To just blame the bankers for the problem, especially one individual banker at some party, is just ludicrous. Sure, bankers were greedy and they are easy targets because they made tons of money. But the government encouraged lending with cheap credit and policies to increase home ownership. Now, I'm not going to say that home ownership is bad, after all it's part of the American dream. However, not everyone is cut out for the responsibility.
Which leads to another leg of the crisis. Some people can be counted out to budget their spending so they are prepared to make a mortgage payment every month, and a property tax payment every year, insurance, utilities, and a zillion other things. Just taking a random sampling of people I know, there are definitely some that aren't up to the responsibility (artsy fartsy types perhaps?). But everyday American's exacerbated the problem by buying homes they couldn't afford - and I think buying homes without being really prepared for the full range of expenses. I think back to when I bought my first car (first year of college) as an example - I just wasn't ready. I made just enough money to afford the payments, had to scrape money together to pay the insurance, then after a year I got hit with $300 for registration and didn't have it. Then, I blew out a tire and didn't have the $200 to replace it, then had a small accident and a $500 deductible. I feel like a lot of new homeowners fell into a similar situation. They weren't necessarily speculating, but took out equity loans to pay for stuff they just didn't expect.
Another factor was the flood of cheap money coming into the country. Countries that traditionally held a lot of US treasuries started buying up highly rated mortgage securities because they offered higher yields. This drove down the yields on a full range of securities so that the spread between BBB and AAA was historically low (you weren't getting a premium for risk). This flood of money coming in meant that bankers had to work at breakneck pace to create mortgage securities so they could be sold to willing buyers around the world. What's missing here? Well, the ratings agencies. I dealt with them both as a lawyer (CMBS lawyer) and as a banker, and I can tell you for a fact that the people at the ratings agencies are not up to the challenge. They don't attract the best talent, and they simply do not understand a lot of the stuff they are rating. Certainly, they are only part of the problem, but I'd put a big chunk of the blame on the rating agencies.
Another big factor that lay people hardly every point to is Sarbanes Oxley. I'm 100% in favor of making executives at companies sign their names certifying financial statements, but that's where the policy should have stopped. the mark-to-market accounting required by Sarbanes Oxley put the financial system into a death spiral that it had no way of stopping without a huge capital injection from the government. It's too complicated to explain here, and I don't think many people want to read about it, but look up mark-to-market if you want to understand why once Bear fell (bad business perhaps), Lehman's fall was inevitable (probably not a bad business); why Merrill (probably not a bad business) jumped into BofA's arms within a day after Lehman failed; why AIG & Wachovia then immediately required bail-outs; and why Goldman & Morgan (not bad businesses) went into death throes before the government stepped in.
So, among all the factors involved, greedy wall-streeters were likely not the most important. Some years from now there will be lots of books written about the events of the past year, and we'll look bank to figure out where to lay the blame, but I'm betting greedy bankers will be a small factor. Let's face it, they have always been greedy so that's nothing new and we've never seen a crisis like this in our lifetimes. Some of the other new stuff (new government policies, new inflows of money, easy credit, rating agency stupidity, greed on main street, etc.) will be far bigger factors. Try explaining that to your artsy friends.
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18 Oct 2008, 14:25
