2009 January 27 Tuesday
Some Bankers Avoided Making Loan Disaster

Writing in MarketWatch David Weidner points to banking executives who avoided the loan debacle including Comerica CEO Ralph Babb.

But if there's anything that recommends him, it is this: Comerica is the biggest bank in Michigan. Knowing what's happening to the auto industry, how it lost tens of thousands of jobs, is there anyone who isn't impressed that Comerica made nearly $200 million during the last 12 months?

Here's another reason to bring him to Washington: the bank only had $133 million in charge offs in the fourth quarter on a balance sheet of more than $65 billion, and that was double the rate of a year ago.

Analysts, such as Peter Winter at Bank of Montreal, note with a hint of astonishment that credit has held better at Comerica than many of its competitors. Consider that unemployment in Michigan is now about 10% and the state lost 30,000 jobs in October and November alone, according to the Bureau of Labor Statistics.

I am very interested in people who make accurate predictions and wise decisions. Can you point to financial industry executives who managed to implement policies that avoided reckless lending and reckless purchase of dodgy collateralized mortgage obligations and the like? Can you point to economists or traders who publically and accurately predicted much of the financial disaster years in advance? I'd like to build up a collection of links to people who made correct decisions so we can find out what they think now.

Weidner points to others:

It's a group that includes people like Christopher Wood, a chief strategist a Credit Lyonaisse's Asia brokerage who told investors to get out of the U.S. mortgage securities market in 2005 and to sell U.S. and European banks in 2007.

It includes Peter Schiff, a regular on business TV shows, who warned against a real estate collapse. Alone, that prediction was hardly unique, but what set Schiff apart was what he forecast as the fallout: deep recession, credit crunch and bank failures. Yes, that sounds familiar.

Incorrect predictions are much easier to find.

I do not know whether Nouriel Roubini will continue making correct predictions. He spent several years predicting premature financial disaster before finally being vindicated. But if Roubini is correct this is going to be a long deep recession.

Jan. 27 (Bloomberg) -- Global stock market declines are increasingly correlated and emerging economies will follow developed nations into a “severe recession,” according to New York University Professor Nouriel Roubini.

Roubini said economic growth in China will slow to less than 5 percent and the U.S. will lose 6 million jobs. The American economy will expand 1 percent at most in 2010 as private spending falls and unemployment climbs to at least 9 percent, he added.

Who should we listen to now? Who has the track record that makes them worthy of our time?

Update: Jeremy Grantham doesn't think much of the predictive ability of Alan Greenspan or Ben Bernanke.

What is one question you would ask Alan Greenspan?

What did you do to get the job? Because nothing in your record seems to justify it.

Have you ever talked to him?

No, and I'm happy to leave it that way.

What would you ask Ben Bernanke?

How did you possibly miss the housing bubble? How could you say at the peak of this three-Sigma event--a one in 1,000 year event at the top of 2006--how could you say the U.S. housing market merely reflects a strong U.S. economy? Surrounded as you are by all this statistical help, and with your experience with the Great Depression, how could you miss it? I simply don't get it.

The housing ratios for housing prices-to-income and housing prices-to-rental prices were so far out of whack from historical trends that the housing bubble was extremely easy to call for people whose jobs ought to involve looking at financial ratios.

Share |      By Randall Parker at 2009 January 27 08:14 PM  Economics Lending


Comments
black sea said at January 28, 2009 1:37 AM:

Question: How could you say at the peak of this three-Sigma event--a one in 1,000 year event at the top of 2006--how could you say the U.S. housing market merely reflects a strong U.S. economy?

Answer: I lied.

Stephen said at January 28, 2009 3:36 AM:

Some Bankers Avoided Making Loan Disaster

...and yet the most incompetent bankers get to suck on the taxpayer's teat.

Buckaroo said at January 28, 2009 5:20 AM:

I suggest you could add Robert Schiller (of, inter alia, the Case-Schiller real estate price index) to the list of people who consistently and correctly called the bubble and its inevitable demise. I remember hearing him on an NPR talk show in early 2007 patiently explaining why there was no way on God's green earth that the RE prices then prevalent were either justified or durable. He had plenty of data, including Randall's favorites: price-to-income and price-to-rents ratios. I don't recall anyone in the call-in portion challenging his conclusion. And you really couldn't. At least not with arguments any more sophisticated than "Oh, yeah?! Is too!". It was a great program because it confirmed what I had already concluded about the market and stiffened my resolve not to participate in the madness.
BTW, I believe Schiller was doing this as a part of a book tour so he must have been repeating the message in many fora. Anyone who cared to listen could. This is one more reason why I have exactly zero sympathy for either the lenders or the borrowers in this fiasco. They all deserve zilch. But of course they are already getting bailed out by wealth transfer from the prudent. The whole thing is almost platonically immoral and yet another sign of progressing degenracy of a once-great republic.

Ned said at January 28, 2009 7:40 AM:

The people who run Comerica are sharp. In 2007, they moved their headquarters from Detroit (where it had resided for over 150 years) to Dallas. I live in Michigan, and the economy here is in freefall. Double-digit unemployment, hundreds of thousands of job losses, people leaving the state, a worthless governor and an incompetent state government, yep, we've got it all here in the frigid Upper Midwest. Comerica was smart to leave.

kurt9 said at January 28, 2009 8:37 AM:

Jim Rogers talked about this stuff back in '02. However, he predicted a decade-long commodities boom, which has been cut short by the depression. He is still bullish on China.

I think Wells Fargo bank kept a level head during the credit bubble and, as a result, did not suffer too much during the crash.

Thai said at January 28, 2009 8:50 AM:

Mish was correct http://globaleconomicanalysis.blogspot.com/ (actually he was stunningly accurate)

Yves on Naked Capitalism was correct http://www.nakedcapitalism.com/

Calculated Risk on Calulated Risk was correct

Ben Bittrolf, the financial Ninja, has been prescient and correct for quite some time http://benbittrolff.blogspot.com/

Maxed Out Mama was correct http://maxedoutmama.blogspot.com/?ref=ukhousebubble.blogspot.com

The guys at financial sense have been pretty close http://www.financialsense.com/

Most things Satyajit Das has written on have been particularly prescient http://www.wilmott.com/

Are these the types of recommendations you are looking for? Or do you want something of a different flavor? Do you want investing sites or economics sites or something else?


Robert Hume said at January 28, 2009 11:10 AM:

Yes, Schiller predicted both the dot-com peak and the housing peak. The dot-com in the first edition of his book "Irrational Exuberance" and the housing in the second edition. He saved me a lot of money.

In his latest book "The Subprime Solution" he suggests sensible yet radical policies to prevent future bubbles. Get it, read it, recommend it to your politicians.

Stephen said at January 28, 2009 2:19 PM:

Robert, what are Schiller's radical policies re preventing future bubbles? I'm v.interested.

Stephen said at January 28, 2009 2:24 PM:

Buckaroo said: "This is one more reason [readily available risk assessment information] why I have exactly zero sympathy for either the lenders or the borrowers in this fiasco. They all deserve zilch. But of course they are already getting bailed out by wealth transfer from the prudent. The whole thing is almost platonically immoral and yet another sign of progressing degenracy of a once-great republic.

Exactly right.

kurt9 said at January 28, 2009 3:56 PM:

This is one more reason why I have exactly zero sympathy for either the lenders or the borrowers in this fiasco. They all deserve zilch. But of course they are already getting bailed out by wealth transfer from the prudent. The whole thing is almost platonically immoral and yet another sign of progressing degenracy of a once-great republic.

I am beginning to think that there is a non-trivial possibility that the U.S. Federal government, along with the FED, could collapse in the next few decades. All central banks and fiat currencies collapse sooner or later.

Stephen said at January 28, 2009 4:15 PM:

MIT professor, Ricardo Caballero in his article "A global perspective on the great financial insurance run: Causes, consequences, and solutions" hypothesises that the problem was that the world had lots of savings looking for a safe investment that provided a decent rate of return. The traditional safe investment was government bonds but from the 90's onward the rate of return was too low. The investment banks sensed an opportunity to get their hands on all that money.

They hit upon the idea of repackaging debt in a way that blurred the risk underlying the debt. The rating agencies fell for it hook, line and sinker (after all, they needed things to rate) and started giving AA-rating to the new products. Greedy investors relied on the rating agencies instead of using their own common sense and started pouring savings into these dodgy financial products. A bubble formed...

...then it burst.

Stephen said at January 28, 2009 4:20 PM:

Here's Caballero talking about why a bubble burst and the subsequent recover in his article titled "Knightian uncertainty and its implications for the TARP":

"Financial institutions specialise in handling risk but are not nearly as efficient in dealing with uncertainty. To paraphrase a recent Secretary of Defense, risk refers to situations where the unknowns are known, while uncertainty refers to situations where the unknowns are unknown. This distinction is not only linguistically interesting but also has significant implications for economic behaviour and policy prescriptions. There is extensive experimental evidence that economic agents faced with (Knightian) uncertainty become overly concerned with extreme, even if highly unlikely, negative events. Unfortunately, the very fact that investors behave in this manner, makes the dreaded scenarios all the more likely. This mechanism has played an important role in the financial crisis.

Fascinating stuff. I like the way Caballero thinks.

Randall Parker said at January 28, 2009 6:06 PM:

Thai,

Show me links to predictions made at least 4 years ago where Mish or Yves predicted what has since happened. Heck, even 3 years ago. I like reading Mish now. But I wasn't reading him in 2003 or 2004 or even in 2006. What was he saying?

Kurt,

You got a link to Jim Rogers in 2002? Even in 2005? Get specific.

Buckaroo,

Certainly Shiller saw that the housing bubble was happening. But can you point to a written source where he predicted any sorts of outcomes as a result?

anon said at January 28, 2009 8:09 PM:

Randall,

Fred Foldvary has consistently called the ~2008 real-estate/banking depression as far back as 1997. See his paper "The Business Cycle: A Georgist-Austrian Synthesis" in the American Journal of economics and Sociology, and his editorials on http://www.progress.org

kurt9 said at January 29, 2009 8:19 AM:

Yeah, check out www.jimrogers.com It has not been updated recently. So, it still contains his comments from '01 and '02 under "Articles". I especially recommend "Unreal Estate" dated April 19, 2002.

Bunkered said at January 29, 2009 8:47 AM:

"I am beginning to think that there is a non-trivial possibility that the U.S. Federal government, along with the FED, could collapse in the next few decades. All central banks and fiat currencies collapse sooner or later."

You're giving the whole thing that long? Like I said, precious metals: brass and lead...

Anon said at February 1, 2009 11:58 PM:

I don't actually think that many of the people in positions of power who could have prevented this fiasco were unable to see it coming... rather, they probably had some vested interest in keeping on with the idiotic policies they were following. Maybe they didn't think it'd be quite THIS bad, but I bet they knew what they were doing was wrong.


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