Remembering the Roots of This Crisis – It Wasn’t Obama and Geithner
The outrage over AIG bonuses is dying down, but it is only being replaced by a blame game. According to critics, President Obama went too far in his populist pronouncements against banks, and his administration, led by Treasury Secretary Timothy Geithner, is bungling the rescue effort. Banking executives have piled on, telling The Washington Post that possible restrictions on their pay will sink their companies, and it’s all the government’s fault.
As a reality check, let’s review something that happened recently — a reminder of how we got into this crisis and who bears most of the responsibility for it. On Thursday, the Federal Deposit Insurance Corporation announced it had completed the sale of IndyMac, a once high-flying subprime lender that failed last summer. The total loss to the federal insurance fund? Some $10.7 billion, according to the FDIC.
IndyMac sustained huge losses selling Pay Option ARMs, which are loans that require little or no documentation. They allow the borrower to pay only the interest on the loan for several years, or to choose the amount of the monthly payment. These loans went south quickly, often because borrowers couldn’t afford the houses they bought or their loans reset to much higher payments as the loan balance grew.
Did any of this stop IndyMac from selling these loans, even at the end of its tenure, when it was clearly in trouble? No. Banking analyst Bert Ely told TWI that IndyMac used $10 billion in loans from the Federal Home Loan Bank of San Francisco to continue making Pay Option ARMs — even when investors figured out that the loans might not be such good bets and refused to buy them anymore.
IndyMac wasn’t alone. Other struggling banks also borrowed from the Federal Home Loan Bank system to keep themselves afloat, as TWI reported. The financial newsletter of the Institutional Risk Analyst wrote that Congress ought to be investigating the whole mess:
“„“Most of the failed banks resolved by the FDIC during 2008 have been excessive users of FHLB advances…Remember, it was the availability of the FHLB advances as funding source which allowed the management of IndyMac to grow the bank’s size beyond that supported by its natural deposit base… Like WaMu and Countrywide, but even to a larger degree, IndyMac leveraged government funding via the FHLBs with unsafe and unsound lending practices – and all with the full approval of federal regulators!
Obama and Geithner weren’t in charge when all that deregulation was going on, as I recall. It’s true the rescue effort hasn’t been perfect, and the populist anger against AIG often has gone too far. And it’s convenient for congressional Republicans — the biggest cheerleaders of the free market for financial services — to try to pin some of the resulting damage on the people in charge now.
But the huge cost of winding down IndyMac is an important reminder: Don’t forget how we got here — and who led the way.
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