Wednesday, January 09, 2008

Mistakes Were Made

'I can understand the mistakes many financially naïve borrowers made but have a hard time understanding how so many investment professionals could have been so wrong.'

— William Poole, St. Louis Fed

Poole's list of five key mistakes:
• Borrowers took on mortgages they could not afford.

Real mistake: Lenders did not vet borrowers.

• Mortgage brokers put too many people in unsuitable mortgages. They knew, for instance, that adjustable-rate mortgages probably wouldn't be right for many borrowers if interest rates rose as the market expected.

Real mistake: Lenders did not vet borrowers.

• Investment banks jeopardized their reputations by securitizing mortgages without doing due diligence on the underlying assets, many of which were based on "inadequate or spurious information."

Real mistake: Lenders did not lend responsibly.

• Rating agencies put their stamp of approval on securitized mortgages without considering whether AAA ratings could be maintained if house prices fell.

Real mistake: Lenders eschewed oversight.

• Investors scooped up those securities without doing adequate analysis first. "Investors too readily accepted the AAA ratings at face value," Poole said. "A reach for yield with inadequate attention to risk in another basic lesson that apparently cannot be relearned often enough.

Real mistake: Lenders did not reveal material information pertaining to these securities.

Poole is trying too hard to spread the blame. I blame the lenders.


Ogg the Caveman said...


Don't worry Dawg, there's plenty of blame to go around.

chickelit said...

Can't we just blame the illegals? That's what John and Ken say.

Rob Dawg said...

John & Ken do NOT blame illegals. They spend hours saying they don't blame those poor schmoes for jumping the border. They blame the bleeding hearts and soft touches and liberal do-gooders in the US for allowing/encouraging it.

chickelit said...

I'll give a pass to Ken but John definitely does. Yes they blames the bleeding hearts too, especially Latino ones. Funny thing about KFI is that their broadcasters rarely if ever spoke ill about the whole ramp-up in property values (Ziegler was an exception). Yet they are a leading AM radio broadcaster of what some would call "predatory lenders" (less now than in the past).
I'm still a PM listener though.

Bob said...

Why did lenders become so irresponsible from 2001 forward?

Because the Fed, the Treasury, the FNMA and State Community and NDP Programs, the SEC, State AGs, and State Banking Commissioners either provided the cash, reduced the risk premiums for repayment, or failed to exercise the oversight required by law.

Kick out the props and lenders wouldn't have had the rope to hang us all.

Anonymous said...

Dawg -

I think you're sugar coating this. The bottom line is fraud.

There was organized fraud by groups of industry insiders that have been busted all over the country.

There was fraud by every mortgage broker that convinced an unwitting borrower to refi into an Option ARM or subprime loan.

There was fraud by lenders who didn't perform enough due diligence on borrowers or brokers.

There was negligence by lenders who didn't investigate fraud tips.

There was fraud by lenders and banks who bypassed reserve ratios by creating off book entities to buy the loans.

Rising home prices hid the losses because underwater borrowers didn't default.

Now the chickens are coming home to roost.

Bilgeman said...


There's another mistake here, a big one, a gargantuan one that nobody at all is talking about.

The government's.

How many illions of dollars were poured down the "Homes for Low and Moderate income families" sinkhole?

What did it get us?

Why didn't it work?

Think about it for a minute.

If people had had an actual effective government program to turn to for help and guidance in financing, the entire sub-prime mortgage industry would have been stillborn.

So what did those bastards in Washington do with all the money?