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My Thoughts EXACTLY!
By JLP | November 16, 2007
I love the November 26, 2007 cover of Fortune:
Here’s a link to the cover story.
Oh, and here’s an article I came across last night about who’s to blame for the subprime crisis. The author’s number 1 culprit: Alan Greenspan – give me a break! My number one cause: plain and simple GREED coupled with stupidity.
Topics: Mortgages | 7 Comments »
November 16th, 2007 at 6:12 pm
Stupidity or calculated actions? Arguably a lot of investors were stupid (hello Casey Serin! and others who were too illiterate to understand what they were getting into), but plenty of lenders and brokers and appraisers and realtors knew full well what they were doing.
November 16th, 2007 at 6:59 pm
Stupidity and greed have been around as long as critters have walked the earth, which predates the subprime crisis by a few hundred million years
In this case, the problem were legion, starting with mortgage brokers not needing much at all in the way of licenses or needing to be fiduciaries (which would require that they be legally responsible to get the best loans for people, not just the loans that made them the fattest commissions), coupled with loans perfectly tailored for sale to people with “monthly payment mentalities”.
At the investor level, the problem was in broken risk modeling.
Greed and stupidity will never go away, but it can be minimized by not setting up perverse incentives.
November 16th, 2007 at 9:13 pm
The subprime fiasco was caused by several parties.
1. Greenspan: clearly they lowered rates way too low. There was no signs of deflation as they worried so folks could borrow money at rates equal to inflation.
2. Investment bankers: these guys used some fancy computer algorithms to take subprime loans and turn them into AAA rated paper. By creating tranches in the collateralized debt obligations (CDO), these bankers thought they could turn lead into gold. Of course, they collected a fat fee for creating and selling these instruments.
3. Rating agencies: Standard and Poors, Moody’s, and the other rating agencies were giving the first CDO tranches the investment grade ratings. Obviously, the products weren’t investment grade. Of course, the rating agencies collected a fat fee from the investment bankers to rate these instruments (shouldn’t that be a conflict of interest).
4. Hedge funds: they bought these instruments and levered them five or ten fold. Using the carry trade, they borrowed from Asian entities at low rates and invested in “investment grade” CDOs. They should have seen that the CDO would lose value if they were forced to sell rapidly. Of course, the hedgies made their 2/20 fees each year.
5. Mortgage brokers: It is bad to lump these folks in one group as I know some really honest mortgage brokers, but there were enough scam artists to give the group a bad name. The investment bankers told these folks they would take any loans the mortgage brokers could give them. Of course, the mortgage brokers made some extra commission for the exploding ARMs.
6. Realtors: These folks had to know that some of their clients were signing up for loans their paycheck couldn’t cash. Of course, they ignored this fact to get that 6% commission.
7. Consumers: If you don’t look out for yourself, then you can’t expect anyone else to. This country was founded on personal responsibility. So I have little sympathy for folks who took out exploding ARMs or bought CDOs based on the rating agency classification.
So there are plenty of folks who deserve the blame.
November 16th, 2007 at 11:30 pm
Greed + Stupidity is a very powerful combination.
November 17th, 2007 at 5:02 am
Let’s not forget one big culprit: the mass media. Sure, they are coming out with big cover stories titled “what were they thinking”, now, but what were they saying at the height of the bubble? I remember TV shows titled “flip that house” and cover stories praising brilliant real estate investment decisions.
I understand why they do this. They are in the business of selling advertising, and they will write whatever happens to sell. Because of this, article such as “what were they thinking” don’t mean much to me. Tomorrow they will write the opposite.
November 18th, 2007 at 7:19 pm
Haha, that’s awesome. Mortgage brokers love their commissions, banks love originating loans, people love borrowing money, that can be combination.
November 19th, 2007 at 2:28 pm
Greed and stupidity. Big financial firms completing high risk lending to individuals who can’t afford these astronomical mortgages! The people who are taking these mortgages on are partially to blame, but come on, if you build it, they will come. I hope this never happends again.