Subprime Suspects

It's called leverage. if AIG didn't hear about the word "Derivative", they would not be owned by the Taxpayers. Blame is to go all around, but the main problem was this belief that home prices would always go up. You take that belief and you create massive leverage with credit default swaps. CDS's were created from insurance premiums AIG was receiving from other hedge funds and banks. These bonds (which are based on insurance premuims and not the actual asset) were then sold off to other firms. A small default causes a massive wipeout. LEVERAGE!!!!!!!!
That is no spin. Those are the facts. Warren Buffett wrote about in his 2002 annual report. The leverage creates enormous profits, but the de-leveraging becomes a weapon of mass destruction.
If there was no leverage (No CDO's No CDS's), the subprime defaults would have minimal impact on our current economy. People would lose their homes and banks would reposses like normal. AIG, Lehman, Bear Sterns WOULD NOT BE GOING OUT OF BUSINESS and the current commercial credit market would not grind to a halt.

It's called leverage. if AIG didn't hear about the word "Derivative", they would not be owned by the Taxpayers. Blame is to go all around, but the main problem was this belief that home prices would always go up. You take that belief and you create massive leverage with credit default swaps. CDS's were created from insurance premiums AIG was receiving from other hedge funds and banks. These bonds (which are based on insurance premuims and not the actual asset) were then sold off to other firms. A small default causes a massive wipeout. LEVERAGE!!!!!!!!
That is no spin. Those are the facts. Warren Buffett wrote about in his 2002 annual report. The leverage creates enormous profits, but the de-leveraging becomes a weapon of mass destruction.
If there was no leverage, the subprime defaults would have minimal impact on our current economy. People would lose their homes and banks would reposses like normal. AIG, Lehman, Bear Sterns WOULD NOT BE GOING OUT OF BUSINESS!

Absolutely great article. I live in Boca Raton and watched over the last nine years the build-up of hype in the mid-upper middle class about getting into the real estate speculation craze. Everybody in my neighborhood of 400k-900k homes was either taking out second mortgages or seriously thinking about it in order to buy into the latest condo conversion or townhouse project. It got so bad that the builders started holding lotteries to determine who could buy the units. People bought on spec with interest only or ARM loans, thinking they'd be able to sell at a huge profit within months, and never really have to worry about payments.
I heard alot of 'There's only so much land in Florida, you can't lose!' 'Every body wants to live here, you can't lose!' and much more. The fervor reached such a crazy level that the Sun-Sentinel had several articles featuring waiters, hairdressers, etc., who'd mortaged their homes to invest in real estate and 'flip' properties.
There was a lot of greed, and not all on the part of the wealthy, either.
V.L. Boca Raton, FL

I am a minority, I did take out a loan that was too big, I did have to get a second job to pay for it .. It is all of our faults, all of us, all of us Americans period. Owning up to our own problems is the first step, remember. I am for McCain I think Obama is the wrong radial change, we don't need to give up being true Americans to fix this mess, we have been in worse. Our fundamental hearts of freedom, pride, integrity, grit, are strong!

ACORN Vegas Office Raided in Voter Fraud Investigation
ACORN's Las Vegas headquarters has been raided by Nevada authorities looking for evidence of voter fraud.

http://www.comcast.net/articles/news-politics/20081007/Voter.Fraud.Probe/

lets not forget, people who were entirely responsible for their loans still found their houses worth 0 if the houses around them went into foreclosure. Any argument solely blaming borrowers is foolish and in this case racist. That neocon tranny who suggested this deserves a good smack

This mess is a symptom of inflation bought on by high gas prices,
which caused the fed to change interest rates banks followed.
Remember most adjustable rate mortgages are tied to the prime rate.

Als

Thank you for a great article. As an economist, I completely agree that the "Ownership Society" embraced by several consecutive administrations, along with the protection of Fannie Mae and Freddie Mac by our esteemed Congress, have certainly added to the economic bedlam. But the financial meltdown we're experiencing right now is by and large the result of Wall Street greed and hubris. Mortgages-any mortgages subprime or otherwise-were the drug and Wall Street the addict. The brilliant mathematicians employed by the financial giants thought that via tranches and credit swaps they had completely mitigated the risks of subprime lending. I promise you that if it was not for the insatiable appetite Wall Street had for mortgages, we would not be in this mess. Though I agree that homeowners should have been more circumspect in taking out these loans, make no mistake. Wall Street is the most responsible for this financial meltdown.

metzlerd is an idiot. ACORN is an organization established to help home first time home buyers you idiot. Do some more googling before trying to discredit this writer's work.

Thank you for a great article. As an economist, I completely agree that the "Ownership Society" embraced by several consecutive administrations, along with the protection of Fannie Mae and Freddie Mac by our esteemed Congress, have certainly added to the economic bedlam. But the financial meltdown we're experiencing right now is by and large the result of Wall Street greed and hubris. Mortgages-subprime or otherwise-were the drug and Wall Street the addict. The brilliant mathemeticians employed by the financial giants thought that via tranches and credit swaps they had completely mitigated the risks of subprime lending. I promise you that if it was not for the insatiable appetite Wall Street had for mortgages, we would not be in this mess. Though I agree that homeowners should have been more circumspect in taking out these loans, Wall Street is the most to blame for this crisis.

Bleah, sorry for the double post. Newsweek's boards are buggy.

The subprime problem in itself is a symptom of a deeper society-wide reliance on high-cost, low-requirement credit that extends far beyond the mortgage arena. The personal savings rate in America is nearly nil and we've built a house of cards on the omnipresent availability of high-interest debt.

We're going to have problems until we fix this *across the board*. People are defaulting on mortgages because we *all* have too much debt. Both the moneylenders and the borrowers are both to blame, if we want to waste a lot of time on blame - the borrowers for making contracts they couldn't possibly live up to, and the lenders for being so greedy as to lend THIRTY TIMES as much as the company's value or more to questionable borrowers in a naked grab for profits.

For those who suggest that the lenders were "forced into this", nobody made them lend their companies money out thirty times over. To suggest otherwise is to attempt to make victims out of a lot of people who bear a lot of responsibility for this mess. They practically pissed themselves in their haste to profit off the "housing boom".

And the homebuyers weren't swindled, except possibly by the resale of their mortgages to ten different institutions and the resulting poor service of the loan paperwork. Their contracts did what the contracts said they did. The buyers could have taken the time to take a hard look at their futures, but the triumph of hope over experience is one of the saddest and most perpetual themes of history.

I'm tempted to say that out of the two groups, Wall Street should have had a better shot at knowing better, but it's really a moot point - apparently they didn't. They were as naive and overreached as far as the homeowners did. We ALL collectively tried to live above our station - and why not? Advertising and consumer culture bombard us with the idea that our net worth equals our human worth. There are too many messages trying to get us all to believe that money equals happiness and self-esteem. Every American gets bombarded with credit card offers that are a recipe for decades of debt from the age of 18 onward.

But it is ugly beyond belief to blame this on skin color. There are plenty of subprime borrowers who weren't minorities who are defaulting. There are plenty of white people who played dice with the assets of a hundred people who loaned them money. The GOP is the party of Lincoln, guys. His legacy deserves better.

This crisis runs far deeper than the subprime mess. It's a direct reflection of an economy-wide reliance on high-interest borrowing and credit instead of assets and personal savings as a driver of purchases and economic expansion.

There is a lot of blame to go around, if we want to waste time pointing fingers instead of trying to fix the problem. The borrowers made foolish deals, and the banks made greedy ones. And our entire culture is implicit in this - too many people these days consider wealth synonymous with human worth. We get bombarded by signals that designer brands and expensive cars are status symbols, and that those without them are uninteresting or unexceptional, so everyone chases them. Wall Street and credit card companies nearly wet themselves in excitement to mark down new loans at high interest rates to unproven borrowers - every college student in the country gets bombarded with credit card offers from the day they start school until well into their late 20s. The complete availability of high-cost credit encourages debt across the board.

But it's not about race. Dan Gross is perfectly right about this - it's about personal and financial responsibility irrespective of color. The act in question may have encouraged lending to subprime borrowers. What it *didn't* do is force them to borrow up to 30 times as much as the value of their companies - that can't be blamed on the homeowners at all. Wall Street owns the responsibility of its bad lending just as much as the subprime defaulters do.

I think that the economy is going to suffer for longer than people are projecting. There's a reason that moneylending at interest has been illegal at various points in history - it was called "usury". Interest is a perfectly natural "charge" for the use of a given amount in its intended use at rates a reasonable amount over inflation. But when it becomes a credit card 22% annual APR with a ten thousand dollar limit that can balloon into thirty within a few years, or the same thing in an incredibly speculative ARM, it becomes an instrument for debt entrapment.

It's ugly beyond words to put any minority blame on this, though. There are plenty of defaulters of any race you want to mention and a lot of rich white people who played dice with billions of dollars. The GOP was the party of Lincoln. You all need to shape up.

This crisis runs far deeper than the subprime mess. It's a direct reflection of an economy-wide reliance on high-interest borrowing and credit instead of assets and personal savings as a driver of purchases and economic expansion.

There is a lot of blame to go around, if we want to waste time pointing fingers instead of trying to fix the problem. The borrowers made foolish deals, and the banks made greedy ones. And our entire culture is implicit in this - too many people these days consider wealth synonymous with human worth. We get bombarded by signals that designer brands and expensive cars are status symbols, and that those without them are uninteresting or unexceptional, so everyone chases them. Wall Street and credit card companies nearly wet themselves in excitement to mark down new loans at high interest rates to unproven borrowers - every college student in the country gets bombarded with credit card offers from the day they start school until well into their late 20s. The complete availability of high-cost credit encourages debt across the board.

But it's not about race. Dan Gross is perfectly right about this - it's about personal and financial responsibility irrespective of color. The act in question may have encouraged lending to subprime borrowers. What it *didn't* do is force them to borrow up to 30 times as much as the value of their companies - that can't be blamed on the homeowners at all. Wall Street owns the responsibility of its bad lending just as much as the subprime defaulters do.

I think that the economy is going to suffer for longer than people are projecting. There's a reason that moneylending at interest has been illegal at various points in history - it was called "usury". Interest is a perfectly natural "charge" for the use of a given amount in its intended use at rates a reasonable amount over inflation. But when it becomes a credit card 22% annual APR with a ten thousand dollar limit that can balloon into thirty within a few years, or the same thing in an incredibly speculative ARM, it becomes an instrument for debt entrapment.

It's ugly beyond words to put any minority blame on this, though. There are plenty of defaulters of any race you want to mention and a lot of rich white people who played dice with billions of dollars. The GOP was the party of Lincoln. You all need to shape up.

This crisis runs far deeper than the subprime mess. It's a direct reflection of an economy-wide reliance on high-interest borrowing and credit instead of assets and personal savings as a driver of purchases and economic expansion.

There is a lot of blame to go around, if we want to waste time pointing fingers instead of trying to fix the problem. The borrowers made foolish deals, and the banks made greedy ones. And our entire culture is implicit in this - too many people these days consider wealth synonymous with human worth. We get bombarded by signals that designer brands and expensive cars are status symbols, and that those without them are uninteresting or unexceptional, so everyone chases them. Wall Street and credit card companies nearly wet themselves in excitement to mark down new loans at high interest rates to unproven borrowers - every college student in the country gets bombarded with credit card offers from the day they start school until well into their late 20s. The complete availability of high-cost credit encourages debt across the board.

But it's not about race. Dan Gross is perfectly right about this - it's about personal and financial responsibility irrespective of color. The act in question may have encouraged lending to subprime borrowers. What it *didn't* do is force them to borrow up to 30 times as much as the value of their companies - that can't be blamed on the homeowners at all. Wall Street owns the responsibility of its bad lending just as much as the subprime defaulters do.

I think that the economy is going to suffer for longer than people are projecting. There's a reason that moneylending at interest has been illegal at various points in history - it was called "usury". Interest is a perfectly natural "charge" for the use of a given amount in its intended use at rates a reasonable amount over inflation. But when it becomes a credit card 22% annual APR with a ten thousand dollar limit that can balloon into thirty within a few years, or the same thing in an incredibly speculative ARM, it becomes an instrument for debt entrapment.

It's ugly beyond words to put any minority blame on this, though. There are plenty of defaulters of any race you want to mention and a lot of rich white people who played dice with billions of dollars. The GOP was the party of Lincoln. You all need to shape up.

This crisis runs far deeper than the subprime mess. It's a direct reflection of an economy-wide reliance on high-interest borrowing and credit instead of assets and personal savings as a driver of purchases and economic expansion.

There is a lot of blame to go around, if we want to waste time pointing fingers instead of trying to fix the problem. The borrowers made foolish deals, and the banks made greedy ones. And our entire culture is implicit in this - too many people these days consider wealth synonymous with human worth. We get bombarded by signals that designer brands and expensive cars are status symbols, and that those without them are uninteresting or unexceptional, so everyone chases them. Wall Street and credit card companies nearly wet themselves in excitement to mark down new loans at high interest rates to unproven borrowers - every college student in the country gets bombarded with credit card offers from the day they start school until well into their late 20s. The complete availability of high-cost credit encourages debt across the board.

But it's not about race. Dan Gross is perfectly right about this - it's about personal and financial responsibility irrespective of color. The act in question may have encouraged lending to subprime borrowers. What it *didn't* do is force them to borrow up to 30 times as much as the value of their companies - that can't be blamed on the homeowners at all. Wall Street owns the responsibility of its bad lending just as much as the subprime defaulters do.

I think that the economy is going to suffer for longer than people are projecting. There's a reason that moneylending at interest has been illegal at various points in history - it was called "usury". Interest is a perfectly natural "charge" for the use of a given amount in its intended use at rates a reasonable amount over inflation. But when it becomes a credit card 22% annual APR with a ten thousand dollar limit that can balloon into thirty within a few years, or the same thing in an incredibly speculative ARM, it becomes an instrument for debt entrapment.

It's ugly beyond words to put any minority blame on this, though. There are plenty of defaulters of any race you want to mention and a lot of rich white people who played dice with billions of dollars. The GOP was the party of Lincoln. You all need to shape up.

The CRA never told the lenders to lie, cheat, or steal. Lenders talked poorer borrowers into taking much bigger loans than they could assume and then hitched it to a ARM instead of a 30 yr to bring down the cost. Kabooooooooooooooooooooooom