There's a little truth in each excuse, but none is completely honest.
Big lie No. 1: No one could have known
Consider this scenario: You work at the top of a key bank on Wall Street. You hire the smartest guys from the best schools. You get paid big bucks to know your business better than anyone else. And warning signs are everywhere. When it goes bad, can you really say you didn't know?
Yet time and again, we've heard something similar to this from top bankers.
With the crisis looming, the bank had placed big bets against, or shorted, the mortgage-backed securities it was selling to customers, a maneuver Angelides says is akin to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
relaxed lending standards and a speculative housing market bubble are dangerous.
In September 2004, the FBI publicly warned that a potential epidemic of rampant mortgage fraud could cause "the next S&L crisis," referring to the huge savings-and-loan meltdown of the 1980s. In early 2005, The Wall Street Journal and The New York Times began running articles warning that relaxed lending standards and a speculative housing market bubble were dangerous.
http://articles.moneycentral.msn.com/Investing/CompanyFocus/5-lies-the-big-banks-keep-telling-us.aspx
Big lie No. 2: It's someone else's fault
Wall Street is quick to point the finger elsewhere but reluctant to admit much fault.
Christopher Whalen, the managing director of bank watchdog group Institutional Risk Analytics, finds attempts by Wall Street bankers to shift the blame to the ratings agencies particularly galling. That's because bankers gamed the system by selecting subprime-mortgage-backed bonds to get the highest ratings possible on debt instruments made from them. "They would say, 'Hey, if we do it this way, what rating will you give me?'" Whalen says.
Certainly, there's a lot of blame to go around in this mess, starting with those who were buying more home than they could afford and the loan officers who egged them on. Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) took too many risks, and some Securities and Exchange Commission staffers were reportedly surfing for porn when they should have been looking for fraud.
But no one forced Wall Street to turn bad loans into fancy investment vehicles and sell them around the world, or leverage themselves to ridiculous levels in the process. Says Whalen: "Of course it was the banks' fault."
Big lie No. 3: Our sophisticated customers should have known better
It's true that that when high-end customers asked a bank for a specific kind of mortgage-backed debt instrument to bet on, the bank was providing a legitimate service by producing it -- even if the bank didn't think it was a good bet.
It's another thing if the bank doesn't reveal what went into the design of the debt instrument. That's what the SEC accuses Goldman Sachs of doing.
The overall question here is whether some of the many mortgage-backed securities created by Wall Street were so complex and confusing that no one could have been expected to figure out what was in them or what they were worth. "It is unfair to say these people should have known because the dealers were trafficking in securities that were so opaque and so deceptive that no one could know," Whalen says.
Fabrice Toure, a Goldman trader at the center of the SEC case, in a now-public e-mail described one index created to help value mortgage-backed securities was "like Frankenstein" and "the type of thing which you invent telling yourself: 'Well, what if we created a "thing," which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?'"
With that sort of product, can you really say that customers "should have known better"? (And in the end, real people's homes were involved. Read "He got rich -- and they lost their homes" for more on that.)
http://articles.moneycentral.msn.com/Investing/CompanyFocus/5-lies-the-big-banks-keep-telling-us.aspx?page=2
