08 crash who caused it?

4 Replies

One man's opinion:

1) Big price inflation in housing

2) Some guy in Congress said EVERYONE should buy their own house

3) Lenders obliged and dropped credit/qualifying standards so a lot of buyers on knife's edge

4) CMBS puts 1000 loans in a portfolio to be sold to 3rd parties. People start getting late on payments or walking, then is that 1 out of 1000 are bad or 100 out of 1000? So no certain value and portfolio is unsellable.

5) Inability of banks to service portfolio payments means they lock up and stop issuing loans

6) Music stops and no more chairs, people realize they bought at top of the market and better to just walk on the property.

Now that Biden's talking like 2) (people need $15K tax credit to be a first-time buyer even if they can't afford a place) and price have inflated and we still have CMBS, seems almost prophetic. Add in he wants to kill the 1031 and that'll be chaos in the markets since 90% of my sellers want to do a 1031 for tax deferral.

Sorry, no number 5) yet.  However, rates are great, but banks are getting really hinky on qualifying loans.  Guess is if we get stuck, it'll be the Fed buying a big chunk of the bad portfolio loans.

This is extremely well documented, the Wikipedia page is pretty comprehensive:


At a high level, the early 2000’s push for everyone to own a home via deregulation led to massive amounts of lending to people who couldn’t afford the home, and when they started defaulting it threw sand in the financing mechanism of the global financial industry....so banks in general froze up and presto, global financial crisis.

In the big picture, blame lies not just with one president who was the champion of the deregulation (president bush), but with the society that thought it could get something for nothing...such people elected a man who would try to get them what they wanted. A high level breakdown of the mechanics is below.

0. Root cause: mortgage lending industry is deregulated and federal standards override state and local standards, ostensibly to encourage more mortgage lending to more people. Laws that remain aren't well enforced. This throws off the entire system by allowing the introduction of large volumes of low quality loans that the rest of the downstream financing chain wasn't prepared to handle.

1. Lenders gave loans to people they knew couldn’t afford them, just so they could collect the commission on the sale of the loan. The loans were then sold, without clawback provisions, in step 3.

2. People borrowed more than they could afford without really making an effort to understand the terms of the loans. ARMs with a low interest rate upfront and a very high rate later caused them to default at high rates later on.

3. Investment banks packaged these low quality loans into preexisting baskets of loans (CMBS) and then falsely marketed those baskets as lower risk than they really were. CMBS up until this point assumed high lending standards, so no one thought through the damage of adding low quality loans to these portfolios....they just looked at the higher returns.

4. Investors didn't do the math on the underlying loans, and looked for easy money by buying new CMBS with stupidly high returns and fraudulently low risk profiles. FYI these are sophisticated investment companies that should have done their homework, but did not. The ratings agencies, all of them, signed off on the new CMBS products.

*side note: A small handful of investors did the math on how bad some of the loans were, and later made a killing betting against the performance of these products.

5. Investment banks then sold quasi insurance policies (CDS) on the performance of the CMBS baskets. The CDS products interlinked the balance sheets of major financial institutions with the performance of the CMBS products and by extension....the crummy loans from point #1. Oh and they did this at extremely high leverage again assuming that CMBS products were overall stable. Cue disaster.

The risk of the bad loans didn’t go away, it was transformed into a systemic risk to the very financial system itself.

SO when people started defaulting on mortgages, the CMBS holders got banged and attempted to collect in the CDS insurance policies. The losses were so great it blew up the banks who sold the CDS policies, who then couldn't lend to every other area of the economy that relied on financing. Payroll financing, supply chain financing, leveraged acquisition financing, commercial paper.....EVERYTHING froze up in an instant. The government didn't intervene until it was too late, so when they did a massive amount of money was needed. But the damage had been done and American business and hiring didnt fully recover until about a decade later, and many places around the world didn't recover at all.

People don’t realize how much everyone around the world suffers when America makes a mistake.

A few investors/economists who did the math on the original sets of mortgages made a killing by betting against everyone who thought the easy money would last forever.

Banks were giving money to everyone since it was so cheap. Eventually, borrowers couldn't keep up with all the bills. When borrowers stop paying, the banks start getting low. When the bank gets low, the economy follows.

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