The fact that the regulators made a fixed percentage quota tells you that level (50%) wouldn't have been reached under normal circumstances. Else why set a percentage quota?
I'll admit that it probably lowered the overall quality by small percentage. But a small percentage drop in the quality was not what lead to this crisis.
This was created by the WS 'masters of the universe' inventing a bogus and non-regulated 'insurance' (CDS) that gave originators a market for imbecilic loans. Accelerated by the bubble (and the CDS accelerated the bubble by providing free capital) these things grew almost overnight to a multi-multi-$Trillion industry based on air. A perfect synergy as long as home prices went up... a perfect disaster when they started to decline.
It appears there is total capital, critical capital, and risk-based capital, presumably all defined differently (undoubtedly the latter two are subsets of the total capital). It met the latter two requirements, but was still significantly undercapitalized as to total capital. I think thats enough to say it was not "pretty solid" prior to 2005, which is what I took issue to.
I disagree. It was 'pretty solid', maybe not 'absolutely solid'. And you are only talking about one quarter out of many, many quarters... so what you are saying is misleading.
Like all things there are trade-offs. You can't say its a good thing at any cost - for example, if to put more people in home ownership, one has to debase lending stds so much that a lending crisis is created, then a drastic mistake has been made. Its not worth that to get another percent or several in owned homes.
Again, that isn't what caused the crisis. The crisis was caused by the availability of no money down adjustable rate mortgages to almost anyone. Wall Street enabled those, that the originators sold them to whoever they could; towards the end that included Freddy/Fanny.
I'm not sure who has bought loan certificates, perhaps pension funds, insurance companies, foreign investors. All kinds of investors.
They were sold to investment banks, bundled, and then resold to all those folks with bogus insurance.
We don't know that. People who bought early on in the home runup may still have equity in their homes even after prices have fallen. But having equity isn't the same thing as meeting payments. There've been a lot of creative mortgage writing, refis, with all kinds of loan features - variable rates, balloons, whatever. I don't think you can justifiably say - none of our problem started before Bush was President - which seems to be your goal here.
I don't have a goal here except figuring out what happened... and it's taken a lot of reading to build a 'picture'. You can't put your finger on one single thing... but the CDSs enabled the investment community to drastically lower standards and make vapor loan marketable, so if I had to pick one thing, it would be credit default swaps.
And the CDSs are pervasive, not just in the mortgage industry. Supposedly a $60Trillion industry all cased on questionable credit. There are probably other shoes to drop.
When you market high risk/high return stuff as risk-less this is what happens. The 'masters of the universe' pulled a $60Trilion scam... and to quote the Good Reverend Wright, "the chickens are coming home to roost". |
