Recent diaries on Bernie Sanders’s interview with the editorial board of the New York Daily News emphasize what looks to be Sanders’ lack of clarity, perhaps even a lack of depth, on his signature issue. Speaking as a supporter of Sanders, I might, in the best of all possible worlds, have liked him to have the details of financial regulation and of prosecution of Wall Street malfeasance a bit more solidly in hand. After all, this is a very complex set of issues that desperately requires wonkery, and the interview did make me wonder whether he’s completely done his homework on the mechanisms necessary.
However, none of this is to say that Sanders is wrong on the ultimate problems with the financial sector, or the measures that should be taken. In this respect, what I find troubling about some of the conversation surrounding the interview is the idea that, just because he is not scrupulously on top of the details, that he is somehow fundamentally wrong about what ailed the market in 2008, and what really should have, or still should be done about it. For Sanders’ opponents to say that “OK, yeah sure, there was some fraud involved in the subprime mortgage market, but it wasn’t the whole ball of wax” is to make the claim that the whole issue of subprime lending was some pesky sideshow to the 2008 financial crisis, and not its underlying structural determinant.
There was fraud at every step along the way in the lending, selling on, repackaging, and investment in the subprime mortgage market. In many if not most cases, the prospective homeowner had to have been sold a bill of goods to get them into a home, lending them no-doc, no down payment loans with massive balloon payments coming due a few years into the mortgage.
The repackaging of thousands of loans into collateralized debt obligations itself involves a kind of sophistry, an assumption that the mere act of repackaging is itself a kind of risk management. As we wound up seeing, putting diverse buckets of bullshit into one massive bucket of bullshit is not risk management so much as it is… one massive bucket of bullshit.
But no worries — there were credit default swaps to act as “insurance” on the underlying collateralized debt obligation. However, if anyone can buy a CDS on a given underlying asset — even if they haven’t themselves bought the underlying CDO — then the whole enchilada just becomes a kind of large-scale casino, with everyone betting on the success or failure of the assets. Then, when the whole thing goes south, you’ve not only exposed the investors with the underlying CDO, you’ve exposed everyone else to the market downside as well.
In any event, these buckets of bullshit, with their numerous tranches of bullshit of varying stench, had to be assessed by rating agencies, many of whom had a vested interest in the continuation of the sham. So some irresponsible, high-investor-grade triple A rating gets applied to a massive bucket of bullshit, a process that in turn allows it to get sold on to unsuspecting institutional investors.
This is where the most high-profile and well-known instances of fraudulent bank activity come into the mix. We have the paper trails on traders who knew the stuff they were selling on was bullshit, and who did so anyway, perhaps to rake in the fees on the trade. You’ve got the boring old pension fund, managing the savings of thousands of soon-to-be-retirees, getting suckered into backing this market in CDOs. What the retirees imagined to be a safe, blue-chip investment posture (remember: all those CDOs were rated as “triple A!”) turns out to be a dynamic, buoyant market in big buckets of bullshit. And the investment banks were quite happy to keep that market going, so long as the CDOs weren’t still in their hands when the music finally stopped.
So, look: fault Sanders, if you will, for his less-than-convincing answers on the nuances of policy wonkery. He absolutely should know more about this by now. But is he wrong about the underlying issue of market fraud? I really don’t think so. You had mortage lenders who knew the stuff they were selling was bullshit; you had ratings agencies who knew the stuff they were rating was bullshittier than they acknowledged; and you had investment banks selling this happy bullshit along to ostensibly safe, stodgy, institutional investors, under the pretext of the extremely solid ratings that they were given.
This is what all that “financial innovation” amounts to, folks.