Economics is like actuarial science: Voodoo predictions based on a set of assumptions and mathematical models. The thing is, none of those models work when behavior is erratic, rules broken and and focus put on the quick buck rather than true growth. If no other lesson from the financial meltdown resonates, let that one ring.

Alan Greenspan knows it too. That's why he came before Congress on October 28, 2008 and told them he was wrong:

He was wrong, yes, but now he's not willing to blame the Wall Street moguls for everything. In March, he gave this gem of an interview to Bloomberg News. Here are some of the mind-boggling parts:

HUNT: Right. Let’s talk about the subprime a little bit. You said in your Brookings speech, I’m going to quote you, “We at the Federal Reserve (this was a footnote I think actually) were aware -

GREENSPAN: I’m impressed.

HUNT: - (inaudible) as early as 2000 of instances of some highly irregular subprime mortgage underwriting practices but regrettably viewed it as a localized problem subject to standard prudential oversight, not the precursor of what was to happen.”

Is that saying you saw instances of highly irregular underwriting, but you didn’t dig deeper?

GREENSPAN: No, we knew that there was a lot of egregious underwriting going on. The critical issue is that it wasn’t subprime per se that created the triggering of the crisis. It was securitized subprime. And securitization didn’t happen until mid-2003, 2004 in the volume, including not only securitization but essentially adjustable rate mortgages - subprime adjustable rate mortgages

I had to read that twice, but I think I understand it now. My interpretation: "We knew there were a lot of toxic assets being created, but it was ok because at that point they weren't carved up and bundled as securities."

This happens after the S&L mess, Orange County, California's bankruptcy after a $1.6 billion dollar loss on derivatives, and the failure of Long Term Capital Management in 1998 due to a huge derivative loss.

If there was a lesson to learn from those three events it is this: Bad loans make bad investments. If that has the ring of truth, how on earth can Greenspan sit and admit with a straight face that he knew bad loans were being made?

Of course, Greenspan loves hedge funds now, especially since he consults for one of the biggest ones, and has since January, 2008. They love him too. Digby points out that the guy who loves him best is John Paulson. THAT John Paulson. The Goldman-Sachs-is-in-very-deep-trouble John Paulson. Let that deep conflict of interest sink in.

His next tidbit made my head explode. In a discussion about the deficit, the current recovery, whether it's sustainable, and whether a value-added tax makes sense he says this:

GREENSPAN: The problem, however, is very much the type of issue that Greece has got. We can find money to bail them out in the short run. But unless the underlying system contracts, the deficit contracts, it’s just delaying the problem.

So I’m not convinced by any means that we can succeed in stabilizing this long term outlook strictly from a value added tax because unless we come to grips with the fundamental issue, which is the fact that we have promised in the ways of benefits for Medicare, for Social Security physically more than we have assets to deliver with.

So the economy can only grow so far and right now the claims on the real economy, forget finance, are getting larger and larger. And it is not an issue just in Social Security I might add, its money. You can always print money and solve it.

Medicare is a defined - is not a defined benefit program. It is one based on the physical needs of the population.

Those darn American people again. Sitting around on Main Street, getting in the way of the economic recovery with their health care and retirement needs. Those entitlements.

This is the same guy who gave away the Treasury to the rich guys by green-lighting Bush tax cuts. The same guy who testified that cutting the deficit and creating a surplus was the way to economic growth in the 90s before he said if the deficit got too low and the US got too solvent, it could cause economic problems in 2000. The same guy who let John Paulson endow a chair in economics in his name at NYU so he could leave a legacy of inconsistent, erratic, self serving conservative monetary policy to students in perpetuity.

If you're in the mood for some common sense abuse, read the whole thing. He'll explain why big banks shouldn't be broken up but why they shouldn't be bailed out, why regulators missed the warning signs of the meltdown (I'd argue they ignored them, didn't miss them), why Fannie and Freddie were good before they were bad, and more.

It would be so nice if something made sense for a change. - Alice in Wonderland

When it comes to the Wall Street meltdown, just about every financial institution out there is a villain. Then there's Washington Mutual, who may have rewritten the definition of villain by their conduct in the subprime mortgage madness of the past decade.

The Senate Permanent Subcommittee on Investigations is beginning hearings today on Washington Mutual's lending practices to make a record on the behaviors that led to Wall Street's meltdown in 2008. Based on what I've read so far, it promises to be explosive.

Levin:

Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river,” said Levin. “Using a toxic mix of high risk lending, lax controls, and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad. Examining how Washington Mutual operated, and what its insiders were saying to each other, begins to open a window into the troubling mortgage lending and securitization practices that took our economy over a cliff.

Here are some of the revelations you can expect to hear:

• WaMu intentionally lured borrowers qualified for prime mortgages into subprime mortgages, then bundled those with the riskier loans to "spread the risk."
• Over half of the loans made were obtained with fraudulent information.
• The WaMu culture emphasized revenue and production over all else, including prudent lending practices, rewarding employees with trips to Hawaii and the Caribbean for high production.
• Loans were marketed and sold by mortgage brokers who were not employed by WaMu. After funding the loans, WaMu chose the ones most likely to default for packaging as securities to be sold on Wall Street.
• When Washington Mutual executives were made aware of the danger in 2006, their only concern was for how it would make them look, rather than the damage it could do to the financial structure of the country as a whole.

If Washington Mutual were unique, we could listen to these hearings, call for prosecution of those executives who should have been more prudent and banker-like in their dealings and move on. But it wasn't unique. Countrywide Mortgage engaged in similar practices, as did other large banks and lenders across the country, while the rug was pulled out from under the middle class.

I expect the subcommittee hearings to reveal a story of greed, power, privilege and unparalleled arrogance. Senator Levin is carefully making the case for sound financial reform with a consumer protection agency at the center of it.

LA Times:

Levin said the findings showed the need for a new consumer financial protection agency, which Obama has proposed as part of his regulatory overhaul, to stop lenders from preying on borrowers. "The bottom line is that WaMu had poor policies, poor controls, inadequate oversight of its loans [and] turned out toxic mortgages that sunk the bank, devastated homeowners and polluted the financial system like a poison," Levin said. "This was a Main Street bank that got taken in by these Wall Street profits."

Stay tuned. I know I will.

(Hi, dday here from Hullabaloo and Calitics and my own site D-Day. Thanks to John for having me over for the week to fill in for Dave Neiwert.)

I don't think I'm being hyperbolic by saying that the average subprime mortgage broker should probably be in prison by now. They took loans that their customers had no possibility of paying back, often by forcing them into exotic arrangements where their payments would shoot up by double after a reset. They got bonuses for putting people into a higher interest rate than what the borrowers could qualify for. Now lots of those loans have gone sour, but the broker's company has already passed on that risk in the form of mortgage-backed securities. Indeed, these same lenders who preyed upon homeowners by getting them into residences they couldn't afford are now ripping them off again by setting up loan modification companies.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.” [...]

FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company. The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers.

“Our job was to get the money in and then we’re done,” said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. He recounted his experience, he said, because “I really feel bad.”

Before state regulators and the Feds figured out this was going on, hundreds of loan modification companies took probably billions from distressed homeowners and provided virtually nothing in return. They saw opportunity in crisis - and they also CREATED much of the crisis by selling the homes to people who couldn't afford them in the first place.

Special place in hell reserved for them...

Corporate welfare at its finest.

White House:

This is a pivotal moment for America's economy. Problems that originated in the credit markets -- and first showed up in the area of subprime mortgages -- have spread throughout our financial system. This has led to an erosion of confidence that has frozen many financial transactions, including loans to consumers and to businesses seeking to expand and create jobs. As a result, we must act now to protect our nation's economic health from serious risk.

There will be ample opportunity to debate the origins of this problem. Now is the time to solve it. In our nation's history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment.

America's economy is facing unprecedented challenges, and we are responding with unprecedented action.

Paul Krugman details what happened and says:

The unthinkable - a government buyout of much of the private sector's bad debt - has become the inevitable.