-
-
Email Event
-
-
The credit crunch and financial panic of 2008 triggered a remarkable series of government interventions and bailouts, including huge government investments in financial firms and ballooning of the Federal Reserve balance sheet. What have been the effects of these massive interventions, and what do they imply for the future?
Listen to Audio
play
pause
Download Audio as MP3
What is 2009, with a new administration and Congress, likely to bring? What should be done or not done? At this event, a panel of experts will address these and other questions.
This event is cosponsored by AEI and the Professional Risk Managers' International Association.
|
2:15 p.m.
|
Registration
|
|
|
|
|
|
|
2:30
|
Introduction:
|
Alex J. Pollock, AEI
|
|
|
|
|
|
2:40
|
Panelists:
|
Tim Bitsberger, Bitsberger Consulting
|
|
|
|
Barry L. Ritholtz, Fusion IQ
|
|
|
|
Joshua Rosner, Graham Fisher & Co.
|
|
|
|
Walker Todd, American Institute for Economic Research
|
|
|
|
R. Christopher Whalen, Institutional Risk Analytics
|
|
|
|
|
|
|
Moderator:
|
Alex J. Pollock, AEI
|
|
|
|
|
|
4:30
|
Adjournment
|
|
WASHINGTON, JANUARY 30, 2009--The Washington Post
proclaimed that "the future of the nation's financial system is in
view" and that the nation must get used to big-name institutions
failing and prepare for the financial sector to go through a "wrenching
change." A late 2008 editorial? No, 1991--a fitting reminder that the
first step in understanding today's financial and economic crisis is to
look to the past. Speakers at a January 28 AEI conference examined just how we found ourselves on a precipice of financial doom. Barry Ritholtz, author of The Big Picture, observed that
"for the past fourteen million years, [lending] was based on borrowers'
ability to service the debt." In sharp contrast, he argued, stands the
period from 2002 to 2007, during which time lending suddenly became
"based on a lender's ability to take debt and sell it off to someone to
securitize it." At the same time, Josh Rosner of Graham Fisher &
Co. added, the mortgage industry reduced down payment requirements from
20 percent to zero, weakened underwriting standards, and perverted the
appraisal process. These lending practices quickly inflated the housing bubble and
greatly expanded the number of borrowers who could get a home loan.
Former Freddie Mac executive Tim Bitsberger classified bubble
homeowners into three categories: those who should have never gotten a
mortgage, those who could afford a mortgage but were talked into bad
loans, and those who could afford the mortgage that they agreed to. He
recommended that the government allow the people in the first category
to fail and that all rescue efforts be focused on mortgages in the
second category. Ritholtz affirmed this stance, noting that in the 1990s and early
2000s, 3-4 million homes were sold each year, but that from 2002 to
2007, this number soared to more than 7.5 million homes per year.
During this period, a glut of 6-9 million homes built up, which
Ritholtz estimated were purchased primarily by people from Bitsberger's
weakest echelon of borrowers. He forecast that there will be 2-3
million additional foreclosures in the coming years, on top of the 2-3
million that have already occurred. "Foreclosures are painful but
necessary," Ritholtz said. "I cringe whenever I hear someone from
Congress say that they want to rescue homeowners." Other panelists advocated a painful recovery process for the banking
sector. Chris Whalen of Institutional Risk Analytics said that the top
four banks are responsible for two-thirds to three-quarters of the one
trillion dollars of banking losses. "Community bankers are not happy,"
he explained. "We've been giving the big New York banks passes for
years." Walker Todd, a research fellow at the American Institute for
Economic Research, elaborated: "[The] regulators have allowed banks to
bring us to the brink of systemic risk four times in the past thirty
years. Now they want another chance. . . . No one should be too big to
fail. . . . [It will be] less costly in the long run and we'll have a
healthier banking system if we can bring ourselves to do it. . . . If
you allow these guys to come back again, without putting them out of
their misery, we'll be back here again in ten years." He identified
several options for separating the bad banks from the good: creating a
Resolution Trust Corporation, nationalizing the banks, declaring a bank
holiday, or developing a Home Owners' Loan Corporation. Both Rosner and Ritholtz worried about the government bailing out
the banks with taxpayer money and making them investors in failed
institutions. Rosner suggested that the government buy senior preferred
stock to improve this situation, and Ritholtz advocated nationalizing
the banks so that taxpayers will be guaranteed to get at least some
return on their investment. Ritholtz and Whalen clashed over whether modifications to the
fair-value accounting standard would be necessary to moderate the
effects of future economic upswings and downturns. Whalen called the
accounting rule the "last remnant of bubble-think" and criticized it
for "accelerating the problem" of the housing bust. He encouraged
companies to publish a variety of financial metrics, including the
historic cost of assets and the inter-period movement of prices, to
generate a complete picture of their financial situation (as proposed
by AEI's Alex J. Pollock in The American Spectator on
December 22, 2008). Ritholtz disagreed with Whalen's perspective,
noting that "banks didn't mind marking-to-market every day when the
markets were going up." He said that the accounting standard couldn't
be blamed for the fact that "someone made the decision to buy
hard-to-value, difficult-to-exit paper. . . . They need to pay for
that." In discussing possible future legislation and ballooning Treasury
debt, Bitsberger suggested that all government intervention be judged
on its ability to smooth out the progression to long-term market
equilibrium. Additionally, successful legislation should have clear
goals, means for monitoring progress, exit strategies, and a feasible
implementation plan. Above all, he noted that "the unintended
consequences of borrowing are what led to this mess. . . . Let's not
make the same mistake again when devising a solution." --KAREN DUBAS For video, audio, and event information, visit www.aei.org/event1866. For media inquiries, contact Veronique Rodman at 202.862.4870 or vrodman@aei.org. ###
Tim Bitsberger recently formed Bitsberger Consulting. From January 2006 until December 2008, he was the senior vice president and treasurer of funding and investor relations at Freddie Mac. He was responsible for the company's debt and mortgage funding programs, as well as debt and mortgage securities investor relations. Prior to joining Freddie, Mr. Bitsberger was appointed by the president to serve as the assistant secretary for financial markets at the U.S. Department of the Treasury. Under his leadership, increased transparency led to improvements in debt management, which resulted in enhanced relationships with all market participants. Mr. Bitsberger previously served as deputy assistant secretary for federal finance at the Treasury for three years, providing policy recommendations on federal financial market issues and assessing the impact of those policies on industries and markets. Prior to the Treasury appointments, Mr. Bitsberger worked on Wall Street for more than fifteen years, most recently as a senior vice president of investments at Salomon Smith Barney.
Alex J. Pollock has been a resident fellow at AEI since 2004, focusing on financial policy issues, including government-sponsored enterprises, retirement finance, housing finance, corporate governance, accounting standards, and issues raised by the Sarbanes-Oxley Act. Previously, he spent thirty-five years in banking, including twelve years as president and chief executive officer of the Federal Home Loan Bank of Chicago, while also writing numerous articles on financial systems and management. He is a director of Allied Capital Corporation, the Chicago Mercantile Exchange, the Great Lakes Higher Education Corporation, the International Union for Housing Finance, and the chairman of the board of the Great Books Foundation.
Barry L. Ritholtz is the chief executive officer and director of equity research at Fusion IQ, an online quantitative research firm. He is also the author of “The Big Picture,” a leading financial blog that covers everything from investing and trading to macroeconomics and has been praised by numerous publications, including the New York Times, the Wall Street Journal, and Business Week. A frequent commentator on CNBC, Mr. Ritholtz is a regular guest on Kudlow & Company, Power Lunch, and Fast Money, and he has guest-hosted Squawk Box on numerous occasions. He also appears regularly on Bloomberg, Fox, and PBS. His market perspectives are quoted regularly in the Wall Street Journal, Barron's, Forbes, Fortunes, and other print media. He writes the "Apprenticed Investor" column at TheStreet.com. Mr. Ritholtz is the author of the forthcoming book, Bailout Nation (McGraw Hill, 2009). He has been on the board of directors of Burst.com, a publicly traded software firm, for the past four years, and he teaches a course on the economy of America for New York University's School of Continuing and Professional Studies. Previously, Mr. Ritholtz was the chief market strategist for Maxim Group, an investment bank where he managed over 5 billion dollars in clients' assets and wrote weekly market commentary for the firm's brokers and institutional clientele.
Joshua Rosner is a managing director at the independent research consulting firm Graham Fisher & Co., where he advises regulators and institutional investors on housing and mortgage finance issues. Previously, he was the managing director of financial services research for Medley Global Advisors, the premier provider of policy information on monetary, fiscal, regulatory, and political developments to many of the world’s leading banks, mutual funds, hedge funds, and other institutional investors. Mr. Rosner was among the first analysts to identify operational and accounting problems in the government-sponsored enterprises (GSEs), the peak in the housing market, the likelihood of contagion in credit markets, and the weaknesses in the credit rating agencies' collateralized debt obligation (CDO) assumptions. His work on GSEs, credit rating agencies, and mortgage markets has resulted in invitations to present both privately and publicly before numerous organizations, businesses, policymakers, legislators, and regulators. Mr. Rosner has coauthored papers on the risks of CDOs to the mortgage finance market and the risk of misapplication of ratings in the structured finance market. Prior to joining Medley, Mr. Rosner was an executive vice president at CIBC World Markets and a senior vice president at its predecessor firm, Oppenheimer and Company.
Walker F. Todd is a research fellow and conference organizer for the American Institute for Economic Research (AIER), where he has worked in various capacities since 1995. As an instructor in the AIER summer fellowship program, he teaches a course on the history and origins of competing theories of property rights. Mr. Todd is an attorney admitted to practice in Ohio and New York, an economic consultant with twenty years' experience at the Federal Reserve Banks of New York and Cleveland, and has been an instructor in the special studies program at Chautauqua Institution in Chautauqua, New York, since 1997. A director and program organizer for the Committee for Monetary Research and Education, Mr. Todd was an adjunct faculty member of the Cleveland-Marshall College of Law of Cleveland State University for thirteen years. He has authored numerous publications on banking, central banking, and monetary and property rights topics, including those related to international debt, the International Monetary Fund, and the regulation of the banking system and financial markets.
R. Christopher Whalen is the cofounder and managing director of Institutional Risk Analytics, where he is responsible for sales, business development, and editorial activities. He has worked as an investment banker, research analyst, and journalist for more than two decades and has covered a variety of industry sectors, including technology and financial institutions. In addition to editing the newsletter The Institutional Risk Analyst, Mr. Whalen contributes regularly to publications such as Barron's, The International Economy, and American Banker. He is a member of Professional Risk Managers International Association, he volunteers as a regional director of the association's Washington, D.C. chapter, and he chairs its speakers committee.
Pollock, Improving the Financial System for the Next Cycle
Pollock, Two Ways to Improve TARP for Taxpayers
Rosner, An Urgent Agenda for Reactivating the Financial Sector
Rosner, An Urgent Agenda for Reactivating the Financial Sector Executive Summary
Todd, Bank Receivership and Conservatorship
Todd, FDICIA's Emergency Liquidity Provisions
Todd, History of and Rationales for the Reconstruction Finance Corporation
Todd, Latin America, Asia, and Russia - Have the Lessons Been Learned
Todd , Plans from the 1930s to Rehabilitate Both Mortgage Financing and the Banks
Todd, The Federal Reserve Board and the Rise of the Corporate State
Todd & Schwartz, Why a Dual Mandate Is Wrong for Monetary Policy
