Is Wall Street Responsible for the Mortgage Meltdown?

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What exactly do people mean when they say that Wall Street caused the financial crisis. If the pin that burst the housing bubble was people defaulting on mortgages, then who’s to say anyone but the overextended home owner is to blame?

CNBC aired a show last week about the unsettling role Goldman Sachs played in the events leading up to the mortgage meltdown. They interviewed a city official from Cleveland who despised the financial giant because of the 10 thousand plus homes in foreclosure in his once fine city. Although Goldman didn’t originate the loans that razed Cleveland, many argue they added gasoline to the fire.

So why is no one picketing the hundreds of banks responsible for lending to homeowners unlikely to repay? How come no one is singling out specific banks the way Goldman is being attacked? The (short) answer is because of the secondary market.

When banks make mortgage loans they turn around and sell them immediately. Institutions who purchase these loans do so in huge quantities and sell them to investors as Mortgage Backed Securities. The bank that originated the loan now has it’s cash back to turn around and make another loan (thereby amplifying the poor decisions). Leading up to the mortgage meltdown investors appetites for mortgage backed securities was insatiable. The demand was so high that banks could sell even poor quality loans. If it weren’t for the secondary market the bank that originated the loan would be stuck with it for better or for worse.

So what do you think? If investors are demanding a product (Mortgage Backed Securities) and you can provide that product is the outcome really your responsibility? Isn’t supply and demand what makes capitalism such a powerful force?

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  • http://twitter.com/OutOfYourRut Kevin M

    I think the answer is yes…and no! Wall Street functioned as an enabler, greasing the wheels by creating obscure securities in limitless quantity. But the investors who bought them were also responsible for not digging deeper into what they contained. They were chasing yield.

    Lenders were creating the loans because doing so creates a revenue stream. Borrowers happily took mortgages that enabled them to afford (however marginally) homes they never thought they could. Regulators were asleep at the wheel. Government policies encouraged runnaway lending to juice the economy. The real estate/builder industries were making a fortune. Have I left anyone out???

    We can’t lay this mess at the feet of any one industry or entity; it was more like a culture wide mental breakdown that everyone wanted to participate in when it was hot, but no one wants to be blamed for now that it’s blown up.

    It’s reminicent of Ronald Reagans oft-repeated quote (from someone else), “Victory has a thousand fathers, but defeat is an orphan”. I think we’re in the orphan stage right now.

  • http://bedrockcoaching.us/blog/ Deacon Bradley

    Hah, so true Kevin. That’s a great quote you mentioned from President Reagan. It was somewhat maddening watching the CNBC story on Goldman last week because both sides so adamantly argued that only the other was at fault. In my opinion it’s the noticeably missing “third leg” of the capitalism stool; moral restraint. Maybe you can’t blame any one entity for causing the problems, but each are to blame for not exercising moral restraint.

  • http://bedrockcoaching.us/blog/ Deacon Bradley

    Hah, so true Kevin. That’s a great quote you mentioned from President Reagan. It was somewhat maddening watching the CNBC story on Goldman last week because both sides so adamantly argued that only the other was at fault. In my opinion it’s the noticeably missing “third leg” of the capitalism stool; moral restraint. Maybe you can’t blame any one entity for causing the problems, but each are to blame for not exercising moral restraint.

  • http://twitter.com/OutOfYourRut Kevin M

    Moral restraint is a tough road when all the signs are pointing in the other direction. I think that was the case here. In nearly all quarters, partaking in the great mortgage giveaway was painted as an unqualified “good thing”.

  • http://twitter.com/Rob_Bennett_ Rob Bennett

    We’re all responsible. Every last one of us. We all either participated in the bull market or encouraged others to participate or kept quiet while others participated knowing on some level of consciousness that they were destroying themselves.

    Those in higher positions of responsibility are MORE responsible. For obvious reasons. It is their JOB to step up to the plate when things like this happen.

    No, this is NOT capitalism, at least not the form that we are accustomed to in this country. This was pure greed. In cartoon versions capitalism is portrayed as being pure greed. But the capitalism that made our society a rich and free one was not pure greed. Capitalism puts greed to good uses but it works only when there are RESTRAINTS on the greed. A company that will sell any product that makes a buck, even if it hurts people in very serious ways, is not engaging in the good form of capitalism. The idea that there is no need for investors to lower their stock allocations when prices rise to insanely dangerous levels (Buy-and-Hold) is the sick, pure-greed form of capitalism. That form of capitalism gives capitalism a bad name.

    I think we are going to need to reform Buy-and-Hold so that it works in the real world. I think we are going to do it. We are today in the process of working up the courage needed to do the job.

    Rob

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  • Anonymous

    I have said this from day 1 and people thought I was crazy.
    A lot of times Wall Street was the victim and Fannie Mae/Freddie were going to be much bigger problems than sub prime. Wall street had no idea what they were buying because Fannie Mae/Freddie mac sold the mortgages (sealed/rated through Moodys) as “A” paper loans.
    If you had a 680 score , self-employed for 1 day, stated income, stated assets, 5% down…..you would get the same loan/rate as a doctor for 20 years with a million dollars in the bank.
    This is a ton more riskier than sub prime….plus sub prime washed through the system within 12-18 months……we still have a LONG WAY to go until we flatten out.
    expect a whole another wave of foreclosures in 2011-2012 that will be a lot worse than what we have already experienced…
    That kills me to say because by nature, im a positive guy….

  • http://bedrockcoaching.us/blog/ Deacon Bradley

    Excellent point Gregg. I guess stated income loans and all the other junk sounded great when real estate prices were guaranteed to go up. Free money! uggh

  • http://bedrockcoaching.us/blog/ Deacon Bradley

    Well said Rob. I watched a 60 minute special on Goldman’s behavior up do and during the financial crisis and not once was the word “restraint” or “morals” used. You’re totally right that without restraint capitalism gets a bad rep (and rightly so). Thanks for stopping by Rob!