Monday, October 20, 2008

Keeping good books

Via The Devil's Archivist comes this perspective on our economic woes:

Records-level view of the financial crisis (Part 1), and
Records-level view of the financial crisis (Part 2)

In working as an information and document auditor I was in position to witness the convergence of the “buy-now-pay-later” and “quantity-over-quality” mentalities indicative of the mortgage industry boom and bust. I’ve mentioned this before, but you can tell a lot about people’s motivations through the records they create. Though most of the records, files, and groupings were completely legitimate and probably have happy endings awaiting somewhere, one with my job couldn’t help but notice a great deal of the haste, sloppiness, and underhandedness that characterizes the mess in general.

This is where the sub-prime phenomena started to become a problem, simply because if broker’s chose to, they could fudge the documentation process for the scads of people willing to walk into situations they couldn’t afford. No amount of oversight was able to detect the subtle ways that companies met recordkeeping requirements without really thinking of larger consequences beyond the law. And at all levels - from broker to funder, to wholesaler, to other wholesaler, to final buyer - there was this notion that you could pass the buck and that someone else would be responsible for collecting the final bill.

Having worked in accounting (sort of), I know that people hate all those pesky rules and record-keeping requirements that slow things down. And I also know that when you make it easy to do things, a lot of things get done that ought not to have. It's really hard to work out a scheme where only the good activities are facilitated.


James Hanley said...

While these things did in fact happen, the meaning and blame, as implied in the cited article, are wrong. Beginning in the '90s, financial institutions were pressured to make riskier loans to unqualified homebuyers. The alternative was to be accused of redlining--that is, refusing to loan based purely on racial grounds, which could have led to prosecution of the firms.

But the pressure to make them loan to uncredit-worthy borrowers didn't change the essential uncreditworthyness of those borrowers, hence the need to fudge and obfuscate to make them look creditworthy.

And, ironically, after being accused of redlining, refusing to loan to people who couldn't afford to repay loans, these firms are now being accused of unscrupulously loaning money to people who can't afford to repay the loans.

Brad said...

My intent in discussing the sloppiness I observed in mortgage documentation and recordkeeping was not to offer it as a main cause, but only to show how these things were emblematic of larger problems. And it's much more complicated than "a bunch of minorities didn't pay back their loans that they didn't deserve in the first place," which appears to be the underlying mentality behind your post. I realize that's the official story that Wall Street and their cohorts in Washington want people to believe, but it's a quite a reach in a lot of ways. Uncreditworthyness and subprime defaults did play a role, but certainly not the most significant one. The vast majority of foreclosures in the recent crisis were made by entities that were not subject to the Community Reinvestment Act, which has had a comendable track record since its inception in the late 1970s. In other words, blaming some nefarious liberal policy for forcing businesses to conduct business against their best interests just doesn't hold up. I don't claim to be any kind of a financial or economic expert, but it would be nice if people would look at things from a practical standpoint instead of finding some political bogeyman to pin everything on.