Thursday, November 05, 2009

Charlie Gasparino's New Book "The Sellout"

With his new book, "The Sellout," released on Tuesday and already available on Amazon for about $15, Charlie Gasparino appeared on CNBC nearly non-stop that day.

Harper-Collins' publicity people arranged for a same-day book review in the Wall Street Journal, as well. The review is extremely positive and provides some important details which Gasparino ceaselessly provided in his on-air interviews that day.

Specifically, Gasparino repeated a phrase he coined that went something like this,

'If Wall Street became greedy, as many have charged, it was in response to the federal government's actions in the mortgage markets.'

From many viewings of Gasparino's bullying rants a few years ago in discussions with senior WSJ editor Allan Murray, I have come to have a latent dislike for the man. But I admire his honest and full exposition of how the mortgage-backed financial meltdown truly came to exist. And that is due to explicit, bi-partisan federal government manipulation and coercion of the financial system to make questionable mortgage loans to lower-income borrowers, then securitize those loans as if they were high-quality debt instruments.

Credit goes to Gasparino for mentioning clearly and loudly, in nearly every interview, the name of Massachusetts Democratic Representative and current chair of the House Banking Committee, Barney Frank, as a prime architect of the financial mess which exploded last year.

The Journal review highlights Clinton-era HUD secretaries Henry Cisneros, who resigned under a cloud of bribery charges, and current NY AG Andrew Cuomo, as having unilaterally pushed down the income thresholds for 'low income' borrowers and pushed up the percentages of GSE-sponsored bonds composed of loans to those borrowers to 50% of all their mortgage-backed bond issuances.

It's pretty rich to consider that Cuomo helped kick off this orgy of bad mortgage lending, then has the gall to go after BofA over the Merrill purchase, which was brought about by....bad mortgages backing bonds.

Too bad Cuomo can't, or won't, prosecute himself for being part of this mess. He certainly deserves it.

In a rather arcane note in the Journal review, it mentions Gasparino's very detailed explanation of how the Fed's revised capital standards incented banks to hold more mortgage-backed securities, relative to Treasuries, since the former were given higher weight in the calculation of regulatory capital. To illustrate the impact, the review relates that Lehman's mortgage-backed holdings tripled in only three years, while its Treasury holdings remained flat.

Clearly, the US federal government designed the systemic incentives and underwriting activities which fed the so-called "greedy" Wall Street financial machine. On this point, Gasparino is quite clear, and does a real service by reminding or, in many case, informing people for the first time just how much of the responsibility for what occurred last spring and fall rests with various federal officials in administrations or the Fed stretching back as long ago as 1995.

Otherwise, you'd be prone to believe the current administration's demonizing of investment and commercial banks as the sole culprits in the recent and continuing financial services debacle.

It's a timely book and, by all the evidence available, a worthwhile read. I'm probably going to buy a copy on Amazon this week.


dex said...

Your post suggests that GSEs and banks were not responsible for peculiar rules that led to perverse incentives. Alas, the GSEs and banks lobbied for much (perhaps most) of these rules, so the GSEs and banks are as responsible as the politicans and regulators.

C Neul said...

I disagree regarding the banks. I never wrote that GSEs were or are innocent.

Simply that, on one dimension, they were encouraged and directed by Congress to do some of what they did.