Friday, May 23, 2008

Who’s idea was it?

Several years ago, in some Wall Street conference room, someone said, “I have an idea. What if we told people we would loan them $500,000 to buy a house with no down payment and regardless of their ability to repay the loan or their credit rating? People would climb over each other to borrow money from us.”

“And what if we told the rating agencies they wouldn’t get our business unless they rated these loans AAA? Then we could sell the loans as AAA loans and we would make a bundle!”

As they say and the readers of this blog know, the rest is “history.”

But someone had to come up with that idea. The other day, Mrs. Paul asked me who that person was. She wants to know that person’s name so that America can give that person the credit that he/she deserves.

Paul

7 comments:

Buying Time said...

The NPR piece on "the global pool of money" tracked this down a bit. Great piece if you have the time.

Sippn said...

Always follow the money.

Read last week where one of the rating services was "blaming the computer model" ....BS! Not an acceptable excuse from Ivy League MBAs and PHDs!

Models were tweaked, real estate cycles were "forgotten", statistical variances were "forgotten"...ug

erin@erinattardi.com said...

Give that person the "credit" he/she deserves...no pun intended! lol

sacramentia said...

I think it was probably a lot of little adjustments that led to the final mess rather than a big decision made around a boardroom.

Here's an article in the Economist giving someone some credit:
http://www.economist.com/finance/displaystory.cfm?story_id=10113339
There's a economist article from last fall that mentions the name of the SVP at Citi that was trying to grow his division but I can't find it right now.

The part of all this that still confuses me is the derivatives, since they are all tied to real loans where someone has to make payments.

Logic would say that nobody would enter into a derivatives contract without thinking they are reducing their own risk. But since the actual event of default cannot be reduced by a derivative, the more derivatives out there, the more understated the aggregate risk is.

Patient Renter said...

BT, I was just about to recommend listening to the same thing -

This American Life did some reporting with NPR in an excellent story, "The Global Pool of Money", which discusses the timeline of how all of this came to be. It's actually the best reporting on the subject that I've seen/heard anywhere, and I highly recommend listening (hour long):

http://thislife.org/Radio_Episode.aspx?sched=1242

bob said...

The thing is that this whole bubble was started by a very simple event: rates were lowered and there was a sudden and gigantic surge in home buying, which in turn started the stampede buying. People are basically sorta like squirrels. Once that machine got to rolling along and suddenly hit a stall in 2003, that's when all the lenders, banks, and so on decided they didn't want the party to stop. That's when all these funny little products started becoming widely available for the masses, and the rest is history, as you all know.

alba said...

Alan Greenspan.

Looking to prop up the economy after the dot.com bubble, equity in homes was used to fuel the shadow banking/credit market.