Thomas Frank on banking regulation

It\’s a predictable whingefest.

Everything is to do with deregulation and the neoliberal bastards. However, let us take one declamatory statement, at near random, and examine how well he knows his stuff.

Unregulated lenders, we now know, pushed millions of Americans into home loans they could not afford. Much-deregulated investment banks packaged those lousy loans up into investments that the nation\’s ratings agencies promptly declared to be of the first quality.

Err, no, they didn\’t. The ratings agencies that is.

What was done was securitisation, something that Fannie and Fredie were also doing, indeed, what they were set up to do. And Sallie Mae (?) has been doing it with student loabns since forever, credit card receivables are treated the same way etc etc etc.

There\’s nothing new or strange about securitisation at all. To be against securitisation is to be against the 30 year fixed rate mortgage for example, and that\’s really not a position I would expect Frank to adopt.

But more than this, the ratings agencies did not declare these securitisations to be \”investments….of the first quality\”. In fact, they did exactly the opposite. They rated different tranches of the securitisations differently: here\’s some stuff which is AAA, yes indeed. But also here\’s some AA, some A and by the way, this stuff over here is pure dreck, equity option type stuff, really not a bond at all.

It simply isn\’t true that all those mortgages wrapped up into bonds were declared AAA.

At which point we could conclude one of two things: Frank has let his rhetoric get away with him which would be the polite thing to say or Frank is clueless on what really happened which is probably closer to reality.

8 thoughts on “Thomas Frank on banking regulation”

  1. I think the problem was more that those equity and BBB tranches were wrapped up into CDOs and rated AAA. Then the BBB and equity tranches of those CDOs were wrapped up again into CDO squareds and cubeds and sold as AAAs to investors.

    Whilst not ALL of the terrible loans were rated AAA, it’s probably a fair point to say that a lot were.

  2. All done under the “watchful eye” of the federal regulators, those gubmint zeros who watch over US folks always.

    Also, “pushed” into taking a loan you cannot afford?. Sent a team round did they? “Youse better sign for this loan or it will be the worse for your wife/kids/granny/little dog.”

    Leftist bollocks.

  3. I suppose it’s fair to say that most of the poor-quality mortgages contributed were put into mortgage pools, at least the highest tranche of which became AAA rated. So Frank’s statement is not exactly wrong.

  4. It was my understanding that US regulations existed to “push” lenders to make loans in circumstances that might be against their better judgement- this in order to help the poor buy their own homes.
    I hence think that the regulations initiated the problem- and unregulated lenders would have done much better.

  5. OK Tim, so maybe they weren’t ALL rated AAA. But I think AWS is right: whatever their initial credit ratings, as the packages were sold on down the line, they were broken up and reconsolidated into new packages (maybe marketed as having “a hint of AAA with the earthy scent of AA+”) and sold on again. What the bankers were doing – with the Clinton and Bush administrations’ connivance – was what P J O’Rourke memorably described as “the room-full of horseshit trick”.

  6. And for those who, like me, haven’t read the book morpork is referring to, here’s the full quote: “We’re going to sell you a room full of horseshit. And with that much horseshit, you just know there’s a pony in there somewhere.”

  7. Dear god Tim, this is scraping the bottom of the pedantry barrel even by your own standards. Man writes a small summary of the financial crisis for a non-expert audience that omits the fine detail and you infer from the omission of this fine detail that he’s an idiot.

    Way to defend your rightwing politcal worldview.

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