N.Y. Fed Official Says Incentive Pay Fueled Credit Crisis

[bobbyw24]

Ack! Where do they get these people:

Thomas Baxter, general counsel of the Federal Reserve Bank of New York, said Saturday that incentive compensation fueled the global credit crisis and there is a need for greater loan discipline.



"Incentive compensation can and has led us into temptation," and is one of the causes of the financial crisis, Mr. Baxter said. It "put people into loans they shouldn't have had at all."



Baxter, speaking at the ninth Harvard University Forum on Islamic Finance held at the university's law school, noted that U.S. lenders were given incentives to put consumers in more costly, riskier mortgages that they didn't require. Securitizing those loans and selling them off also contributed to the financial crisis.



Mr. Baxter called for greater discipline and prudence across the global financial system to prevent the next financial crisis from being as severe.



The credit crisis sparked by consumers' inability to make mortgage payments that suddenly ballooned on a wide scale about three years ago dried up liquidity in the U.S., producing shocks that continue to ripple around the world. ...



Mr. Baxter also said that Senate Banking Committee Chairman Christopher Dodd's (D.,Conn.) financial reform bill demonstrates the need for legal principles that are consistent with ethical behavior in the financial world.

http://www.zerohedge.com/article/ne...the+survival+rate+for+everyone+drops+to+zero)

 

[noxagol]

Greed is countered by fear of failure. Government removed fear of failure, so greed ran rampant into decisions that were stupid and would not have normally been made.

 

[Live_Free_Or_Die]

Tell us something we don't already know about Fannie and Freddie. No shit it was incentive pay mandated and regulated by... gasp... government.

 

[Zippyjuan]

Not necessarily executive pay. But to some degree, I agree with what the claim is. The root was the divorce between those who sold loans and those who held the loans. Those selling loans would get their money (incentive pay) based on how many loans they could issue. They had no interest or concern in the quality of the loans- whether the person borrowing could even pay it back in the future. As the incentives increased, the loan brokers needed to sell more loans to make more money. The ratings industry said that there had never been any significant losses due to home loans (which was true for the time but ignored the increasing riskyness of loans coming down the pike) so they said that the resold loans were fine. So we have the financial incentive of loan sellers to sell as many as they could and reselling them.

The buyers of these loans were offered good, solid returns on them-promised by the loan raters. They bought up as many loans as they could get and repackaged and sold them to others- making a cut. Now they wanted more loans to buy so they encouraged the issuers to put out even more loans. Collecting a percentage means that they too would make more money the more loans they bought and resold. Things started to feed and in the drive to get more loans, the standards for issuing them continued to decline until by the end, you did not even to say you actually had a job or put any money down to get a home loan.

Twenty years ago, the loan types which lead the defaults today would have been impossible to make. The incentives for issuing, buying and selling loans encouraged these products to be created and sold. A bank was the likely mortgage seller and they would have kept that loan until it was paid off-either by the loan being paid back or through refinancing. Since they were keeping the loans, they had in incentive to make sure the loan had a high probability of being paid back. Two years ago, the incentives were twisted into giving loans to anybody you can and this is why we saw the large numbers of failures on those loans.

It is the notion of private property. If you own something, you are more likely to take care of it than if you rent or borrow it from somebody else.

 

[ammasmith]

Now they wanted to buy more loans in order to encourage issuers to take out loans even more. Collectibles shares means that they, too, would make more money and more loans, they bought and sold. Things started to feed and ride more loans, gave them the rules continued to fall until the end, you will not even tell you really had a job or put your money for a mortgage.