On the occasion of an “investigation” into what federal banking regulators did to whom in the fall of 2008, let’s excise the notion that the meltdown was some sort of surprise. Here is some coffee-stained blogger from August 2007 warning that Bank of America and Wachovia faced some sort of downside due to their mortgage portfolios:
Merely as participants in the broader credit and lending sector there has to be some sort of impact on the two giants as a result of a general tightening of credit after years of easy money.
Having said that, Wachovia execs seem far too glib about the status of their Golden West Financial arm. You do not want to be holding a bunch of California no-money-down mortgages during the bust cycle of the state’s infamously fickle real estate market. Plus they do not seem to grasp that California’s high-tax, high-regulation model has been steadily chasing off jobs and economic activity for a solid decade now.
And again here in November 2007:
Ahem. Don’t look know but it looks like the subprime infection is a little deeper at Wachovia and Bank of America than previously known. Still too early to panic, but this is going to take most of 2008 to fix and the local economy may feel it. … Tremendously oversimplifed, the banks acted like they were merely making change — 4 quarters for $1 — in these transactions when in reality the value of their subprime holdings was tremendously sketchy and wound up falling through the floor.
Things get really interesting however, when you consider that had these transactions been considered outright loans federal capital requirements would have kicked in, mandating that the banks set aside higher levels of reserves in order to match the increased lending risk.
That did not happen. Hence there is no money. Well, that is not exactly correct.
There is some guy named John Q. Taxpayer that the bankers, the Fed, and politicians are trying to track down.
As analyst Chris Whalen explained there is no such thing as “off-balance sheet” transactions for banks — or anyone else. Someone always pays in the end.
Bend over, America.
Ow. That’s painful to read. More from April 2008 here and here in May 2008.
The point is that there in no way on Earth that it should have taken federal regulators until July and August of 2008 to figure out that Wachovia had “weaknesses in overall risk management and ‘top of the house’ board and senior management oversight” and that “Wachovia’s recent difficulties have stemmed from questionable strategic decisions and incomplete due diligence activities.”
Just sad. What were the guys with complete access to the banks’ books looking at?
What is fairly hysterical is that it took the Fed and the FDIC mere weeks to go from there might be a problem to, “Bob, I’m afraid you have to sell your bank to Citigroup. For America.”
Even more fascinating is that the FDIC’s forced pairing of Wachovia and Citi — a shotgun zombie wedding that may well have not survived 2009 — was only averted because FDIC gnomes did not want to be on the hook upfront to the tune of $2.16b. for the deal. Instead, the FDIC got the IRS to manufacture a tax break for Wells Fargo, which will likely be worth billions in accelerated write-offs for Wachovia’s losses.
Talk about doing the right thing for the wrong reasons. And by “right” we mean slightly less wrong.
Yet, somewhere in Uptown right now, some non-profit is setting out coffee and bagels, dreaming big dreams, all paid for by hot checks from the Wachovia-Golden West merger, a deal cleaned up by John Q. Taxpayer. All must be right with the world.
