Notes
Notes Chapter 1. Capitalism and the Crisis: Bankers, Bonuses, Ideology, and Ignorance 1. Richard Gugliada, who was in charge of S&P’s CDO ratings until 2005, told a reporter that ‘‘the mortgage market had never, ever, had any problems, and nobody thought it ever would’’ (quoted in Jones 2008). First Pacific Advisors was one skeptic, and sold its investment of $1.85 billion in mortgagebacked bonds in September 2005. Later, discussing a conference call with Fitch in March 2007, First Pacific CEO Robert L. Rodriguez (2007) described the Fitch representative as ‘‘highly confident regarding their models and their ratings ,’’ even though the representative admitted that the model ‘‘would start to break down’’ if ‘‘home price appreciation was flat for an extended period of time’’ or declined. Not to leave out Moody’s, it often ‘‘piggybacked’’ off of S&P’s ratings, and vice versa (Smith 2008a). 2. Chapter 3, however, suggests that the bubble actually began in the late 1990s, after capital gains on the rising value of a house were exempted from taxation. This would explain why the flood of credit released by central banks in 2001 went into the housing market (and into mortgage- rather than other asset-backed securities): a boom in the housing market was already under way. As suggested in the text, however, another contributory factor may have been the even more affordable mortgages that were (at first) made possible by the GSEs, which could borrow money even more cheaply than the banks that took advantage of the extraordinarily low interest rates in the first half of the decade. 3. A home-equity loan is cash lent to the mortgagor at interest. The loan amount and interest are added to the mortgage. A home equity line of credit (HELOC) is like a credit card where the purchases and interest are added to the mortgage. Cash-out refinancings allowed the borrower to take out ‘‘a larger mortgage, pa[y] off the previous one, and pocke[t] the difference. With mortgage rates low and falling, homeowners could increase the size of a loan without increasing the monthly payment’’ (Zandi 2009, 59). 4. The IMF (2008, 62) also notes that ‘‘the risk assumptions for low- and no-documentation housing loans were too low,’’ and that ‘‘the likelihood of early delinquencies going into foreclosure seems to have been underestimated.’’ 298 Notes to Pages 13–15 The primary reason for requesting a low- or no-documentation loan seems to have changed during the boom: prior to the boom the reason was self-employment or cash-economy employment; soon the reason became house flipping— something else that would be missed by pre-boom models. A house flipper would be more likely to allow foreclosure if prices went down, since he or she had never intended to live in the house. 5. Some experts have been credited with prescience about the bubble. The most-often cited seer has been Robert Shiller, the author of Irrational Exuberance (2000). In fact, however, Shiller said in 2003 that ‘‘he’d only predict a nationwide housing slump if a worldwide economic slump ‘kills’ consumer confidence. Only some ‘high-flying’ cities like San Francisco, Denver and Boston are at risk of price depreciations, and the chances of declines in those regions are less than a third, he said’’ (‘‘Fannie Mae’s Raines Sees No Housing Bubble, Low Interest Rates.’’ Bloomberg.com, 6 June 2003). Although Shiller predicted that housing prices would rise ‘‘everywhere,’’ he denied that this would result in a bubble. ‘‘‘It would be quite daring to predict’ a nationwide housing bubble, he said.’’ This was the same year in which Alan Greenspan, then the Chairman of the Fed, ‘‘said that any comparison between the housing market and a stock market bubble was ‘rather a large stretch’’’ (Bartlett 2009). In July 2004, an economist at Northern Trust predicted a housing-related financial crisis, noting that ‘‘60 percent of banks’ earning assets were mortgagerelated —twice as much as was the case in 1986.’’ Simultaneously, however, a Bear Stearns analyst noted solid fundamentals underlying the housing boom: ‘‘declining unemployment, low interest rates, a decline in the inventory of unsold homes and the 1997 cut in capital gains taxes on owner-occupied homes’’ (Bartlett 2009). Only in 2005, the year that housing sales began to fall, did Shiller begin sounding alarms about a nationwide housing bubble and the possibility that its bursting could lead to a recession, although he did not see the connection between housing and the banks...
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