If you can bear to relive it one more time, here’s the housing bubble and subsequent blow-up, summarized in a single paragraph:
For years, the federal government pushed for higher homeownership rates, especially among low-income borrowers, by (among other things) pressing Fannie and Freddie to loosen underwriting standards for mortgages for which the two GSEs would provide a federal guarantee. Subprime issuance grew. Soon investment banks—who earned fat returns originating and securitizing these new loans–needed to find additional channels to sell them into, and so developed innovative new securities such as CDOs. These securities carried triple-A ratings, thanks to new risk models conjured up by the rating agencies, and were thus attractive to traditional fixed-income buyers who otherwise wouldn’t go anywhere near subprime. These new buyers saw the triple-A ratings and asked no further questions. Issuance of subprime paper grew by some more. More innovative securities followed that were attractive to even more uncurious new buyers. Before long, subprime mortgage lending was all the rage on Wall Street. Just about every big bank in the country was issuing subprime paper like mad and was loaded down with the stuff, which was fine–until the underlying mortgages began to broadly default, at which point the financial system nearly collapsed.
Remember? Oh, you can quibble if you’d like over how big or small a role the government played, or ratings agencies or the lenders played, or whomever played in the whole fiasco. But they all did, and willingly.
I mention this because it seems you can’t turn around lately without seeing Tim Geithner talking to some interviewer or other as he tours the country plugging his new book. As I listen to him, I’m wondering if he lived through the same crisis I did. Here, for example, is a bit of what he had to say to USA Today yesterday:
Q:Should there be more enforcement action now against some of the people who helped bring about this crisis?
A:First of all, of course there should be. How could you argue the opposite? But you have to talk to the prosecutors across the country about this. … They’re gradually trying to build a record of actions.
Wait, what? Prosecute banks and bankers? I understand why financial services industry outsiders have taken to calling for the scalps of fat-cat bankers in the aftermath of the crisis. That’s old-fashioned rabble-rousery; it’s been around as long as the Republic. But Tim Geithner was an insider. He was the ultimate insider: Treasury secretary and, before that, head of the New York Fed. The whole mess happened on his watch. If Geithner really believes now that indictable offenses were occurring during the bubble and the bust, he should have been the first to know. It was his job to ferret out wrongdoing and put a stop to it before things got as bad as they ended up getting. But he didn’t. And now he thinks some of the people he regulated should be thrown in jail because of his own regulatory incompetence?
This is beyond outrageous. There was no shortage of greed and poor judgment on display during the housing bubble. But greed and poor judgment on their own aren’t illegal. Reasonable people can disagree on how aggressive prosecutors should be in pursuing banker indictments. But Tim Geithner ought to be the last person to be calling for prosecutions. He had a front row seat to the crisis. The time is long past for him to be throwing a flag.
What do you think? Let me know!