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DanKarmelSecondPaper 6 - 18 Apr 2010 - Main.DanKarmel
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< | The critical element uniting all the players, whether they believed that real estate was never going to die, or whether they were prepared to make billions pushing it over, was that no one bore the risks for their bad investments. Mortgage lenders originated the loans and would generally sell them in huge pools to investors within weeks, sometimes days. The loans were then passed along and cut up through various entities, all the way up to the government-sponsored Fannie Mae and Freddie Mac. At both the front and the back, the ones usually left holding the bag were the original borrowers and the government-sponsored corporations. Even the major credit rating agencies, like Moody’s and Standard and Poor’s, the entities most in need a proper perspective on risk, were paid by the banks issuing the securities they were rating, and thus similarly created risks for which they were in no way accountable. As one writer wrote, it would be like if “Hollywood studios paid movie critics to review their would-be blockbusters." So to answer the question of why the really smart finance guys didn't figure out that they were building a house of cards - they had no incentive to. | >
> | The critical element uniting all the players, whether they believed that real estate was never going to die, or whether they were prepared to make billions pushing it over, was that no one bore the risks for their bad investments. Mortgage lenders originated the loans and would generally sell them in huge pools to investors within weeks, sometimes days. The loans were then passed along and cut up through various entities, all the way up to the government-sponsored Fannie Mae and Freddie Mac. At both the front and the back, the ones usually left holding the bag were the original borrowers and the government-sponsored corporations. Even the major credit rating agencies, like Moody’s and Standard and Poor’s, the entities most in need a proper perspective on risk, were paid by the banks issuing the securities they were rating, and thus similarly created risks for which they were in no way accountable. It would be as if “Hollywood studios paid movie critics to review their would-be blockbusters." So to answer the question of why the really smart finance guys didn't figure out that they were building a house of cards - they had no incentive to. | | | After The Sale |
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