“No Mr. President, Summers Did Not Resolve the Financial Crisis”

In his Interview with Jon Stewart, President Obama complimented Larry Summers, “Heck of a job, Larry.” As I said several times on this blog, Mr. William Black has been one of the best sources of information for me in the last several years. He weighs in on the President’s vote of confidence in Summers – by essentially ripping apart Summers’ record. (Via Huffington Post)

Summers had financial red ink on his hands at the time he was appointed. He was Rubin’s chief minion in the successful effort to defeat effective financial regulation and supervision. (Yes, the effort was bipartisan and the Republican leadership shares in the guilt.) Summers was not simply wrong, but also arrogant and brutal, in blocking effective regulation at the SEC and the Commodity Futures Trading Commission. Summers was made rich by Wall Street in one of those sordid consulting arrangements designed to buy influence and reward past and future favors.

President Obama’s appointment of Summers as his chief economic advisor made the administration’s overall response to the crisis predictable. (Robert Kuttner gives a detailed explanation of the policies that Rubin’s protégés championed in his new book, A Presidency in Peril.) The response would follow the disastrous Japanese model that has harmed their economy and damaged their integrity. The dominant characteristics can be summarized quickly: (1) the government would act for the benefit of the largest financial firms and their CEOs, even when they directed massive frauds, by (2) engineering a cover up of the banks’ losses and the CEO’s misconduct; (3) the administration would use the fictional reports generated to conduct the cover up to declare victory (due to their brilliance); and (4) the same strategy would impair the recovery. (For more on the cover up, see here and here.)

The strategy was also an assault on integrity, the rule of law, and the core precepts of the Obama campaign for president. This is why we warned from the beginning that the cover up could enrage the nation and make him a one-term president.

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Losses on homes are not driven only by employment and housing values. Mortgage fraud causes dramatically greater losses. How much mortgage fraud did the administration initially estimate? That’s almost a trick question, for the administration rarely uses the “F” word (fraud) and gave no evidence at the time of its initial estimates that they took into account fraud losses. Since the time of the administration’s initial loss estimates it has become indisputable that fraud was endemic in liar’s loans and that liar’s loans were not simply enormous, but also far more common than was originally reported. We have discovered since the administration’s initial loss estimates that it was common for the SDIs to lie about the liar’s loans they originated, sold, and purchased. Fannie, Freddie, Lehman and many others falsely called their liar’s loans “prime.”

What else could affect losses on liar’s loans and CDOs backed by liar’s loans? The failure of the secondary market meant that sales of CDOs and packages of liar’s loans had to be individually arranged. Has the secondary market in nonprime mortgages been restored since the administration’s initial cost estimates? No. That is important because the administration initially claimed that the secondary market’s collapse was a temporary liquidity problem. The administration anticipated that the secondary market would soon reemerge. It died more than three years ago. With any luck it will never be resurrected. Once more, the changes since the time of the initial loss estimate should have led to greater losses than the administration’s initial estimate.

This leaves us with two analytical puzzles. First, since the administration’s anti-regulators have spent nearly two years carefully not looking at the liar’s loans and determining their true value and the true incidence of fraud, how is the administration estimating losses without the facts necessary to make estimates? Second, ignoring the first problem for the moment, what miracle made virtually all the losses disappear — at virtually no cost to the public — even though every aspect of the administration’s initial loss estimates proved too optimistic? Logically, the losses should be far greater. For the administration’s claim to have any merit they must have discovered the ultimate “silver bullet” that slays $2 trillion in losses. So what is it — and how did it save $2 trillion? It certainly wasn’t their brilliant negotiation of the TARP terms. Any commercial lender that provided such an unlimited guarantee would have cut a far better deal.

There was no silver bullet. The administration made the losses disappear the old-fashioned way — with fictional accounting. I have already explained how the administration allowed the Chamber of Commerce, American Bankers Association, and the Fed to enlist the Congress to extort FASB to pervert the accounting rules so that most of the SDIs’ losses disappeared. The Fed also took over a trillion dollars in toxic, largely fraudulent collateral — and carefully avoided conducting due diligence to discover either the value or the fraud incidence of the collateral. In essence, the Fed took the toxic stuff off the balance sheets (of banks).

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