âFailed moral compass of bankers was primarily responsible for crisis": Goldman Sachs

ByLoSellHi · Oct 21, 2009

But this is coming from a firm that received 50 billion in direct (through a variety of programs, not just tarp) taxpayer dollars, and that was likely to fail at the time, sans U.S. taxpayer help, according to Andrew Ross Sorkin and others with the best sources on the meltdown.

The real gem is the moral preaching about compensation from Griffiths of Goldman Sachs:

âWe have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,â Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion at St. Paulâs Cathedral in London. The panelâs discussion topic was, âWhat is the place of morality in the marketplace?â

http://www.bloomberg.com/apps/news?pid=20601087&sid=amGn6lOXMlNQ

Goldman Sachsâs Griffiths Says Inequality Helps All (Update1)
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By Caroline Binham

Oct. 21 (Bloomberg) -- A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy.

âWe have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,â Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion at St. Paulâs Cathedral in London. The panelâs discussion topic was, âWhat is the place of morality in the marketplace?â

Goldman Sachs Group Inc., based in New York, set aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46 percent from a year earlier and enough to pay each worker $527,192 for the period. The amount set aside this year is just shy of the all-time high $16.9 billion allocated in the first three quarters of 2007. Goldman Sachs spokesman Michael DuVally in New York declined to comment.

Banks in the U.K. and U.S. have been pressured by lawmakers to contain compensation after bailouts of financial firms by national governments. Goldman Sachs repaid $10 billion plus dividends to the U.S. government this year, and resumed allocating billions of dollars for year-end bonuses after slashing compensation last year when the firm reported its first quarterly loss.

Griffiths, 67, called on bankers to boost their charitable giving to help improve the financial industryâs reputation following a worldwide crisis.

âMuch Is Expectedâ

âTo whom much is given much is expected,â he said. âThere is a sense that if you make money you are expected to give.â

Griffiths said that banks should hire and promote people based on criteria beyond how much money they could or did make.

âIt was the failed moral compass of bankers which was primarily responsible for why we had this crisis,â he said. âThe question is: what can we do in the culture of institutions to make them behave in a more socially responsible way?â

Financial Services Authority Chairman Adair Turner, speaking at the same event, repeated his call for a global tax on financial transactions, a so-called Tobin Tax. He said in August a tax could redistribute bank profits to the worldâs poor and to causes like fighting climate change.

âThe role of regulation is to bring a concordance between private actions and beneficial results,â Turner, 54, said yesterday. Central bankers, lawmakers and regulators bear the greatest blame for the seeds of the financial crisis, not traders or their senior executives, he said.

Tobin Tax

James Tobin proposed a tax in 1971 on currency trading to deter speculation in the wake of the collapse of the Bretton Woods system of pegging currencies. Tobin, who died in 2002, won the 1981 Nobel Prize for his work on financial markets.

Turner told U.K. banks last month that they should place âsocial usefulnessâ above profit. Prime Minister Gordon Brown and the leader of the Anglican Church, Archbishop of Canterbury Rowan Williams, have previously warned against banks returning to âbusiness as usualâ amid concerns that momentum for policy changes in the wake of the financial crisis will subside.

Turner and Griffiths spoke at Londonâs 300-year-old landmark church where Winston Churchillâs funeral was held. The event was organized by the St Paulâs Institute, a group that âseeks to recapture the cathedralâs ancient role as a center of education or public debate.â

To contact the reporter on this story: Caroline Binham in London at cbinham@bloomberg.net
Last Updated: October 21, 2009 11:20 EDT

Scataphagos · Oct 21, 2009

What about the "failed moral compass" of the Government?

1. Mandating banks make loans to obviously non-qualified borrowers.

2. Mandating Freddie and Fannie to buy those crappy loans from banks... all with taxpayer backstop...

truehawk · Oct 21, 2009

Quote from Scataphagos:

What about the "failed moral compass" of the Government?

1. Mandating banks make loans to obviously non-qualified borrowers.

2. Mandating Freddie and Fannie to buy those crappy loans from banks... all with taxpayer backstop...
More...

Confused again Scat?

The CRA required regulated banks to loan to the working poor, but they had had a pretty low default rate until the meltdown.
The meltdown was caused by ballon, no doc liar loans and option arms going belly up and the Fs never bought any of the balloon,, no doc liar loans, or Option Arms with reset, or any of the other toxic loan products sliced and diced by the private banks into CDOs.

In fact the Bush administration interfered with states who tried to regulate high default risk loans such as balloon, no-doc loans.

McClatchy Washington Bureau
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Posted on Sun, Oct. 12, 2008
Private sector loans, not Fannie or Freddie, triggered crisis
David Goldstein and Kevin G. Hall | McClatchy Newspapers

last updated: October 27, 2008 03:12:24 PM

WASHINGTON â As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks â not Fannie and Freddie â dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.

About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.

Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.

Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.

Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, "it led to tremendous pressure on Fannie Mae and Freddie Mac â who in turn pressured banks and other lenders â to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."

Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems.

"Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

McClatchy Newspapers 2008
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cleveland45 · Oct 21, 2009

"Failed moral compass" coming from Goldman Sachs.

Charitable giving will make it all better.

Hilarious.

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âFailed moral compass of bankers was primarily responsible for crisis": Goldman Sachs

ByLoSellHi

Scataphagos

truehawk

cleveland45

âFailed moral compass of bankers was primarily responsible for crisis": Goldman Sachs