> Why do I post these things?
> Because these less than well known, often insightful "editorials", pov's,
> and news reports get lost in the mass media ocean but are, imho, essentially
> relevant to philosophy, logic, rationality, common sense, politics, Law,
> Karma, and ongoing Life on Earth. :)
> -------------------------------------
> Sub-prime and banking crisis: Who caused this nightmare? The blame spreadshttp://business.timesonline.co.uk/tol/business/industry_sectors/banki...
> Guns don't shoot people, people do. So goes the defence of America's arms
> lobby.
>
> In the same way, sub-prime mortgages and the bonds secured by them have not
> caused the financial and banking crisis that America faces today: it is
> individuals who bought and sold them who emerge as the real culprits. So who
> can we blame for Wall Street's mortgage and banking crisis - the nightmare
> that has seen around $2 trillion wiped off the value of American homes in
> the past two years? Who can the one family in every 30 in Stockton,
> California, blame for losing their home? And to whom should Bear Stearns's
> shareholders direct their anger after Wall Street's fifth-biggest bank
> almost went bankrupt on Thursday afternoon?
>
> The culpable are spread across the whole gamut of America's political,
> economic and banking infrastructure. They trickle down from Capitol Hill
> with the policies devised at Washington's Federal Reserve Bank and head up
> the coast to Manhattan's Wall Street chief executives. Downstairs from the
> chairman's office lie more culprits populating investment bank trading
> floors, and the maths graduates in front of their Excel spreadsheets,
> designing ever more complex structured debt products. The blameworthy also
> sit in the credit rating agencies who endorsed the debt and extend wide
> across America to the network of thousands of mortgage brokers and lenders
> who sold bad mortgages over the past decade.
>
> Sitting at the top of the blame tree, many look to Alan Greenspan, the
> former Chairman of the Federal Reserve, America's central bank.
>
> Under Mr Greenspan's leadership, the Fed continued to cut interest rates
> during the 1990s - the cheap cost of borrowing helped inflate the housing
> market, with some states such as Florida and California experiencing
> doubling house prices over a five-year period. Cheap money and surging house
> prices also created fertile ground for mortgage brokers to push home loans
> that borrowers could ill-afford, in the hope that property values would
> continue to rise and homeowners could simply remortgage.
>
> Pushing the dream of universal home ownership, was former President Bill
> Clinton, whose policies helped encourage individuals whose low incomes and
> poor credit ratings should have prevented them from taking on mortgages at
> all. Chris Whalen, founder of the Wall Street consultancy Institutional Risk
> Analytics, also blames Washington for the design of America's mortgage
> industry. He said: �The real father of sub-prime is Congress for setting up
> Fannie Mae and Freddie Mac. Their existence effectively meant that the
> Government had the monopoly on mortgages. The banks had to scrabble around
> with what was left - and what was left were jumbo loans [big mortgages] and
> bad credit quality debt.�
>
> He explained: �Because of the way the market was structured, the likes of
> Bank of America and JP Morgan between 2004 and 2005 were so hungry for
> mortgage assets, they took market share from Fannie Mae and Freddie Mac.�
>
> Countrywide and Bank of America, among the US's biggest mortgage lenders,
> stand accused of predatory mortgage lending, and of being complicit with
> mortgage brokers, who sold home loans aggressively to boost their
> commissions. In order to manage the higher risk associated with either very
> big or very shaky mortgages, investment banks needed a means of trading the
> debt on. They devised a means of pooling the loans, paying a credit rating
> agency to rate them, and the pools - from which they could sell bonds -
> became liquid and tradeable.
>
> In the 1990s Bear Stearns was the best - now they are perceived as being the
> worst - at designing these complex pools of mortgages to sell on. Bear
> Stearns, under the leadership of James Cayne, who resigned as chief
> executive earlier this year over the toxic securities, was the King of Sub
> Prime.
>
> Unlike its Wall Street rivals, Bear Stearns had a cradle to grave model -
> they sold their own sub-prime mortgages, through their own retail lending
> arm. Bear Stearns was the market leader in creating new and ever more
> complex structured debt and selling it on through its extensive fixed income
> sales teams.
>
> Joseph Mason, associate professor of finance at Drexel University, argues:
> �Bear Stearns was the most innovative, and by innovative I mean 'worst', at
> creating these complex instruments. They had a cradle to grave mortgage
> structure. They originated it, pooled it and sold it on.�
>
> Professor Mason also explained that it was the likes of Bear Stearns, Lehman
> Brothers and Citigroup who, in 2001, tried to find ways of splitting out the
> worst bits of the mortgage pools and securitising them separately. In turn,
> they split out the worst of the secondary pools into a higher risk set, then
> repeated the process into a third pool. �Bear, Lehman, Citi - they were big
> in this space. It meant that they created a way to sell on high risk debt,
> which was crucial to be able to securitise further. They fed the bubble.�
>
> Most of the structured debt products - known as collateralised debt
> obligations - were typically designed by less than five mathematics experts
> in their twenties at each bank, armed with a spreadsheet, as part of the
> fixed income teams.
>
> Professor Mason argues that not only did the likes of James Cayne not
> understand either the debt products themselves or the risks they posed, but
> neither did the banks' heads of fixed income. �The heads of fixed income
> were more interested in whether they could sell the bonds, rather than how
> risky they were - whether they would perform.�
>
> Yesterday, Roland Arnall, the billionaire founder of Ameriquest, once
> America's biggest sub-prime mortgage lender rescued by Citigroup, was laid
> to rest. It may be some time before his legacy draws to a close.
>
> Cream of the crop
>
> James Cayne chief executive officer of Bear Stearns from 1993 until January
> 2008
> Earnings $40,004,315 (2006)
>
> Charles Prince former chief executive officer of Citigroup, 2003 to November
> 2007
> Earnings $15,105,376 (2007)
>
> Stan O'Neal former chief executive officer of Merrill Lynch, 2002 until
> October 2007
> Earnings $24,306,586 (2007)
>
> Richard Fuld chairman and chief executive of Lehman Brothers, 1993 to
> present
> Earnings $34,382,036 (2007)
>
> John Mack chief executive of Morgan Stanley, 2005 until present
> Earnings $7,400,000 (2007, requested no bonus)
>
> Angelo R Mozilo chief executive of Countrywide, 1998 to present
> Earnings $48,133,155 (2006)
>
> Kenneth D Lewis chief executive of Bank of America, 2001 to present
> Earnings $27,873,348 (2006)
>
> http://business.timesonline.co.uk/tol/business/industry_sectors/banki...