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.


  1. Indictments would be appropriate… except that, like evey other complex system, allowing (or encouraging) one segment to fail would have ripples we probably wouldn’t like. And the politicians would like it even less (partly because they know where their butter comes from, and it ain’t us). So more likely they will skate, and someone else (borrowers and/or stockholders) will pay the price.

  2. There were plenty of ripples in the Enron and Jack Abramoff cases, with several players going to prison, and the system survived. Are you saying there should not be indictments if (when) the fraud is discovered?

    One big problem on the the subprime mess is, given the way thousands of mortgages are packaged together and sold, that allowing say a given number more time to pay or better terms becomes almost impossible.

  3. The Enron and Abramoff cases were MUCH smaller in terms of economic impact. Enron had already melted down, and Abramoff and his cronies had political clout but no economic impact. The subprime market OTOH, especially if it goes up as high as you say, could shake the underpinnings of the entire debt market (threatening the current means of financing our overspent government).

    As to whether I’m saying there should be indictments, I repeat: “Indictments would be appropriate.” I’m not saying they shouldn’t happen, I’m saying they probably won’t.

  4. That depends what the forensic accountants find. And many of them are already looking at the books of subprime mortgage companies that went belly up.

    Yes, if the subprime debacle gets really bad, it’ll make Enron look minor.

  5. The risky subprime borrower dynamic goes much deeper.
    Fraud? Yes, “Mortgage Servicing Fraud” by investment banks owning servicing companies that manufacture mortgage defaults swelling lucrative credit default positions. Google Mortgage Servicing Fraud and see how many times BS owned EMC Mortgage Corp comes up.
    Many of these victims never missed a payment!

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