Wall Street helped create the subprime mess


Wall Street investment banks encouraged lending to those with little ability to pay, then created hedge funds (also using borrowed money) that bought and sold bizarre and risky packages of those very same mortgages. Thus, the subprime mess is very much their own creation.

When that Bear Stearns fund blew up recently, the company was forced to prop it up with billions of dollars in secured loans. They did this because the other investment banks, who have similar shaky portfolios, didn’t want Bear Strearns liquidating because this would set new, sharply lower market prices for the garbage mortgages in their portfolios. If Bear Stearns had liquidated, they’d be out of the club, and other investment banks would no longer deal with them. So, these august titans of Wall Street are really just pretending their mortgage portfolios are solid when it’s obvious more carnage is coming. They will probably come begging to DC soon for bailouts too.

No doubt that many subprime borrowers shouldn’t have been allowed to borrow money, but they still shouldn’t be faulted for creating this mess. Doors were opened to them because Wall Street firms and the banks welcomed the business they brought, for their own greedy purposes.

Rather than bailouts, I’m thinking indictments would be more appropriate. Why? Because it’s a given that some of these transactions were fraudulent and the books were cooked ala Enron.