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Time Rewrote History With "25 People to Blame for the Financial Crisis"

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Much of Time's "25 People to Blame" is a sham. Instead of pinpointing culpability among the key players, it deflects blame away from Republicans and falsely implicates Democrats, to create a muddleheaded "plenty-of-blame-to-go-around" narrative.

For a sense of how Time distorted the facts, imagine an article on 25 people deserving blame for the Iraq quagmire. And then consider a passage like this: "When he ordered the bombing of Iraqi security targets in December 1998, Bill Clinton began a policy of continuous escalation that led to the full scale invasion in March 2003. Like Clinton, Bush had aggressively supported the U.N. inspection regime, but it can't be denied that the burdens of a 140,0000 troop occupation occurred under his watch." Time's article on the financial crisis is even more misleading.

The article's phony and contrived "balance" serves as fodder to conservative talking heads who, perversely, are given a platform for falsifying the history of the financial crisis. Remember, sixty years ago nobody asked Albert Speer to critique the Marshall Plan, but today Larry Kudlow spins for five hours a week on CNBC.

Here's how Time got it very wrong. But first,

A brief precis about what really happened. (Feel free to skip over this, and go to corrections on the 25 People.)

CNBC's David Faber confirmed that the problems all occurred during the Bush Administration. "There was a precipitous drop in [residential mortgage] lending standards that took place in this country... from 2003 until 2006," Faber told Charlie Rose. "Wall Street [] became a much larger player in those securitization markets, beginning in 2003 right through 2006. They did not apply the same lending standards that did Fannie Mae and Freddie Mac to originators, and that is where the balance shifted significantly..."

Why was there a drop in lending standards? Several reasons:

The rating agencies stopped performing independent analysis of mortgage pools. In March 2001, Standard & Poor's started rating real state investments without first going through the analytic review process. As reported by Bloomberg, S&P and Moody's would rely on each other's analysis and "substituted theoretical mathematic assumptions for the experience and judgment of their own analysts. Regulators found that Moody's and S&P also didn't have enough people and didn't adequately monitor the thousands of fixed-income securities they were grading AAA."

Then, in August 2004, reports Bloomberg, Moody's took another step to subvert the independent ratings process. It removed the diversification criteria used for rating collateralized debt obligations, or CDOs. Subprime mortgage CDOs, of which about 3/4 were rated AAA, took off.

The investment community's reliance on AAA ratings cannot be overestimated. Although bankers and regulators are obligated to do independent analyses, they still tend to reference the agencies' opinions as a benchmark. Trillions of dollars of AAA securities were held by banks and others in the belief that they would pay out at close to par.

In 2003 the Bush Administration opened the floodgates to predatory lenders.

"Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye...[though] the Office of the Comptroller of the Currency (OCC).

"In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules...But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks." "Predatory Lenders' Partner in Crime," By Eliot Spitzer, The Washington Post, February 14, 2008

As for unregulated mortgage lenders, Greenspan ignored his duty to provide regulatory oversight. In the aftermath of the S&L crisis, unregulated lenders were becoming a major force in mortgage lending, so in 1994 the Democratic congress passed the Home Ownership and Equity Protection Act (HOEPA) directing the Federal Reserve protect the public against predatory lenders. Greenspan, warned repeatedly about the problem, refused to do anything.

How did the drop in lending standards play out?

Fraud and predatory lending took off. The primary participants of the fraud, the mortgage brokers and mortgage lenders, were not subject to any real regulatory oversight. Consumers went to mortgage brokers, who got bigger upfront fees from steering their customers to subprime mortgages. The loans were issued by mortgage lenders like Countrywide Financial, which then packaged and sold the loans to investment banks. Because there were no protections against predatory lending, consumers got mortgage loans that they could not afford to repay. Loans had teaser rates of 3% for the first two or three years, before the monthly payments doubled or tripled.

Banks relied on AAA ratings and credit default swaps. The subprime mortgage pools were sliced and diced into mortgage securities that were sold to various investors. About 80% of the securities were rated AAA by S&P or Moody's, and a huge chunk of those securities were held by American and European banks. Why? Bankers thought if a bond is rated AAA, they could always sell it at something close to par. Also, residential home values had held up fairly well during the Great Depression. Finally, because of rules related to regulatory capital, the mortgage bonds received a lower weighting on mortgage securities than on ordinary corporate loans.

The real estate bubble burst and bond prices collapsed. Most subprime mortgages were extended for 80% of the appraised value, but many home buyers in California and elsewhere financed 100% of their home purchase.

Because so many people were buying homes they could not afford, market discipline was lost. California, Florida, Nevada and Arizona experienced a real estate bubble. When the bubble collapsed, almost everyone who bought a home in those markets from 2005 onward saw their home equity wiped out.

Three years after private label mortgage securities took off, they started collapsing. Because of the non-standard documentation, the suspicion of underlying fraud, and the difficulty in restructuring the loans with the borrowers, the securities became very difficult to value and market for them dried up.

How did this steady deterioration suddenly become a global financial meltdown? The two-word answer is Hank Paulson.

9/12 Changed Everything. On September 12, 2008, just as Lehman entered into final negotiations to find a buyer, Hank Paulson announced that the government would not backstop Lehman's solvency. What was the difference between Lehman and Bear Sterns, or between Lehman and the other banks? The prices of mortgage securities had declined since the Bear Stearns bailout, so the level of government support for Lehman would have been higher. Also, Lehman's fiscal quarter ended one month earlier than the other banks, so the magnitude of its problems was disclosed before those of other banks.

Paulson's refusal to support Lehman was extraordinarily reckless, because there was no transparency in the financial markets, given that vast amounts of money tied up in hedge funds and credit default swaps. Markets became destabilized right after Lehman declared bankruptcy on September 15, 2008.

Lehman suddenly defaulted on 900,000 derivatives, hedge fund assets were frozen, and countless hedged positions suddenly became unhedged. Nobody knew who was solvent and who was not. The different capital markets started freezing up in succession: the interbank lending market, money market funds, the commercial paper market. Banks cut back on extending trade letters of credit, thereby slowing down shipping and the trade of raw materials around the world, and further pushing down commodity prices. Global trade declined for the first time since World War II.

Paulson's TARP bait and switch. To stabilize the markets, Congress forked over $700 billion to Paulson, who then gave the banks another sucker punch on November 12, one week after Obama was elected. Paulson said he would not apply TARP funds to help abate the foreclosure crisis, and the prices of mortgage securities plunged further, effectively forcing the largest banks into insolvency.

Fact Checking Time's List of 25 People to Blame

1. Angelo Mozilo Bottom Line: Countrywide's CEO deserves to be on the list, but not in the top five.

Time's Conspicuous Omission: Roland Arnall This omission is egregious because, as reported in Chain of Blame, Arnall popularized "no income no asset" loans that opened the doors to the fraud that eventually overwhelmed the mortgage markets. His firm, Ameriquest, was more like a vast criminal enterprise, operating as a boiler room that preyed on the elderly and fixed property appraisals. Arnall had powerful Republican friends, including George Bush, who appointed him Ambassador to The Netherlands over the objections of many in Congress.

The media has deemed Angelo Mozilo to be Arnall's stand-in, the poster child of all corrupt mortgage lenders. But there's really no comparison between Arnall and Mozilo. Arnall was far more corrupt. Why do reporters keep coming back to Mozilo and forget Arnall? The real reasons, I suspect, are: (a) Mozilo looks like a character from The Sopranos, (b) Roland Arnall died last year, (c) Arnall's firm, Ameriquest, shut down in 2007, and (d) Arnall was chairman of the Simon Wiesenthal Center.

2. Phil Gramm Bottom Line: He deserves to be at the top of the list. It's hard to overestimate the damage he caused.

Unmentioned by Time: Gramm slashed the SEC's budget, stacked the CFTC with his cronies, helped emasculate investor protections under the SEC acts.

3. Alan Greenspan Bottom Line: Time sanitizes Greenspan's record.

Greenspan recklessly ignored parts of his job description, which included correcting the regulatory loopholes that allowed predatory lenders like Ameriquest to flourish. And he recklessly ignored evidence of the risks. After the S&L crisis of the early 1990s, everyone knew the hazards of unregulated mortgage lending. (Greenspan had championed S&L deregulation and was a big booster of Charles Keating.) Everyone knew that subprime mortgage lending was fraught with peril and could lead to financial disaster by June 2000, when First Union wrote down its entire $2.8 billion investment in The Money Store, a subprime lender acquired two years earlier. But Time gives it all a "mistakes-were-made" spin, merely noting that "his long-standing disdain for regulation underpinned the mortgage crisis."

Time's Conspicuous Omission: The Republican Congress.

"Federal lawmakers didn't pose much of a threat to the subprime industry in recent years. Members of Congress received at least $645,000 in donations from Ameriquest and large sums from other big subprime lenders, Federal Election Commission records indicate. They debated new oversight of the industry, but took no action." The Wall Street Journal, December 31, 2007


4. Chris Cox Bottom Line: Time got it right.

5. American Consumers Bottom Line: Part of the phony "plenty-of-blame-to-go-around" narrative.

"We really enjoyed living beyond our means... Household debt in the U.S.--the money we owe as individuals--zoomed to more than 130% of income in 2007, up from about 60% in 1982... Now we're out of bubbles." Time neglects to mention how those bubbles were inflated with artificially low interest rates and a new tax exemption on dividends during the run up to the 2004 election.

Time's Conspicuous Omission: Republican Tax Cuts. In terms of living beyond our means, consider this. In 2000 Federal revenues (excluding social security) were $1.54 trillion versus $1.46 trillion in outlays. In 2003, long past a recession that ended in November 2001, Federal revenues were $1.26 trillion (an 18% decline) versus outlays that were $1.8 trillion. Revenues had declined three years in a row, something unprecedented since the Great Depression. And this was before we started tallying the cost of the Iraq war.

6. Hank Paulson Bottom Line: Time gets it right, though Paulson should be in the top 3.

"Paulson was too late in battling the crisis, and letting Lehman fail was a pivotal mistake that rapidly eroded confidence. His attempt to fix the problem--a bailout that netted $700 billion from Congress--has been a wasteful mess."

7. Joe Cassano Bottom Line: AIG's CDS maven was one of many.

8. Ian McCarthy (a shady homebuilder) Bottom Line: A small player that should not be on the top 10.

9. Frank Raines (Fannie Mae CEO) Bottom Line: A defamatory smear that plays off of ethnic and partisan stereotypes.

This passage should be taught in schools as a case study in dishonest writing.

"Raines [...] was at the helm when things really went off course. A former Clinton Administration Budget Director, Raines was the first African-American CEO of a Fortune 500 company when he took the helm in 1999. He left in 2004 with the company embroiled in an accounting scandal just as it was beginning to make big investments in subprime mortgage securities that would later sour. Last year Fannie and rival Freddie Mac became wards of the state."

Reality check: Fannie Mae expanded because of the successful securitization of loans to prime borrowers under strict underwriting standards. When exotic private label securities started proliferating, Fannie Mae and Freddie Mac lost market share, down from 76% in 2003 to 43% in 2006. The move to regain market share was undertaken by Raines' successor, Daniel Mudd. "Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers -- more than three times as much as in all its earlier years combined," reported The New York Times. The accounting scandal, which related to amortization of upfront fees, is a red herring that had nothing to do with Fannie's financial strength or its credit risk policies, which were revised by Mudd. The losses that wiped out Fannie's equity were attributable by decisions by Mudd.

So why was Raines, rather than Mudd, singled out? The only two plausible explanation is that Time wanted to include "a former Clinton Administration Budget Director [who] was the first African-American CEO of a Fortune 500 company."

10. Kathleen Corbet (S&P CEO) Bottom Line: The ratings agencies should be in the top 5. Time fails mention Bloomberg's reporting, which showed that the agencies stopped performing bona fide analysis.

11. Dick Fuld (Lehman CEO) Bottom Line: Fuld was in denial, like a lot of his peers, but the damage caused by Lehman's collapse is attributable to Paulson.

12. Marion and Herb Sandler (former owners of World Savings) Bottom Line: These proponents of option ARM mortgages should be higher up on the list.

13. Bill Clinton Bottom Line: Another smear job with a weaselly disclaimer at the end.

Again, dishonest writing like this should be studied in schools.

"President Clinton's tenure was characterized by economic prosperity and financial deregulation, which in many ways set the stage for the excesses of recent years. Among his biggest strokes of free-wheeling capitalism was [A] the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act, a cornerstone of Depression-era regulation. [B] He also signed the Commodity Futures Modernization Act, which exempted credit-default swaps from regulation. In 1995 Clinton loosened housing rules by [C] rewriting the Community Reinvestment Act, which put added pressure on banks to lend in low-income neighborhoods. It is the subject of heated political and scholarly debate whether any of these moves are to blame for our troubles, but they certainly played a role in creating a permissive lending environment."

A. The repeal of Glass-Steagall, which prevented common ownership of commercial banks and investment banks, had almost nothing to do with the crisis per se. (The concentration of market share among Chase, B of A and Citi is something else altogether.) This is another one of those "plenty-of-blame-to-go-around" red herrings.

B. Here's the proof that Time pulled out all the stops to come up with an excuse to include Clinton. The Commodity Futures Modernization Act was introduced in the Republican House on December 14, 2000, and in the Republican Senate on December 15, 2000 . It was inserted into an 11,000 page long omnibus budget bill that Clinton had to sign on December 21, 2000, after Congress had recessed for Christmas and one month before he left office, to keep the parts of the government running. Clinton was in no position to veto anything. But Time attributes the Act to Clinton so that the blame becomes bipartisan.

C. As for the Community Reinvestment Act, Slate's Daniel Gross explained, "The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong."


14. George W. Bush
Bottom Line: Sugarcoats Bush's record. He should be on the top 5.

Time writes that Bush's "philosophy of deregulation... trickled down to federal oversight agencies, which in turn eased off on banks and mortgage brokers." Actually, they interfered with the actions taken by 50 state attorneys general (see Spitzer's op-ed above.) Time misrepresents the battle in Congress over regulating Fannie and Freddie ("he stumped for tighter controls"). As Rep. Michael Oxley explained, the legislation passed in the House and pending in the Senate was opposed by White House 'ideologues' who wanted to privatize Fannie and Freddie and who opposed a bigger government role.

Bush's tax cuts wrecked the government's finances while never stimulating strong employment growth. From 9/12 onward, he was virtually MIA, letting Paulson, Bernacke and Congress do all the heavy lifting. In terms of fault, the bottom line is a lot worse than it happened under his watch.

15. Stan O'Neal (former Merrill Lynch CEO) Bottom Line: O'Neal was like most on Wall street, who believed the AAA ratings for CDOs. But his shop specialized in them, and his legacy was Merrill's eventual insolvency.

16. Wen Jiabao Bottom Line: Part of Time's phony, "plenty-of-blame-to-go-around" narrative. China brought hundreds of millions of people out of poverty, provided an engine for global growth, and bought trillions of Treasuries to finance the Bush deficits, but Wen Jiabao deserves to take a lot of the blame.


17. David Lereah (economist of real estate industry)
Bottom Line: An industry cheerleader is a pivotal player in the crisis? Time was looking for a cheap shot.

18. John Devane (ran a hedge fund) Bottom Line: He was one among many.

19. Bernie Madoff Bottom Line: Time got it right, but Madoff should be in the top 10.

20. Lew Ranieri Bottom Line: Another smear used for Time's "plenty-of-blame-to-go-around" narrative.

Time blames Ranieri for inventing mortgage-backed securities. But Ranieri had relied on the 30-year history of prime mortgages underwritten according to the tested underwriting standards of Fannie and Freddie, whom he called 'the gatekeepers." He had nothing to do with the exotic offshoots that corrupted the market. Time's designation is especially offensive because, since 2006, Ranieri has been sounding the alarm about the dangers of CDOs and subprime securities.

21. Burton Jablin Bottom Line: An especially trivial example of the "plenty-of-blame-to-go-around" narrative. Jablin is the HGTC programmer who put on shows that glamorized real estate. Somebody else's editorial judgement could use an extreme makeover.

22. Fred Goodwin (Royal Bank of Scotland CEO) Bottom Line: Like a lot of bankers, Goodwin relied on the AAA ratings and debt-financed expansion.

23. Sandy Weill Bottom Line: No way that Weill should be on the list. Citigroup was undone by mortgage securities, not its acquisition binge. I'm sure Sandy Weill has a lot to answer for, but he left Citigroup in 2003, before the toxic CDOs enveloped his company.


24. David Oddsson (Iceland's President)
Bottom Line: Time confuses cause and effect.
A small country expands by relying on foreign capital that dries up in a crisis. Oddsson's policies were misguided and his country is collateral damage in the meltdown, but he didn't cause the crisis to happen.

25. Jimmy Cayne (Bear Sterns CEO) Bottom Line: Cayne should be further up on the list, since Bear Sterns was a leader in private label mortgage securitizations.

Overall, the Time piece exemplifies what did in Wall Street. Too many people relied on rehashed superficial analysis, instead of digging deeper for the unvarnished truth.

ADDENDUM 2:50 pm, February 21, 2009:

A number of comments have asked about the role played by Barney Frank and Fannie Mae. I refer to two earlier pieces I wrote on those subjects:

Wagging the Dog With Fannie Mae: Republicans Explain the Financial Crisis With Racist Mythology

" Everyone in financial services knows when and how things happened. Hank Paulson's report to the President reflected the common knowledge expressed by Treasury, the Fed, the SEC and the CFTC:

'The turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for US. subprime mortgages, beginning in late 2004 and extending into early 2007. '[Italics in original text.]

"We see this in all the numbers. According to a survey by the New York Fed, about 77% of subprime mortgages and 85% of Alt-A mortgages were issued after 2004. What happened in 2004? Subprime mortgage securitizations were able to take off because, as Bloomberg reported, in August 2004 Moody's and Standard and Poor's loosened their standards for rating mortgage backed securities..."

Fox News: Barney Frank Escaped Blame for Fannie Mae's Problems Because He Is Gay

"In October 2005 the House, by a vote of 331-90, passed a bill to establish a new federal regulator created for Fannie, Freddie and the Federal Home Loan Banks. The new regulator was authorized to set capital standards and, if it deemed necessary, require reductions in mortgage portfolios. The White House opposed the proposed legislation and instead supported the pending Senate bill. But the Senate bill never came up for a vote, and the legislation died. In other words, the Republicans failed to negotiate a deal when they were in charge, and now place the blame on others. And once again, Fox News treats their distortions of history as reportable fact.

"One Republican has a different take on events. Rep. Michael Oxley claims his bill was opposed by White House 'ideologues' who wanted to privatize Fannie and Freddie and who opposed a bigger government role."

And finally:

The comments that I found most unsettling were the vitriolic remarks against Time, which, of course my piece encouraged. I am a loyal Time subscriber and a big fan of traditional print media. (I'm also a big fan of The New York Times, notwithstanding my utter contempt for Maureen Dowd.)

By singling out Time, and by framing the piece harshly, I wanted to emphasize that the media narrative - that both political parties share the blame for the crisis - is dangerously wrong. Time, like a lot of news outlets who feel their mission is to play it straight down the line, remains vulnerable to assaults by the right wing noise machine that takes umbrage at the idea that the blame belongs only with the GOP. So they are put in a tough position in a very tough advertising market. But this time the truth is too important to be obscured.