Forget Hindsight - Housing bubble was foreseeable (updated)

Wall Street Law Blog responds to FCIC Testimony of Bear Stearns execs and others...

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NOTE TO WALL STREET CEO'S:  FRAUD BY HINDSIGHT? SERIOUSLY?

One of the primary arguments Wall Street executives have been asserting to defend themselves before the Financial Crisis Inquiry Commission goes something like this- 

We could not foresee the collapse of the housing market, and therefore any allegations of fraud are merely impermissible claims of "fraud by hindsight." 

Survey Says? - X (pop culture reference)  Wall Street Law Blog doesn't buy it. 

 

(Brief digression -GO PHILLIES - despite recent inability to score a run, we have faith)

The Fraud by hindsight defense is asserted by defendants in many securities fraud cases.  The meaning of the defense is (as you guessed) that there is no fraud (i.., intentional or reckless misrepresentations or material omissions) if the alleged fraud can only be discerned after the fact.  Hindsight is, as they say, 20/20.  

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Returning to the housing and mortgage markets, and the marketing / sale of mortgage-backed securities, cdo's and related products...

Wall Streeters insist that they did not believe, and could not reasonably foresee, the housing and mortgage bubbles that expanded and ruptured in recent years.  

Umm, let's look at some facts:  

• From 1895 through 1996 home price appreciation very closely corresponded to the rate of inflation (roughly 3% per year).  

• Then, from 1995 through 2006 alone - even after adjusting for inflation - housing prices rose by more than 70%.  
  

How could such an unprecedented increase in the rate of home price appreciation rationally occur without alerting the self-anointed experts on "The Street" to watch out for signs of a massive housing bubble?  

For that matter, how would Wall Street executives and risk managers explain their alleged lack of bubblevision in light of the quite relevant fact that the greatest "boom" in the history of U.S. housing was peaking just a few short years after a little event we like to call the tech-wreck.  Remember the great technology stock bubble that ruptured at about the same time many of us were just recovering from the hoax that was Y2K?    

If their collective memories are so short, what the hell were they doing running our largest financial institutions?  (Rhetorical question)

Come on, Wall Street.  You need to come up with something better than the fraud by hindsight defense.   If you can...

Comments

[Prof. Martin Meyhew]

To my favorite financial bloggers: I hold the Distinguished Julius Hernivoritz Chair for Behavioral Economics at WSU. From the ivory tower I wish to say this about today's blog post. Speaking professionally of course, my observation is that SPRING rules. Ahh, baseball. Your Yankees better look out, the Mariners stole Cliff Lee from Philadelphia.

Write something about baseball, I will write a comment about economics.

Yours from WSU,

Doc Mayhew, PHd