Why We Should 'Point Fingers' and 'Look Backwards'

January 13, 2009, 9:15 a.m.

Breaking news (1030 CT): New FCC Chair to be Julius Genachowski (a choice I would generally support). Stephen Labaton, "Obama to Select Genachowski to Lead F.C.C.," New York Times, January 13, 2009; Ira Teinowitz, "Genachowski at FCC: Advocacy Groups Applaud," TV Week, January 13, 2009. And for an earlier background piece, see Jodi Kantor, "Julius Genachowski," New York Times, November 13, 2008.

How Could We Have Seen Economic Disaster Coming?
Let Me Count the Ways
(Brought to you by FromDC2Iowa.blogspot.com*)
Curious as to how we got into this financial mess -- or, otherwise put, just how many signs there were that it was coming, signs that were ignored by our public officials and the MBA-educated CEOs who have left their crime scenes with millions in tow?

The University of Iowa's Jason Cox has compiled 87 pages of names, dates, places and details of our downward spiral. Jason Cox, "Credit Crisis Timeline," The University of Iowa Center for International Finance and Development (last updated December 3, 2008). It was brought to my attention by an editorial in the Iowa City Press-Citizen, and is well worth perusal by anyone seriously interested in "credit crisis" issues.

There is much to admire and be thankful for in our soon-to-be President Obama, but a willingness to prosecute -- even to investigate, and document -- the serious, even unconstitutional, wrongdoing of others is not among his virtues.

I haven't been enthusiastic about the prospect of bringing impeachment proceedings against President Bush -- though I think they would be justified. However, I do think at a minimum we need an itemization, and documentation, by some official body (presumably a congressional committee) of the Bush administration's mistakes, from the unwise to the unconstitutional, if we are to avoid leaving the impression that the American people and their congress find the Bushies' decisions and behavior over the past 8 years to have been either desirable or acceptable.

President-elect Obama seems to be of a different view, whether the offenses were those in the Bush administration or the financial community.

Last Sunday (January 11) he had this to say with regard to the former:

STEPHANOPOULOS: The most popular question on your own website is related to this. On change.gov it comes from Bob Fertik of New York City and he asks, "Will you appoint a special prosecutor ideally Patrick Fitzgerald to independently investigate the greatest crimes of the Bush administration, including torture and warrantless wiretapping."

OBAMA: We're still evaluating how we're going to approach the whole issue of interrogations, detentions, and so forth. And obviously we're going to be looking at past practices and I don't believe that anybody is above the law. On the other hand I also have a belief that we need to look forward as opposed to looking backwards. . . .

"This Week With George Stephanopoulos Transcript: Barack Obama," ABC News, January 11, 2009.

Three days earlier, in his George Mason University stimulus package address, he took a similar approach to financial community abuses with his reluctance to "point fingers": "[E]very day we wait or point fingers or drag our feet, more Americans will lose their jobs, more families will lose their savings, more dreams will be deferred and denied, and our nation will sink deeper into a crisis that at some point we may not be able to reverse." CQ Transcripts Wire, "Obama Delivers Remarks On Economy," Washington Post, January 8, 2009.

As Paul Krugman has observed:

I’m sorry, but if we don’t have an inquest into what happened during the Bush years — and nearly everyone has taken Mr. Obama’s remarks to mean that we won’t — this means that those who hold power are indeed above the law because they don’t face any consequences if they abuse their power. Let’s be clear what we’re talking about here. It’s not just torture and illegal wiretapping . . ..

Paul Krugman, "Forgive and Forget?" New York Times, January 15, 2009.

Now flash back with me to 2004, if you will.

As I often point out to my law students and others, there are really two legal systems (in addition to the two represented by one for the rich and one for the poor). There is the one that relates to those law violations of which most Americans are aware: you can't steal stuff from other people's houses, drive faster than the speed limit, and so forth. But in fact some of the most severe penalties are handed out for violations of the second legal system, the rules we impose regarding the operation of the first legal system: not showing up for a court date, lying to officials or on the witness stand (perjury).

Remember Martha Stewart? Her "crime" was not so much that she sold stock on the basis of "insider" information as that she lied about having done so. She said that the stock was sold by her broker at $60 a share because of a prior stop-loss order that it be sold if it dropped to that price.

So I am not about to come to Ms. Stewart's defense.

Nonetheless, I think the financial dimensions of what she did, and the penalty she received, can fairly be compared with those of bankers and Wall Street traders during the last couple of years.

[S]he and her former stockbroker, Mr. Bacanovic, were convicted of conspiring to hide the reasons behind her ImClone trade, which netted her about $227,000 [the difference between what she paid for the stock and what she sold it for]. . . . "To believe that I would sell, to avoid a loss of less than $45,000 [how much less she would have received had she sold it later], and thus jeopardize my life, my career and the well-being of hundreds of others, my cherished colleagues and partners, is very, very wrong" [she said at one point].

Constance L. Hays, "Martha Stewart's Sentence: The Overview," New York Times, July 24, 2004.

So what was her punishment for this $45,000 saving -- five months in prison (plus an additional five months of home confinement)!

Can you imagine her getting off scot free if she'd said to the judge, following Obama's logic, "Your honor, we need to look forward as opposed to looking backwards"?

Why is it appropriate for the law to be "looking backwards" at Stewart's $45,000 "crime" (presumably impacting only indirectly, and minimally, other investors), but that it should only "look forward" when it comes to a near-$10 trillion theft of taxpayers' money (as authorized by Congress, Bush, Paulson, Bernanke, and soon to be recommended by Obama)?

A President Obama need not be personally involved in the potential prosecution of former Bush administration officials or bankers who have violated the constitution or the law; that's what the Department of Justice and his new Attorney General are for. But for the former law professor that he is to say that "I don't believe that anybody is above the law" while simultaneously refusing to engage in "looking backward" at those who have behaved as if they were, is at best a little disingenuous.

Can officials and CEOs fairly claim they didn't see this tsunami of economic disaster coming? I don't think so.

Here then are but the first three pages -- 2003 through June 2007 -- of Jason Cox's 87-page itemization of all the events and reasons why their pleas of ignorance ring hollow.

· June 2003:
o Greenspan lowers Fed’s key rate to 1%, the lowest in 45 years
http://www.bloomberg.com/apps/news?pid=20601087&sid=aclMlgBb3taQ&refer=home

· 2006:
o Lenders make $640 billion in subprime loans
o 20% of all mortgage lending was subprime
http://money.cnn.com/2007/04/02/news/companies/new_century_bankruptcy/

· May 5, 2006:
o In possibly the first casualty of the looming subprime crisis, Kirkland, Washington based Merit Financial Inc. files for bankruptcy and closes its doors, firing all but 80 of its 410 employees, kept to wind down the business.
o Chief financial officer, Ryan Kidd, said that Merit’s marketplace had declined about 40% and sales were not bringing in enough revenue to support the overhead of running the company.
http://seattlepi.nwsource.com/business/269154_merit05.html

· August 26, 2006:
o Defaults on subprime mortgages start to occur much earlier in the mortgage process.
o Investors and analysts believe this trend could be the result of lax underwriting quality or a sign of a weakening mortgage credit market.
http://www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/Subprime_Mortgage_Lenders_Seeing_Early_Payment_Defaults.pdf

· January 3, 2007:
o Ownit Mortgage Solutions Inc. files for Chapter 11.
o Owed Merrill Lynch around $93 million when filing.
http://www.californiabankruptcylawyerblog.com/2007/01/californiabased_ownit_mortgage.html

· February 5, 2007:
o Mortgage Lenders Network USA Inc. files for Chapter 11.
o 15th largest subprime lender with $3.3 billion in loans funded in third quarter 2006.
http://www.boston.com/news/local/connecticut/articles/2007/02/05/mortgage_lenders_network_files_for_ch_11_bankruptcy_protection/

· February 7, 2007:
o HSBC, a large London based bank, issues a warning that an earlier statement about its Mortgage Services operations will be much worse than current market estimates.
o HSBS blames this drop on the increased delinquencies of US subprime mortgages and the inability to refinance because of falling equity prices.
o The release said that the aggregate loan impairment charges and credit risk provisions could be 20% higher than the earlier statement.
http://www.hsbc.com/1/2/newsroom/news/news-archive-2007/hsbc-trading-update-us-mortgage-services

· February 10, 2007:
o The Group of Seven Finance Ministers meet in Essen, Germany to discuss worldwide financial problems.
o One of the main concerns is the lack of regulation of hedge funds. Germany says this could be a source of systematic risk for the financial system where the US believed market discipline is the best way to address the issue.
o Henry Paulson noted that the US residential housing market had been cooling over the last year but appears to have stabilized.
http://www.ft.com/cms/s/0/3db4a4e4-b650-11db-9eea-0000779e2340.html
http://www.ustreas.gov/press/releases/hp255.htm

· February 13, 2007:
o ResMae Mortgage Corp. files for Chapter 11.
o Credit Suisse Group buys $19.1 million in assets in auction.
o ResMae made $7.7 billion in subprime loans in 2006 making it 26th in subprime lending.
http://www.bloomberg.com/apps/news?pid=20601087&sid=arsKNQcbPcxc&refer=home

· March 2007:
o New Century Financial announces it will stop making loans and needs emergency financing to survive.
o Stock price goes from $15 at the beginning of March to $3.21 when announcement is
made.
http://www.nytimes.com/2007/03/11/business/11mortgage.html?pagewanted=3&_r=1

· March 20, 2007:
o People’s Choice Home Loan files for Chapter 11.
http://www.bloomberg.com/apps/news?pid=20601087&sid=atkiRNcdlZ8M&refer=home

· April 3, 2007:
o New Century Financial files for Chapter 11.
o Cuts 54% of its workforce or 3,200 jobs
o Largest subprime lender in US.
o Delisted from the NYSE
o Defaults on $8.4 billion in loan repayments
o New Century made $51.6 billion in subprime loans in 2006 making it 2nd in subprime lending
http://money.cnn.com/2007/04/02/news/companies/new_century_bankruptcy/

· April 12, 2007:
o SouthStar Funding LLC files for Chapter 7.
o Another subprime lender
http://www.reuters.com/article/gc06/idUSN1236927220070412

· June 7, 2007:
o In a letter to investors, Bear Stearns suspends redemption rights for a hedge fund heavily invested in the subprime debt market because of liquidity problems.
o The fund had lost 23% of its value since January 2007 including almost 19% in April alone.
http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070612_748264.htm

· June 22, 2007:
o Bear Stearns agrees to a plan to loan $3.2 billion to one of its hedge funds.
o The lack of liquidity at the hedge fund is blamed on the bad bets that were placed on the US subprime mortgage market.
http://www.ft.com/cms/s/0/d7936764-f1d5-11dc-9b45-0000779fd2ac.html

· June 27, 2007:
o SEC Chairman, Christopher Cox, testifies to Congress that the SEC has opened 12 enforcement investigations into collateralized debt obligation (CDO) practices.
o This was in response to questions from Congress about the transparency of CDOs
http://www.reuters.com/article/bondsNews/idUSWAT00779720070626
http://www1.cchwallstreet.com/ws-portal/content/news/container.jsp?fn=07-02-07

Jason Cox, "Credit Crisis Timeline," The University of Iowa Center for International Finance and Development (last updated December 3, 2008).

Of course, if this history merely moves you to sympathy for those who've made off with your share of the taxpayers' money, you can always "Sponsor An Executive":


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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself.

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