While I agree that it's weird to suggest that no one could have been more prescient, it is far too simplistic, obscurantist, and just plain wrong to say:

"the complicated nature of the instruments seems to have been a key player in obscuring the fundamentally hollow nature of the loans. It keeps coming back to the subprime loans."

The nature of the instruments in no way obscured the hollowness of the loans. Rather, the players had too much of a vested interest in ignoring the hollowness of the loans. So they gamed the system to slice and dice the tranches of the loans, and to push the rating agencies to misgrade the instruments.

OF COURSE the subprime loans were key--but that's kind of like saying that the bullet was the key to the murder.

This is correct as far as it goes. But the implications go further: now everybody knows that practically all the decision-makers at practically every financial institution were damn fools. And that raises the question of how those institutions can ever be trusted again: we can recapitalize them, but a fool with a big pile of money is still a fool. We can regulate: but the fools who lied to themselves and to their own risk-management systems will obviously lie to regulators.

The money may come back, but the trust is gone for a generation. How does that fact affect any plans for digging out of the crisis ?

One of the other large issues is that the correct action now (in hindsight) would have been considered a mistake three years ago.

If all the other financial institutions are jumping off a bridge and saying that there's free money at the bottom, the worst one off (at that moment) will be the cautious one who examines the river. Which points to a huge flaw in the regulation.

Please reconcile this post with http://www.prospect.org/csnc/blogs/ezraklein_archive?month=10&year=2008&base_name=daily_schadenfreude.

As for me, I can honestly state that I have no idea how the defaults on a few (in the grand scheme of the global financial system) mortgages brought down the entire system.

As for "practically all the decision-makers at practically every financial institution were damn fools" -- wrong, childish, give me a break. The really interesting part of this mess is that the decision-makers were almost all extremely bright, hard working people. Hubris and misaligned incentives, yes. Stupidity (other than, even the brightest people just aren't that bright), no way.

The subprime market -- which is to say, the market of loans sold to high-risk individuals -- exploded.

And *why* did it 'explode'?? It certainly wasn't because lenders thought these people were good risks. It was because the government secondary market lowered the requirements to include the poor and the minorities that shouldn't have gotten these loans in the first place and it was government meddling such as the Community Reinvestment Act forcing banks to write these loans to achieve a social goal.

As usual, the unintended consequences of social engineering are coming back to bite us in the ass and now no one wishes to acknowledge the responsibility of these policies.

"but in the context of the facts, and my role as i knew them,i'm inclined to think probably not."

at the Narrow Door of The Pearly Gates:

"but in the context of the facts, and my role as i knew them, i'm inclined to think probably not."

KLUNK.

Honestly, Ezra, your description, as a way to describe the possible "mistakes" made by Robert Rubin is essentially useless, and I'm a little dismayed that you're trying to pass this off as a serious examination of the issues involved. The issues with Rubin relate to his deregulatory stance at Treasury, his role in managing Citibank at a time when they were doing a terrible job of tracking their own profits and losses, and his overall role as a business and finance leader widely respected, admired and listened to across the industry. Mistakes? He's being too modest by at least half. But in terms of your post, I don't think it's remotely enough to say "i kind of get what this is about... but not really"; there's a wealth of information out now - and in the recent past - to make very clear what happened, why, and just how many people have some role to play in this fiasco. Especially Rubin. You're not really improving your rep as a thoughtful policy guy by not getting yourself more up to speed and better informed on all of it.

"The really interesting part of this mess is that the decision-makers were almost all extremely bright, hard working people"

So what ? They were all of that, and damn fools as well. The whole function of financial institutions - commercial banks, investment banks, insurance companies, and rating agencies - is to assess and manage risk. And they got it spectacularly, blatantly, obviously, fatally wrong. They made huge bets with borrowed money, and it was a sucker bet that there would never be a nationwide drop in house prices.

They went to good colleges, they work long hours, they wear smart clothes, they get huge bonuses, they drive nice cars. And they're damn fools.
And they'll be the same damn fools if we give them another few trillion dollars to make more bets.

Rubins short answer?

"I was making a lot of money, so why bother?"

This will be the same reason when the next crash occurs, and the one after that, and the one after that.

El, society by definition is social engineering. How do you explain this mess only occurred after a prolonged period of 'social engineering' by Republicans and conservatives? Why won't anyone acknowledge that responsibility? Oh, wait, they did during the 2008 election.

"they were all that, and damned fools as well."

they werent damned fools.

they all knew exactly what they were doing.. and that includes our new attorney general and secretary of state.
......i dont know what they are all doing back in office and good graces.

it is positively alchemical how sow's ears turn back into silk purses.

just to note for the record, as usual, el viajero quite simply doesn't know what he was talking about. The CRA is not why we have this crisis, and the vast majority of loans exploding had nothing to do with freddie and fannie or any other federal program and everything to do with mortgage shops planning on bundling and reselling.

now, as to the real matters: there continues to be enormous confusion about what rubin's job was at citigroup. he was a rainmaker, not an executive. he advised executives, but he didn't manage anything at the firm. this has been well-known for years.

what rubin deserves to be criticized for is opposition to the regulation of derivatives, not for his "management" of citigroup, since he wasn't a "manager."

as for the crisis, the issues keep being conflated. sure, lots of people knew that the housing market had inflated and was likely to regress to the mean (i can produce a fact witness that i encouraged her not to buy a house in LA after her divorce in 2003 because prices were insane and couldn't go on, and only just recently did i say to her "now you can think about buying, although we're not at the bottom").

but we've had housing busts before without jeopardizing the entire system (i bought my first condo in the late '80s in the midst of a multi-year housing bust in boston, where i then lived).

that's the part that wasn't so predictable: even so savvy a set of observers as warren buffet and charlie munger, who had spent years warning about the dangers of derivatives that no one understood, didn't specfically identify that the housing bust would be the causal linkage, and even so prescient an observer as nouriel roubini didn't forecast exactly how this would play out.

that's because we've been dealing with unprecedented levels of leverage among the non-banks: when you're levered up north of 30x, then a slight change in the asset base is going to have enormous reprecussions.

so, finding someone who knew that housing would go bust? not that hard, although not nearly as prevalent as it should have been.

finding someone who knew that a housing bust would lead to over exposure of major financial institutions, the bankruptcy of one of which (lehman) would lead to a financial lockup in the credit markets? impossible. no one predicted it. it wasn't knowable in advance.

"but we've had housing busts before without jeopardizing the entire system (i bought my first condo in the late '80s in the midst of a multi-year housing bust in boston, where i then lived)."

The banks and rating agencies were valuing the CDOs using models which assumed that house prices would never fall!!! And consequently they were assuming that the people with dodgy subprime loans would be able to refinance, rather than defaulting.

That's the foolishness I'm talking about: a whole lot of supposedly smart people building an elaborate house of cards based on the assumption that something that historically has happened every 15-20 years would *never* happen again.

Damn fools.

The CRA is not why we have this crisis, and the vast majority of loans exploding had nothing to do with freddie and fannie or any other federal program and everything to do with mortgage shops planning on bundling and reselling.

While derivatives may have exacerbated the issue, there wouldn't be an issue at all if the underlying commodity (mortgages) were good loans.

A really good example of this is today's future markets on stock portfolios. If howard's theory were correct, the futures markets should have tubed the stock market long ago.

It didn't.

Nope, derivatives don't dictate the success or failure of the underlying commodity, but the underlying commodity certainly does dictate the success or failure of its derivative.

I think howard desires to hang this on Wall Street instead of those who were responsible for these lending practices.

"finding someone who knew that a housing bust would lead to over exposure of major financial institutions, the bankruptcy of one of which (lehman) would lead to a financial lockup in the credit markets? impossible. no one predicted it. it wasn't knowable in advance."

Well yeah. No one predicts the exact sequence of plays in the Superbowl. But you can often predict which team's going to win. Michael Lewis has a good article about this recently: various people knew the banks were over-leveraged, and anyone who looked at the mortgage business in detail knew they were dealing in dangerous junk. The missing piece, perhaps, was that no-one, including the banks themselves, understood just how much of the worst junk was still on the books of the banks. And that's a failure of internal risk management and of regulation.

But really it was clear there was a lot of junk and that somebody was holding and was going to suffer: it wasn't quite clear who that would be.

Richard, i'm not saying that people didn't say there would be hell to pay. bfd: i said there would be hell to pay, in many blog comments over the years. i was so sure there would be hell to pay that i bought one of those 2X short ETFs right after the relief post-bear stearns and, thankfully, more than doubled my money before selling right above the low (at least the low thus far).

but it's one thing to know there would be hell to pay, and another thing to predict the form (if someone said, prior to last year's super bowl, the giants would win big, i wouldn't be impressed).

this also begs the question of wall street culture: nobody wants to be the first to leave the party (and therefore, leave money on the table).

and in none of this am i exempting the ratings agencies, the risk management, or anything else that was a contributory factor (including the ideological willfulness of the bush administration to consider any form of regulation).

but i am saying, loud and clear, that to say it shouldn't have been that hard to figure out this problem when NO ONE FIGURED OUT THIS PROBLEM IN ADVANCE strikes me as cheap-shot monday morning quarterbacking.

now, speaking of ideological willfulness, we turn to our friend, el viajero, who in his usual, fascinating way is fully prepped with empty talking points.

i don't "want" to blame wall street; the facts lead us to blame wall street. the subprime market isn't big enough, by itself, for the system to be in jeopardy, nor are mortgage problems unique to the subprime market, nor did the subprime market become ripe for failure because of the CRA.

the direct problem that has put us all in jeopardy was unregulated leverage. without it, we have a housing bust. with it, we have a systemic risk. "want" has nothing to do with noticing that.

What position of power was it again that Rubin just got offered as reward for still not understanding any of the mistakes he made, so that he can continue not knowing what mistakes he is making while he continues ruining us? And why is it so hard to understand that this is class war?

Rubin is right. he didn't make mistakes. He did what he had to do to serve the ruling class and ruin the rest of us and he actually did a good job at that. What else does it take until you soft-liberals get it? How long will you cling to the old capitalism fairy tales?

The biggest problem wasn't the subprime mortgages-- it was the swaps insuring those mortgages. The swap market was something like 30-50x as large as the subprime market, and it ground to a halt as soon as people realized it was all a fiction. Until people understand that the problem wasn't so much the lending as the financial derivatives based on the lending, it's hard to see how we'll have a sensible response.

"but i am saying, loud and clear, that to say it shouldn't have been that hard to figure out this problem when NO ONE FIGURED OUT THIS PROBLEM IN ADVANCE strikes me as cheap-shot monday morning quarterbacking."

Well, Dean Baker and Mark Kleiman sold their houses and moved into rental housing. Personally, I moved a big chunk of my 401K into a stable-value fund early in 2007 because I was pretty sure that Bush's massive deficits and corrupt maladministration would screw the US economy *somehow*. And there was a hedge fund guy - Steve Eisman ? - who took the time to look at the actual mortgages and made millions betting against MBS's.

The only reason people couldn't connect the dots was that the banks were allowed to cook the books and hide all these potential liabilities. And that was another example of the bankers being damn fools, because they camouflaged their positions so well that they fooled their own internal risk-management.

And that's the bottom line: the basic function of banks and insurance companies is to manage risk. And they failed: they made bad bets, and they didn't even keep track of how many lousy bets they had made. They're damn fools. Fools can be tricky, but cutting your foot off with a laser is just as foolish as sawing it off with a pocketknife, even if it takes more work and esoteric technical expertise.

Don't forget that George W. Bush spend quite a bit of 2002-2004 attacking the concept of down payments on houses as the chief obstacle to his repeatedly proclaimed goal of adding 5.5 million more minority homeowners by 2010. In California, the epicenter of the crash, the percentage of first time homebuyers who put no money down increased from under 7% during the Clinton Administration to 41% in 2006.

Bush and Rove wanted to turn Hispanics into homeowning Republicans so they took important steps to blow up the Housing Bubble to increase the minority homeownership rate. Thus, the total mortgage dollars for home purchases flowing to Hispanics almost octupled between 1999 and 2006.

I'll differ; I think the problem was in essence the deregulation of risk management and equity ratios. Banks have been historically required maintain a certain capital reserve against bad loans, with pretty conservative accounting standards for tracking risk. At the beginning of the decade, major banks were allowed to substantially relax this. They were able to use various modeling methods and derivatives to manage and offset their risk. Over the same period, special purpose entities such as SIV's proliferated, allowing banks to move liabilities off their books.

This generated an enormous appetite for risk; banks (and quasi-banks) could take on much more risk and gain (at least in the short term) much greater profits. Their massive rush into subprime loans is a symptom of this. Their models all said that the resulting structures were all AAA grade, and so they didn't bother to protect against failure, or even require normal underwriting diligence on individual loans.

The problem is that the models were in many cases fatally buggy (note the embarrassing number of Moody's corrections), and many of the pieces had not been around very long. Subprime mortgages were until recently only rarely issued, and then under careful scrutiny. Using that to estimate the default risk for broadly issued, poorly documented mortgages was not reasonable, but still was done. Garbage in, garbage out. The incentive structure for the traders certainly didn't help; no one gets a bonus for blocking a deal. In fact, the deal could be total crap, as long as it didn't go bad until the bonus cycle paid off.

The complexity of the products and the failure to carefully scrutinize the original loans makes it very hard to value the resulting products. This makes them pretty much impossible to sell them off, or even separate the good from the bad. It becomes difficult to know whether a bank is suffering from a liquidity crisis, with mostly good securities, or a solvency crisis, with mostly bad. Each requires its own treatment, and so the details matter when talking about policy solutions in the current crisis.

Similar problems happened with products created from the CDS market. The CDS market isn't itself to blame, but combination of a fairly new financial product and faulty models left people with a false impression of the safety of the result.

And this is where I see Rubin and the other management systematically at fault. Citibank and the rest embarked on a fundamentally new and untested method of risk management, literally betting the bank on it. A more prudent management might have resisted the temptation to reduce the reserve capital so far so fast. The bank was moving away from static accounting approaches to take much more responsibility for managing its own risk; where was the executive oversight? Where were the management and incentive structures to check that the models and assumptions were right? One of the fundamental jobs of a senior bank executive is managing the overall institutional risk, yet it seems that everyone was asleep at the switch.

The salient point missing here is the discussion of the absurd levels of leverage used by the different banks in this crisis. Every subrime mortgage could have defaulted (they didn't) and it would not have brought down the system. Enormous greed and unregulated financial manipulation through the securitization of these bonds permitted this completely irresponsible Ponzi scheme. This is where the crisis stems from, not a bunch of poor people getting scammed by adjustable rate mortgages

There are a number of factors which were all part of the same corrupt system.

There were mortgage backed securities. There were derivatives based on them that would make a lot of money. Subprime loans, because they paid higher interest rates, were actually much more profitable to make derivatives from. Mortgage brokers (and national bankers from outfits like WaMu) pushed people into subprime and alt-a mortgages, into too much house and thus into alt-a mortgages, into rediculously expensive no money down packages, and into huge home equity cashouts.

When the market hit a peak where people couldn't justify paying prices that highly inflated, the demand crashed and then prices, which brought down the whole highly leveraged house of cards.

But bad loans were written because it was absurdly profitable to do so (in the short term).

The problem here is that the politicians acted even stupider than the banks upper management becuase the average voter liked the housing bubble. So how could regulation (always political) have saved us?

In the end it was short sellers who called the end to teh bubble.

BTW some banks did all right avoiding the worst of of the problem.

It sems that the istitutions closest to the people small banks with teh fewest elites in management did best. I wonder if we have a situation were the elites do not knwo anybody that would walk away from a mortgage without making one payment so they asumed that people would always pay their mortgages.

"But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says."

This is from the Michael Lewis article at Portfolio.com. Go read it. I was shocked that Moody's and other rating companies gave AAA ratings to what was basically shit dredged up from the bottom of the barrel. Schwab sold us some of this AAA shit and we lost everything we invested, all the while thinking we were being the most cautious we could be. How does faith get restored in the ratings of anything they try to sell us in the future? And as far as I know, nothing has changed.

Richard,

I'm with you on the "damn fools" theme -- to a point.

But I also think that most corporate decision makers made the risky bets because they were personally making money (in a way that resembles fraud).

I think they didn't care enough to play to the end of the tape and even try to anticipate what might happen to our credit markets or economy.

But I think they were sophisticated enough to get a clue if they hadn't been so busy turning a blind eye.

They just wanted their bonuses and stock options (even if they were based on falsely inflated appearance of profits).

"But I also think that most corporate decision makers made the risky bets because they were personally making money (in a way that resembles fraud)."

Maybe. But at the end of the day it doesn't really matter whether they were frauds or fools: either way you're not going to trust them in future. And that poses a big problem for all attempts to prop up the existing financial system: you can pump in money, but you can't rebuild trust. Financial stocks are in the toilet not just because the balance sheets are bad, but because the same fools/frauds/fallible humans with perverse incentives are likely to screw up in similar ways in future.

"Schwab sold us some of this AAA shit and we lost everything we invested, all the while thinking we were being the most cautious we could be. How does faith get restored in the ratings of anything they try to sell us in the future?"

I'd suggest making sure you understand the products you invest in and doing your own credit work.

I'm not absolving the rating agencies of blame, but seriously it's a pretty basic rule of investment that you don't buy something you don't understand.

Howard you have no clue what your talking about do you?

"and the vast majority of loans exploding had nothing to do with freddie and fannie or any other federal program"

"James A. Johnson--the man chosen by Sen. Barack Obama to lead his vice presidential search committee---served as head of the Federal National Mortgage Association, or “Fannie Mae,” from 1991 to 1998, receiving a reported $21 million in compensation upon his departure.

As CEO of Fannie Mae, Johnson set a goal of buying up $1 trillion in low-income mortgage loans, a move that eventually helped trigger what would become the sub-prime mortgage crisis."

"Almost immediately upon taking the helm at Fannie Mae in 1991, Johnson began expanding low-income mortgage lending, unveiling a $10 billion plan to expand low- and moderate-income mortgage lending by using the “3/2 option.”

This option allowed low-income borrowers to secure mortgages by providing just 3 percent of the required 5-percent down payment from their own funds. The other 2 percent could come either as a gift from a family member or a grant from a non-profit agency or state or local government."

"Fannie Mae opposed any attempt to regulate or monitor that business. In 1992, Congress considered a proposal requiring Fannie Mae and Freddie Mac to disclose their debt to the Securities and Exchange Commission (SEC). Public disclosure of Fannie’s and Freddie’s debt would have allowed the SEC to monitor their business and ensure that these “government-sponsored enterprises,” which were exempt from federal taxes, and had a line of credit with the U.S. Treasury, did not overextend themselves."

Jaycal when you have an ignorant population like Howard handing control of regualtion to the very people who created the problem there has been no accountability. I believe Barney Frank is still in power and he is as culpable as anyone.

Howard did you know you where saying something completly wrong and thought no one would know enough to call you out on it or are you just stupid and uninformed?

Richard Cownie you might know the technical function of an insurance company but you apparently have no grasp on what they do in reality.

In a free market an insurance company would manage risk. In a heavily regualted market like we have they usually finance risk.

For example;

"Meanwhile, Johnson’s prediction that the Clinton administration would be active in pushing low-income mortgages came true. The Department of Housing and Urban Development (HUD) mandated that 30 percent of Fannie Mae’s business be made up of low-income loans by 1994. In a letter to HUD Secretary Henry Cisneros, Johnson speculated that his company would be hard-pressed to meet the new requirements, but that he would make them his top priority.

By March 1994, Johnson not only had met the mandate, he had upped the ante by pledging that Fannie Mae would “transform the housing finance system” by providing $1 trillion in low-income financing by the end of the decade--a pledge that represented not the 30 percent that HUD required, but a full 50 percent of Fannie’s business. "

When your regualtor demands 30% of your loans be made to low income borrowers even though they are bad risk you don't have a choice. You hope that the profits from the good risk exceed the loses on the loans your forced to make. In a free market you could still manage this risk by charging the low income people higher interest or greater down payments and make the loans profitably or break even. But when your regualtor dictates the terms on which you have to offer the loans and further threatens to sue you if your low income black customers pay higher fees then your high income white customers you don't have a choice.

Now is where it gets complicated and those of you on the left fail to follow, that darn inability of liberals to see consiquences to actions. You can't cherry pick loans or offer programs to one person and not another based on race and zip code. In order to meet the 30% requirement for low income loans lenders needed to develope special products. Once those products are available to low income individuals they are also available to ust about everyone else. People that could have afforded 10-20% down instead put down 0-3%. The programs laid out and low interest rates also allowed the low income to compete for homes they shouldn't have been looking at. This lead to a drastic increase in prices as people competed for homes. Lendors had no legal way to comply with the 30% requirement and manage risk.

Listen to Obama's appointee's own words;

Johnson would set even loftier goals for Fannie Mae, saying that the $1-trillion expansion in low-income loans was to ensure that “every American who wants to get a mortgage will have their loan approved.”

Please explain how you manage risk when your regualtor says anyone that wants a loan will get one.....

Nate, you don't get it. Most of those bad mortgages have little to do with low-income loans. And most of them did not even originate with regulated lenders, so screw your silly "blame the regulator" fairy tale. This has been explained abundantly before and if you continue that BS, people will think you are lying deliberately.

"When your regualtor demands 30% of your loans be made to low income borrowers even though they are bad risk you don't have a choice"

I realize that the right-wing machine has issued the talking points declaring that it's all the fault of minorities and Fannie Mae. But we're trying to have a serious discussion here grounded in reality. Fannie Mae and Freddie Mac weren't the cause of the problem: they had sensible standards for their loans. What's a "sub-prime" loan ? Or an "alt-A" loan ? They're precisely loans which don't meet the standards of FNMA.
Low-income borrowers *should* be able to get loans: they just shouldn't be able to get stupidly big loans.

Yes, eventually FNMA got themselves into trouble. But that was more or less inevitable in a widespread housing downturn. The issue with FNMA is that it never should have been (semi-)privatized in the first place: it's a reasonable goal of public policy to ensure that qualified borrowers have access to mortgages on reasonable terms. The cheapest way to achieve that goal is to have a government-backed lender, with suitable regulation, and in the full knowledge that the taxpayer will have to subsidize it in tough economic times. But when the US government can borrow at 3%, and mortgage rates are at 6% or more, government-subsidized lending is a good deal all round.

The difficulty arose when the privatization ideologues decided to make FNMA private and thus force it to make a profit and compete with other financial institutions. That's what sucked it into making high-risk investments in search of short-term profits.

Most of you still don't want to talk about it. It's a class thing. You don't want to hear it because you have grown up with all the propaganda and ended up believeing most of it. But you must, yopu certainly must have noticed that the last 20, 30 years or so were a big party for a very small fraction of the population. The deregulations and liberalizations of the past decades, and the crises and bubbles they caused, have made a few people very very rich. Most of the rest have not been doing very well, culminating in the Bush years which were the apogee of redistribution from the bottom to the top. Trillions and trillions in wealth have been accumulated by a small minority - by the sheer numbers this is probably unprecedented in all of history - while the majority saw its income stagnate and economic security erode. For most Americans, the last 8 years were a permanent recession. Now that the recession is big enough to touch even the top, we the people are bailing out the financial system, that big enabler of giant wealth redistribution, with our own wealth (including our future earnings). Nothing that the government has done so far in reaction to the crisis benefits *us*. It is designed to benefit the system, to give the Ponzi scheme another lease of life. We are paying and they are laughing. You prefer to ignore it.

It has been pretty well documented that fannie and freddie "cooked" the books with highly unusual and questionable accounting practices in order to meet their goals for huge bonuses for management.

Why isn't there an investigation?

Why isn't there a "perp walk" of those involved?

It is because they were all Democrats?

Rubin was not being forthcoming. He let the marketing folks overrule the risk-underwriters. That is his mistake.

The regulations actually were supposedly strengthened before the banks got themselves into this mess, but having a chief risk officer because you are supposed to as window dressing and having one who is allowed to say "no" because it is his job are two different things.

El Viajero -

The accounting problems at Fannie and Freddie that you are mentioning did not cause the bubble. That is why people don't spend a lot of time talking about it in this context.

"It has been pretty well documented that fannie and freddie "cooked" the books with highly unusual and questionable accounting practices in order to meet their goals for huge bonuses for management."

Fannie and Freddie were private financial companies and it woudn't be surprising if they did exactly what almost *all other private financial companies* were doing (except that *they* did it to a lesser degree because there was a bit more oversight). Moreover, they were encouraged to behave just like any private, profit-seeking, bonus-paying financial company by free-market ideologues like you.

Your complaint is self-defeating.

Enron and the others were private companies that didn't have anything to do with the "bubble".

It's called FRAUD. I know that if you don't follow the GAAP rules, it's ILLEGAL.

But......they were friends of Democrats.

piglet your ignorant. It matters nothing who orginated the loan, that's an argument only someone with no knowledge of lending would make. Almost all loans where originated by companies who did not keep them on their books...a major problem. Almost all loans where originated then sold within a couple months. One of the largest buyers was Fannie & Freddie.

If Fannie wasn't buying trillions in bad loans the originators wouldn't have had the money to make them.

You clearly have no idea what your talking about.

Ezra,

You are correct in one regard. The issue is simple, but it's not the subprime loans at the heart of this probem. The real issue is the system failed to do what our free-market, laissez-faire, Milton-Friedman disciples have been preaching it would do...Attach reward to risk. In fact, the system did the exact opposite, it decoupled risk from the reward.

Your statement is true in that subprime loans are related, but the:

- failures at the origination level (failure to properly vet borrowers and flat out deceptive/predatory loan practices)
- failures at the aggregation level. (The buying up of loans without understanding the underlying assets involved and the actual encouragement of poor lending practices)
- failures at the bond rating agencies (rampant conflicts of interest and in cases outright fraud)
- failures at the institutional investor level (abandoning a lifetime's worth of knowledge of markets in favor of the quick fix abnormally high "no-risk" returns)

... all contributed way more to the problem then the, less than 5% of the people, who've defaulted on their "high-risk" mortgages. The value of all of those levels of financial systems of those factors mentioned above was supposed to be that they all had a vested interest in making sure that the underlying securities were properly valued. They, the most informed of all investors, instead chose greed, deciding instead to scrape off the whatever profits they could and hand the big hot-potato of risk to the next guy up the food chain. No one is saying that loans shouldn't be securitized, it's just that while one loan to one bank for $100,000 is a manageable loss on the books, when that one loan turns out to be the starting point for $10 million in derivatives, it put our financial system at risk. Even more so when the value of the original asset is based upon so many uncontrollable factors. Think about it:

Does it really take a financial expert to tell you that if the federal government is only willing to give you 3% on your multi-billion dollar investment and that these CDO's that are giving you a "no-risk" 6% return that this might be too good to be true?

Is it really that difficult a concept that home prices might be too high when the value of homes have doubled and tripled while wages have remained stagnant?

Does it really make sense for a global financial system to be so dependent on the fortunes of the most economically-at-risk segment of a population?

I don't think it is, and those that do/did, at the least shouldn't be running our financial system and in some cases should be in prison.

The real issue is the system failed to do what our free-market, laissez-faire, Milton-Friedman disciples have been preaching it would do...Attach reward to risk. In fact, the system did the exact opposite, it decoupled risk from the reward.

That's because it was not a laissez-faire, free market. Instead, it's a controlled and politicized system.

Again....AGAIN....government was and still is, the problem.

I respect your willingness to come and debate those that may disagree with you, but after having read your arguments as to why government is the problem, I have to agree with most others on this thread, in that you know not of which you speak.

Your entire argument about how the government forced companies to loan money to people with poor credit can easily be dismissed by the mere fact that the government hasn't been able to force banks to loan money to people with GOOD credit right now. If government could do this, then this credit crunch would disappear, commensurate with the amount of money the government keeps pumping into the system. But contrary to your theory, the credit crunch remains.

The facts are that global liquidity shot up due to a combination of low interest rates, rapidly developing nations (see: China and India) and high fuel prices. Capital, like water will flow towards growth opportunities and a dearth in those growth opportunities created an environment where creative finance types houses were able to exploit a loop hole.

The idea that the government was forcing bad lending is, simply, laughable.

I think we can both agree that the secondary market was not private.

I think we can also agree that if those making the loans were responsible for the 'hit' when they went bad, these loans would never have been made.

And paleeeeeze.....don't try to tell us that the Community Reinvestment Act had no effect whatsoever. It was passed with the intention that it would, indeed, have an effect.

That was the whole idea.

I will agree with you that the Fannie and Freddie are only private in the loosest of definitions.

But according to that left-wing rag BusinessWeek:

http://www.businessweek.com/investing/insights/blog/archives/2008/09/fannie_mae_and.html

...both Fannie and Freddie had their share of the loan market decrease as the subprime bubble kicked into high gear. The reason, their lending standards were too high to purchase the crap that was being offered. So if you are looking for a pinata to beat, you need to focus your sights on the private market.

And as far as CRA goes, you need to read something other than Boortz. CRA accounted for between 15-25% of subprime mortgages, so that dog won't hunt either!