In the parlance of a classic “who done it” in the case of the crash on Wall Street, I’d like to think the federal government was at fault in that it aided and abetted the megabanks and investment firms as they committed the actual robbery.
But even after a Financial Crisis Inquiry Commission and reports from the Wall Street Journal which detail the causes of the quandary, some politicians and commentators still contend the bankers were simply bystanders to the federal government’s meddling.
It’s a falsehood that has been pedaled by Republicans who have a constituency to protect and plenty of free-market fundamentalists who would rather blame the Federal Reserve System than Bank of America or Goldman Sachs.
What is a cause for pause is that the tactics used to spread this falsehood are all too reminiscent of the tactics of misinformation used to justify the invasion of Iraq.
President George W. Bush and his cohorts discovered if they said Iraq, terrorism and Al-Qaeda together enough times, people started to make the connections, no matter how faulty. And it worked! A poll by the Washington Post released in September of 2003, months after the invasion, showed around 70 percent of Americans believed Saddam Hussein was personally responsible for the terrorist attack on Sept. 11, 2001.
I can only assume the lobbyists and bankers on Wall Street have had similar results: If you talk about the crash and say Freddie Mac, Fannie Mae or invoke the name of Congressman Barney Frank (D-Mass.), people start to believe it wasn’t overleveraged and mismanaged investment firms such as Goldman Sachs, which was leveraged 30-to-1, that caused the crisis, but the federal government.
The economist F.A. Hayek often commented on how important accurate information was for the marketplace to function properly. Credit rating agencies provided that much-needed information to Wall Street.
Moody’s, S&P and Fitch were spreading misinformation by stamping AAA onto assets and securities that were totally worthless. Bankers erred in their trust, but they also relied on the less-than-truthful agencies, so they could sell their junk to even bigger fools.
All of the toxic assets that weren’t labeled correctly obfuscated the issues of risk management, but it wasn’t as if the megabanks or investments firms on Wall Street were very concerned about risk anyway. Ever since the ‘innovation’ that led to the unregulated instruments known as derivatives, risk could be shuffled across the financial industry without much consequence.
What could go wrong with a financial instrument that was exempt from all regulatory oversight, counter-party disclosure and reserve requirements for a total of $600 trillion worth of trades and swaps? We saw it in 2008. A.I.G. wrote $3 trillion in derivatives, with no reserves against future claims.
It also didn’t help it wasn’t only traditional banks or investment firms that conducted these trades and swaps. But then, what was a traditional bank? It wasn’t very clear, since the Glass-Steagall Law, which separated traditional banks from investment banks, was torn down during in the late 1990s.
So, with little regulatory oversight, the megabanks and investment firms were left to prey on homeowners and prospective buyers.
A few homeowners were foolish enough to purchase homes they couldn’t afford, but the bankers were all too happy to oblige homeowners who were destined for default. The incentives of the business corrupted the trust that should have existed.
Most of this was legal, but much of it wasn’t.
“Some of the nation’s biggest banks and mortgage companies have defrauded veterans and taxpayers out of hundreds of millions of dollars by disguising illegal fees in veterans’ home refinancing loans,” reported the Washington Post on Oct. 4, 2011, “according to a whistleblower suit unsealed in federal court in Atlanta.”
In another example, “the Justice Department on Wednesday announced the largest residential fair-lending settlement in history,” reported the New York Times on Dec. 21st, 2011, “saying that Bank of America had agreed to pay $335 million to settle allegations that its Countrywide Financial unit discriminated against black and Hispanic borrowers during the housing boom.”
“A department investigation concluded that Countrywide loan officers and brokers charged higher fees and rates to more than 200,000 minority borrowers across the country than to white borrowers who posed the same credit risk,” continued the report. “Countrywide also steered more than 10,000 minority borrowers into costly subprime mortgages, when white borrowers with similar credit profiles received regular loans, it found.”
So, despite the insistence of Newt Gingrich, Congressman Barney Frank didn’t force the megabanks and investment firms to do all of that mischief, and the truth must come out.
Truth must prevail, because, once false accusations become conventional wisdom, they don’t fade quickly. In a poll by the New York Times conducted six years after the falsehoods and the invasion into Iraq and published Feb. 11th, 2009, a third of Americans – 33 percent to be exact – said they believed Saddam Hussein was personally responsible for the terrorist attack on Sept. 11, 2001.