack of desire on Capitol Hill to extend funding for it. Here’s Bob Herbert’s NY Times column from July 3rd on this very initiative, “A Jobs Program That Works.”
Gradually, with hindsight being 20/20, we are learning more with each passing day concerning the details as to how 30 years of greed and unbridled capitalism-gone-wild have brought us to where we are now. The solutions to our economy’s problems ARE out there. But, given Republican obstructionism, one may only wonder whether or not the collective will is there (in our government, and within our population as a whole) to solve them.
Evans Liberal Politics would like to thank Bob Swern for permission to republish his work on an ongoing basis. Bob is our favorite progressive economics writer. More than even Paul Krugman, Mr. Swern fleshes out his articles with lots of details and links, and so provides real grist for liberals and progressives to learn from. You are invited to email Bob Swern here.
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