In short, this book is a carefully
constructed chronicle of the systemic greed and hubris, clueless shortsightedness
and incompetence that brought the US financial system to its knees. However, in many ways it fails to place or
assess blame. The authors make clear
that the fundamental hidden assumption that drove the collapse (and that proved
to be fatal in the end) was the ultimately mistaken notion that home prices
would continue to rise indefinitely. Feeding
this blind and almost lemming-like assumption were a host of enabling factors,
most of which straddled the borders of both immorality and corrupt business
practices. Every one of the participants
listed in the book was in part complicit and culpable, but some more than
others. Yet the authors always "pull
their punches" when it comes to assessing blame. To wit:
Loan standards were weakened until they were non-existent.
Lenders, as well as the recipients of loans, were together drunk on the
home-lending madness, which, driven by Congress and Freddie Mac and Fanny Mae,
became a kind of national orgy.
The ratings of the rating agencies were worthless, primarily because they not only
lagged the housing market but at the same time depended on, and pandered to,
the very companies and markets they were trying to rate.
Rules regarding capital requirements became worthless, and thus increasingly were skirted --
as was generally true with other aspects of the mortgage creation process. This continued throughout the evolution -- or
should we say devolution? -- of the process.
The train of packaged loans (which would often prove, eventually, to be virtually
worthless pieces of paper) were leveraged to the sky,
without even a semblance of an institutional safety net. Insurance on the loan packages, the CDSs -- as
well as the CDOs (Collateralized Debt Obligations) too -- eventually proved, in many
cases, to be worthless. Bankers lied to themselves and to their
buyers, just as the buyers lied to them selves -- all in an orgy of mass
delusion and self-deception, which came to have a self-reinforcing life of its
own, that could not be turned around or turned off.
Many homebuyers were greedy & irresponsible borrowers: The mortgages they owned were not so much
bought by them as sold to them; and what the owners got in turn was not so
much a home that was really theirs, but rather a piece of paper that in many
cases eventually became worthless.
Regulations were in place sufficient to manage the mortgage creation process,
but were not enforced .
Nor as the book makes clear, can we ever guarantee that any regulations will ever be enforced. Nor for that matter can we guarantee that any
rating agency can exist as a truly
independent (and thus valid) rating agency.
Its effectiveness is totally dependent on the culture and enforced laws that surround it and that
must be used to help supervise it.
In the end, the CDOs amounted to a clever version of a Ponzi scheme -- primarily because they provided ever
more markets and investors, and allowed banks to ever more profitably leverage
their exposure, while brokers continued to get paid their lavish bonuses,
thereby allowing everyone to ignore the inevitable, and live with their heads
in the sand for yet another profitable day -- which they all did, until the
collapse in home prices finally ran the entire gravy-train off the tracks.
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