Why did the mortgage mess occur when it did? The topic is prompted by a Fortune Magazine
article which proposes a very naive reason:
"As margins shrank in traditional businesses like
underwriting and brokerage, Wall Street looked for new places to make
money," says Louis Pizante, a former investment banker at Goldman Sachs
and Nomura …. In the process the
firms took imprudent risks to make big profits."
Look, Wall Street can make foolish mistakes even when its
profits are roaring away. In fact,
profits in one area are more likely to lead to the idea that they can do no
wrong. And when things are bad,
companies (including Wall Street firms) tend to draw in their horns across the
board, taking as little risk as possible.
If it wasn’t thin margins in other areas, what caused the
In this five-part series, I explain how this mortgage mess
came to be. The key elements are
- The Great Moderation and the benign housing cycle of the
2001 recession, which made real estate appear to be safe
- Securitization, which changed the funders from lenders to
investors, while making the products too complex for most anyone to understand.
- With these two factors in place, the mortgage crisis
evolved from the last recession.
- With this understood, we can see what to expect next time