Wednesday, July 11, 2012

Mea Culpa

From the files of the first "Joyce, Jnr," a confession, of sorts:

Prior to his forming the first mega-bank, CitiBank, and before his role in killing the Glass-Steagall Act, I worked for Sandy Weill for several years.

The corporate mantra then was "We Take *No* Risks," and unless he changed that fundamental belief, I tend to accept his denial of responsibility for the Financial Crash  - but not for his role in the death of Glass-Steagall.  Sandy was a brilliant man, an early architect of the all-in-one finacial supermarkets, but I couldn't help wondering at the time how the risks inherent in merging banks and brokerage could be minimized.

As I had originated several of Weill's company's (Shearson-American Express) mortgage products, I sometimes wonder what role I might have had in putting sub-primes together for Citi if I hadn't quit the company - the instrument most responsible for the Crash.   None, I hope - as I always had a leaning towards helping people with shoddy credit, not burying them in toxic mortgages.

Since the following article was published several years ago, Weill has had to sell some of his toys, but it's still relevant today. (

If Conservatism had been made illegal 20 years ago, would the engines of the financial crash, especially the implementation of FICO
scoring in the mortgage markets, prevented the present depression?  See and

The selling of FICO, a substitute of computerized artificial intelligence for common sense underwriting, to the secondary mortgage market giants, first to Freddie Mac, then to Fannie Mae - spreading out to include FHA, VA, and eventually all mortgage loans - was based on several fallacies.  The worst, of course, was that computer programs could replace people, that machines could replace human beings.

And ranking peoples' "credit worthiness" on their use of credit, deducting points for those who paid cash for their purchases, led to the obvious result:   people who were prudent about borrowing in their past were forced to obtain credit cards AND borrow-to-pay in order to get a mortgage.  Obviously, this resulted in a false bubble of home buying - filling corporate coffers for the sake of Freddie Mac's and Fannie Mae's reduced dependence on common sense, hands-on underwriting.

The other tragic fallacy of FICO computer-driven underwriting: if the borrower's credit score was lower than the prime scores desired by the FICO program, the borrower had to accept a HIGHER RATE, and a neutron bomb adjustable loan.   It didn't take a genius to predict that if the borrower with the worst credit was given a higher payment, or a payment that soared with the smallest spike in interest rates, default was on the horizon.

And as the riskier loans defaulted, the crash spread through the economy and prime borrowers with low fixed rate loans lost their jobs - and lost their homes.

It only took the toxic floating rate mortgage loans to hammer the final nail in the mortgage market's coffin.

A democracy attuned to the benefits of the poor and the middle class would not have allowed such a pernicious system to evolve, much less originate. A democracy attuned to helping peope, not the banks, would have prevented the collapse that has placed us in the current financial depression.


"In this world of sin and sorrow there is always something to be thankful for; as for me, I
rejoice that I am not a Republican."

Henry Louis Mencken (American humorous Journalist and Critic of American life who
influenced US fiction through the 1920s, 1880-1956.)