First, I would like to commend my sometimes Democrat sparing partner on Slate, degsme, for pushing me into taking off my Conservative hat long enough to put this together…thanks Degs. Then I will apologize for the length, bad grammar and style that may irritate some. This is a complex topic and this is only my analysis as to how we got to where we are. I’m hoping I can place the whole thing in a single post. I also hope that I am not breaking any rules of etiquette doing this in this manner.

Sub-Prime lending practice

In short: A sub-prime mortgage was granted to persons who did not fit all of the tradition requirements of lenders…20% down, sustained income, good credit history (rating), loan payment did not exceed 25% of net income. Certain traditional qualifications were lessened or eliminated to make the loan easier to obtain, providing that other traditional qualifications were shown to be strong. The risk factor attached to the loan was based on how many of the traditional qualifications had been adjusted.

There were no real and solid legal regulations as to how a lender constructed the loan; this process was left to the discretion of the lender under the assumption that the lenders would act in their own self interest using “sound lending practices”. Individual lending institutions could determine what forms of loans and how many of the loans that they could sustain.

While this formula expanded lending for homes and small businesses to some extent the practice was not aggressive enough to make substantial change in blighted communities. Blighted being defined as an area of low economic activity and low home ownership rates.

Theory behind CRA

The CRA was put into effect to help remedy the situation in these blighted areas. Before the advent of the sub-prime loan lenders were engaged in a process known as redlining where certain blighted communities were declared off-limits to lending due to high poverty levels and lack of economic activity. The process was inherently discriminatory and unfair as these communities were also, at least in part, populated with persons who had a history that was financially sound. These persons were denied loans purely on the basis of geography. Many of these, not by any means all, were heavily populated by African-Americans which became a basis for a charge of racism against lenders. This charge has had political ramifications although there is no actual proof that redlining was practiced for any reason other than economical concerns.

At the core of the CRA was the belief that lending into these areas would increase economic activity and build a stake in the community by means of property ownership. An increase in small business ownership would provide jobs and with those jobs, a chance to build credit which would lead to more home ownership. Home ownership would lead to a greater sense of belonging, pride and concern for the rest of the community and relieve the condition of blight over time. This is a sound principle and sub-prime lending became a vehicle for advancing these loans.

Effects and expansion of the CRA

For many years sub-prime lending occurred without any deleterious effects on lenders. The lending institution was fully responsible for the loans it made and so lending was advanced while at the same time sound business practice was in place and the repayment rates in the sub-prime market was high. However, the lending and its outcome were not sufficient enough to revitalize the blighted communities meant to be addressed by the CRA. Community activist organizations as well politicians began to look further into the problem of these communities and came to the conclusion that further lending was needed. As a means of spurring lenders into making more loans a rating system for the lenders was adopted and attached to compliance with CRA mandates and goals. The system of ratings is based on the numbers of loans made to persons considered “low and moderate income”, in short, sub-primes. In order to give teeth to these ratings the ability of lenders to expand or merge was attached to the rating given to it. If the lender ranked to low in this rating expansion or merger was denied.

Resistance and Pressure

Many lending institutions resisted this move arguing that the Government was attempting to force the lending industry into making loans which they viewed as higher risk and against “sound lending practices”. This was especially true amongst the smaller lenders whose portfolios could not stand against a higher rate of default should those defaults occur. Many were willing to forego expansion and merger in order, as they saw it, to preserve their financial integrity. Community activist organizations saw things differently. On their part, they saw the lenders as more concerned with profits than the concerns of the communities. Amongst some of the organizations racism was also a concern. As these organizations gained in membership and became more interconnected they began to put pressure not just on the lenders but on politicians to force these institutions into making more loans. The issue began to evolve away from policy and business practice and into an issue of “fairness” and “social justice”.

Response: Fannie and Freddie

In response to the outcry from fair housing activists some in Congress began to push for further action to be taken. The issue now being almost solely focused on housing rather than the original issue in which small business creation was also an aspect, the attention turned to Fannie Mae and Freddie Mac. These institutions are also known as GSEs. While the GSEs do not make loans they are used to purchase and secure mortgages made by other lending institutions. The Mortgage Backed Securities held by the GSEs are backed by “the good faith and credit” of the US Government. Fannie Mae was created after The Great Depression as a means of securing housing loans against another collapse in the banking sector. Technically considered private enterprises the GSEs have never been totally divorced from the Government sector as their holdings are backed by the US taxpayers. Rules of operation, oversight and regulation are imposed and enforced by Congress.

In order to break the logjam between lenders and housing concerns Congress made changes to the percentage of loans considered “moderate to high risk” that the GSEs would purchase. This percentage would eventually reach 56%. The changes were made and promoted as a means of furthering the goals of the CRA.

Effects of Response

As a result of the expansion in loan purchases made through the GSEs lenders had a way in which to decrease the risks in making loans to persons who would have normally been disqualified. The lenders would make the loans, bundle them into packages, and sell them to the GSEs. This move allowed the lender to make money while absolving the institution of the risk. The move also made a way for the lending institution to improve its rating under the structure previously implemented under the CRA and opened the door for expansion and merger. It also relieved the mounting pressure from activist organizations as the lenders were now able to issue many more loans.

Unintended consequences:

With the ability of lenders to essentially sell off all of their risk, “sound lending practice” began to take a back seat to immediate profit. Lenders began to create more “exotic” loan arrangements and tradition qualifications were increasingly ignored. Required income levels that used to be based on steady employment gave way to consideration of temporary and unstable sources. The usual standard of loan payments not to exceed 25% of net income was raised among some lenders to 65% of gross income. Established credit was also ignored, giving way to “Bad credit, not a problem”. The standard of 10-20% down was replaced with no money down. In many cases all of the above situations were present in a single loan arrangement. Other lending practices also came into being. Termed “predatory” by some, these lenders aggressively sought out potential borrowers, they would them apply high pressure sales tactics to encourage the borrower to accept and agree to the loan. These loans were often pushed with “teaser rates and payments” that would allow for lower, more affordable monthly payments for periods up to two years. At the end of the period the payment would “balloon”, often times into an unaffordable situation. The lack of any solid rules governing sound lending practice as well as any guidelines as to who should receive sub-prime loans also invited real estate speculators who, possessing no real knowledge of real estate pitfalls, and often driven solely by the prospects of large and easy profits entered the market, sometimes purchasing multiple properties under instruments such as “interest only” and “no down payment”. The rising demand for these loans also had the effect of generating new lenders whose only interest was in aggressively making the loans and selling them to the GSEs for large and relatively risk less profits.

Effects on housing markets:

As the level of home mortgages increased home values and new home construction also increased as a law of supply and demand. This sharp increase correlates directly to the time period in which purchases of sub-prime mortgages by the GSEs also increased. The net result was the creation of a “housing bubble” in which growth in the housing values grew at rates of up to 20% per year. While there were some in the financial sector and in the halls of Congress who were ecstatic over this growth, others began to become extremely worried. Investors were pleased as the housing market is considered to be a prime indicator of economic growth and this boom was being reflected in their portfolios across several sectors. Members of Congress were pleased as it seemed that the goals originally set about in the CRA were finally being achieved. Of those that were concerned in the financial sector it was felt that the rapid rise in the housing market was unsustainable, that real estate values were artificially escalated and the bubble would burst just the same as the “dot-com” bubble that preceded it. Amongst those in Congress that were concerned the focus was projected to the GSEs whose portfolios increasingly consisted of higher risk debt brought on by the sub-prime market.

Contagion:

The problem of contagion in the markets is extremely complex as it consists of various financial instruments and a certain slight-of-hand performed by financial wizards. To be brief, loans made by lenders were bundled together and sold to the GSEs, these loan packages were then broken up, rebundled and sold to other financial institutions both here and abroad. The bundles were rated by the GSEs according to the risk associated with them. In order to lessen the risk associated with a particular bundle low risk loans were packaged with those of higher risk and more often than not the new package was rated according to the risk ratio within the bundle. This allowed the GSEs to rate the bundle as AAA paper, making the bundle an enticing investment for other financial interests. This enticement was compounded by the fact that the bundles sold by the GSEs were backed by “the good faith and credit” of the US Government.

Glass-Steagal and Gramm-Leach-Bliley

The potential for the spread of a contagion of this sort was to be held in check by an act of Congress known as The Glass-Steagal Act. Glass-Steagal was put into place in 1933 as a response to contributing factors of The Great Depression. Amongst the provisions of Glass-Steagal was a provision that prohibited bank holding companies from owning other financial institutions, thus forming a firewall between these two economic sectors. Glass-Steagal was repealed in two parts, the first having to do with the regulation of interest in savings accounts by The Federal Reserve was accomplished in 1980, the second which dealt with banking and finance ownership was repealed in 1999 by an act of Congress known as Gramm-Leach-Bliley. Both moves were passed by Congress with overwhelming bipartisan support.

It is believed that the repeal of Glass-Steagal made possible the spread of contagion by allowing the merger of financial and banking institutions as well as the selling of banking loan products into the financial sector. At the same time it is also true that overseas economies function without such firewalls and have always done so without problem. Indeed, it was according to this position that Gramm-Leach-Bliley was drafted in the first place. It was the opinion of members of Congress, The Federal Reserve and The Clinton Administration that Glass-Steagal was holding our financial and banking institutions at a competitive disadvantage with overseas interests.

The Burst:

There are several factors which led to the bursting of the housing bubble and the resulting fall of home values in the market. One factor may be the rapid rise in the oil market as oil rose at one point to 147.00/brl. The resulting rise in fuel costs rippled through the economy into several areas including transportation and food. These increases put a strain on the budgets of Americans many of which were already stressed by the high percentage of income to mortgage payment ratios brought on by their home loans. Further exacerbating the problem was the increased percentages of mortgages that were coming towards the end of their “teaser rate” period or facing an increase in loan payment due to ARMs (adjustable rate mortgages) and increases in interest rates by The Federal Reserve. Defaults in loans began to increase with the added strain and an increasing rise in unemployment as the economy crept closer to recession. Home values began to plummet pushing many owners into negative equity positions. This coupled with the number of no money down, interest only and borrowers who’s credit was shaky to begin with created an atmosphere where it was more financially sound on a personal level to allow the mortgage to default, in many cases this may have been a matter much more of survival being a choice between food, medicine and gasoline or an increasingly large mortgage payment.

As mortgage defaults increased, the rate of decline in the housing market increased exponentially until the whole situation became an all out crash.

Gresham’s Law and Mark to Market:

To be brief concerning Gresham’s Law, it is a theory that governs the value of money, breaking monetary values into both “good” money and “bad” money. In the case of the combination of loans bought, bundled and sold by the GSEs into the financial markets, “bad” money would be considered a defaulted mortgage while “good” money would be those mortgages that continued to be paid. The theory goes along the lines of “a bad apple spoils the whole bunch”. Since bad money was mingled with good money in order to justify the higher rating of the bundles sold by the GSEs, when mortgages within the bundles began to default they began to lower the value and security of the good loans within them. This is due to the lack of delineation between loans in the package. This problem is complicated by the lowering of home values. At the base of each loan is a hard asset, a house, as housing values fall it becomes increasingly difficult to place a solid value on the asset. This is further complicated by Mark to Market accounting rules which require a financial instrument, in this case the mortgage bundle, to be revalued every year based on the actual market value of the asset which in this case is the homes. If the home mortgage was taken out at 200,000 and the market decline rendered the actual house at 150,000 then the value of the loan instrument would be devalued as well. This devaluing along with the defaulting of individual elements within the bundle caused the value of the whole bundle to plummet even though the majority of mortgages were being paid on time.

Where are we today?

These bundles of loans which go by several different names are spread throughout financial sectors both here and abroad. Since the loan bundles were sold as a secure investment with the guaranteed assurance of future profit they were bought by many investment firms as part of such things as pension funds and other long term growth programs. Many companies were and are heavily leveraged by the possession of the assets. The bundles themselves are not without value in real terms, however, the mix of “good” and “bad” money must be sorted and the value of the hard assets determined before the a proper correction in the market can take place. Until that time, the actual wealth possessed by lenders is an unknown and there is a hesitancy to lend to anyone other than the most stable and proven borrower both on an institution level as well as personal.

It is erroneous to blame Americans for the "Meltdown".

I agree with Ron Paul and Ralph Nader. This is a crime by both parties protecting their corporate buddies and proof the fiat money sytem does not work.

Unamuno: I also have serious doubts concerning fiat money and I have great respect for Mr. Paul. However, I am uncertain as to whether or not we can return to a gold standard, also there is no will amongst the people or those in Government to debate the issue.Thank you for your comment.

Overall your analysis isn't completely off the mark, but it is significanlty incomplete. In part you fail to incorporate into your arguement the economic research by Nobel Prize for Economics winner M. Yunus who demonstrated that the poor were actually better credit risks than the middle and upper classes of the economy. This lead to organizations like FAIR-ISAAC to study this. What the studies found was that many of those who had traditionally been considered outside of "sound lending practices" were LESS likely to default (2% vs. 4%) than those who had been identified as "sound lending candidates".

For those who don't know what FAIR-ISAAC is, it is the primary borrower risk rating agencie in the USA. TRW, Equivax and Experian all use FAIR-ISAAC as their core evaluation mechanism with some minor tweaks in giving you your credit score. So when FAIR-ISAAC concludes that their formulation is NOT accurately reflecting risk in lower income ranges, then you cannot go back and argue that invoking FAIR-ISAAC you actually get an accurate assessment of the credit risk of these mortgages.

Another area you are incomplete in your analysis is in your overview of what sort of lending programs were available when the CRA was passed. Your claim is that "sub-prime" lending was CREATED BY THE CRA. Yet that is simply not historic fact. Beneficial Finance Corporation - a "hard money" or "sub prime" lender, has been in that business since 1929 - about FIVE DECADES BEFORE the CRA ever was even passed as law. BFC and others have been doing "sub-prime" loans for a long time. And they have been very profitable in that realm. In fact their sub-prime lending was so safe, that they would typically write in 3 year prepayment penalties into their loans to prevent EARLY repayment.

Thirdly Adjustable Rate Mortgages (ARMs) have been around since the mid 1970s when a combinaiton of highly variable inflation made mortgage making difficult. To properly accomodate the Interest Rate Risk (the chance that inlfation would exceed the interest rate on the loan, thus turning it into a money losing proposition), a fixed rate mortgage needed to be around 13%-15%, but no-one could really afford such a mortgage. So banks created ARMs based on either the Prime Rate or the London Inter Bank Overnight Rate (LIBOR).

These mortgages would "adjust" both up AND down The big change came in 2002/3 with the advent of loans which were based on the old BFC loans, but which had "resets" (ie interest or payment adjustments) at the 3 or 5 year mark that allowed the first 3-5 years of a mortgage to be dramatically underfunded (sometimes actually losing ground against what was owed). THIS was a difference caused by DEREGULATION of the sub-prime lending industry. Not by the CRA but by the repeal of Glass-Steagal

Lastly, and perhaps most importantly, you do not provide a timeline for all the changes you describe. You fail to underscore that the CRA and Fannie and Freddie's "conformant loan" structures, were in place and worked very very succesfully (remember the 2%-4% risk rate) UNTIL the repeal of Glass Steagal and subsequent ADDITIONAL deregulation and waiving of regulations in 2001/2002.

The timeline is critical because if something was working very succesfully until some major changes were made; changes which had a built in 3-5 year timer; and then 3 years later a catastrophe occurs, the logical approach is to inspect those changes more closely rather than look at the original structures that worked very effectively for almost 25 years (just about the life of a full mortgage).

Furthermore, if if both Sub-Prime loans existed before the CRA, and the "sound lending practices" turned out not to be so accurate, its almost tautological to claim that these were the cause of the problem.

Lastly, your analysis of "where we are today" is both incomplete and partially inaccurate. The inacuracy comes in your application of Gresham's law. The problem is not that "good money" and "bad money" is co-mingled in these GSEs. Gresham's law basically says that if you have two hard to distinguish assets, say 2, ten year old Chevys, one of which is bad (lemon) and one of which is pristine (cherry), that because the buyer can't easily tell the difference, the value of ALL "cherry" used cars will approach the value of lemons, and similarly all "lemons" will gain a bit in value.

Where this applies in the case of the Mortgage Backed Securities (MBS) is not that failing mortgages are 'bad money' and paying mortgages are 'good money'. Instead, "Good money" are MBSsthat are likely to approach historic default rates of 2%-4% and have an appropriate "risk premium" while "bad money" MBSs are ones where the default rate is higher and FAILS to have an appropriate risk premium.

Since you cannot assess the "appropriate risk premium" without investigating the underlying loans, and since MBSs explicitly HIDE the underlying loans, the ALL MBSs come under the suspicion of not having appropriate "risk premium".

So the problem is that because you can't tell what these MBSs are really worth. Whether they were soled by Government Sponsored Enterprises (GSEs) or by Solomon Bros, really doesn't matter one bit, though in practice the "good money" ones were sold primarily by the GSEs and the "bad money" ones were sold by private industry.

Where we are today

ALL banks and investment houses are highly leveraged. After all, if for every $100 you put in the bank, the bank could only lend $10 at 6%, the rate they could give you is around 0.3%. OTOH if banks were to lend all $100 then if there was any sort of "run on the bank" the bank would instantly fail. So all banks are required to have "reserves" - IE some percentage of the money they have taken in as deposits must be kept "on hand". This is enforced by various laws and is roughly 12%.

In the case of Federal Banks (the kind of banks you put your money into and which wrote the original mortgages) that "reserve" has to be in cash and deposited with the local Federal Reserve Bank where it is held "in trust". But an additional part of that "cash" can be held in "Securitized Investment Vehicles" like bonds or.... MBSs And therein lies the problem. If your bank is required to have 8% of assets either on deposit at the Federal Reserve or in SIVs and the SIVs they own are MBSs which CANNOT BE VALUED because of Gresham's Law - then suddenly part of their "reserve" just evaporated. Even though they still own the asset, even though it may still be "good" it cannot be counted as good because no one will buy it.

For every $1 of reserve the bank loses, they have to stop lending $12. Now their long term loans like Mortgages are immune. Which means they have to cut back on short term lending, like credit cards, car loans or Accounts Receivable. AR Lending is what small businesses use to make payroll. So if AR lending dries up, businesses have to lay people off...

Now that's Where We are with retail Banks.

its WORSE with investment banks.

Investment banks like Solomon bros were ALSO required by SEC law to have 8% reserves. Except that with the advent of a deregulatory mood in WA DC from 2001 onwards, these banks petitioned the SEC to be allowed to drop their reserves to between 2% and 3%.

And guess what? The banks that were granted this deregulatory waiver, are the ones who went bust in the last month.

Coincidence?

Hard to believe.

So your history and analysis is on the right track. But it omits too many relevant facts to draw an accurate conclusion either about the GSEs, where we are today, or what caused the "burst" of the supposed bubble.

Degs: Glad to see you here.

I'm going to try a little point by point here.

Overall your analysis isn't completely off the mark, but it is significanlty incomplete...This is a given, rather lengthy books will be written on this subject for years to come. I know my analysis seems lengthy, but I was really attempting to be as brief as possible while still making my point.

In part you fail to incorporate into your arguement the economic research by Nobel Prize for Economics winner M. Yunus who demonstrated that the poor were actually better credit risks than the middle and upper classes of the economy... Thanks for the link, I did not include the research as I am not familiar with it, I will remedy that soon. I did however note that for many years low income persons recieved loans and that the payback rates were very high. I also noted that the later problems of default spread across a spectrum that included upper middle class investors. The problem was due to a lowering of lending standards and a lack of common sense. Every economic grouping has it's share of those who are either not responsable or are not financially capable of handleing a large loan. The market had a way to sift these people out until the sifter broke down.

Another area you are incomplete in your analysis is in your overview of what sort of lending programs were available when the CRA was passed. Your claim is that "sub-prime" lending was CREATED BY THE CRA. Yet that is simply not historic fact...Well, I went back and reread this section. I did not state that sub-prime was created by the CRA but I can see where you drew this assumption. My view here, and I stated this, is that sub-prime was used by lenders as a vehicle for advancing compliance with the CRA. Once again, in the interest of being somewhat brief, details were left out. As the discussion continues they can be added in.

Thirdly Adjustable Rate Mortgages (ARMs) have been around since the mid 1970s when a combinaiton of highly variable inflation made mortgage making difficult. To properly accomodate the Interest Rate Risk (the chance that inlfation would exceed the interest rate on the loan, thus turning it into a money losing proposition), a fixed rate mortgage needed to be around 13%-15%, but no-one could really afford such a mortgage. So banks created ARMs based on either the Prime Rate or the London Inter Bank Overnight Rate (LIBOR). ..Agreed...I am not saying that ARMs are anything new either, nor am I saying that ARMs are in any way a bad idea for some borrowers. The Federal Reserve was pushing hard for the use of ARMs in the period preceding the rises in interest rates. It is my opinion that "Preditory Lenders" in many cases misrepresented the pitfalls of ARMs, using the lowering interest rates as an enticement to secure the loans. Many people were hit with a shock when the Fed changed course and began to increase rates. Here in CO. Springs there was a huge surge in forclosures due directly to rises in monthly payments associated with ARMs.

These mortgages would "adjust" both up AND down The big change came in 2002/3 with the advent of loans which were based on the old BFC loans, but which had "resets" (ie interest or payment adjustments) at the 3 or 5 year mark that allowed the first 3-5 years of a mortgage to be dramatically underfunded (sometimes actually losing ground against what was owed). THIS was a difference caused by DEREGULATION of the sub-prime lending industry. Not by the CRA but by the repeal of Glass-Steagal...Please provide a link to the portion of Glass-Steagal or Gramm-Leach-Bliley that brought about this change. It seems to me to be more of some kind of move by either The Fed or possibly an unregulated portion of the banking industry. Some of the problems associated with all of this are not due to deregulation, rather a lack of regulation, there was none (to speak of ) to begin with. I want to say here, that I do not blame the creation of the CRA for any of this. As I pointed out, the CRA was needed and a worthy program.

Lastly, and perhaps most importantly, you do not provide a timeline for all the changes you describe. You fail to underscore that the CRA and Fannie and Freddie's "conformant loan" structures, were in place and worked very very succesfully (remember the 2%-4% risk rate) UNTIL the repeal of Glass Steagal and subsequent ADDITIONAL deregulation and waiving of regulations in 2001/2002..Nope, I did not include a timeline, this is an overview as opposed to a detailed accounting. I am working at creating a referanced account that includes a time line but to be honest, with the amount of research required for the referancing, this crisis will most likely be yesterday's news before it is completed. You are right, I did leave out the success rate of Frannie and Freddie and this is an important point that should have been included. Once again I will request a referance to the portion of Glass-Steagle that was abandoned as well as the additional deregulation that you speak of.

The timeline is critical because if something was working very succesfully until some major changes were made; changes which had a built in 3-5 year timer; and then 3 years later a catastrophe occurs, the logical approach is to inspect those changes more closely rather than look at the original structures that worked very effectively for almost 25 years (just about the life of a full mortgage)...Once again we are in agreement. The focus of my concern is not in the original structures of the CRA or the GSEs which I believe worked well and were necissary. It is my position that the problem came later as a result of social and political pressures to increase the numbers of loans as a means of advancing "affordable housing" concerns, this happened over time gaining momentum as it went. The original structures were in a way tampered with. I am finding it difficult comming up with actual legislation or Presidential Congressional mandate that increased the amount of high risk loans purchased by the GSEs to 50 and then 56%...nevertheless it was done. Also, there are no hard and fast rules that define "sound lending practices", this being an area that was largely unregulated. In a sense, I am describing a "perfect storm" scenario.

Furthermore, if if both Sub-Prime loans existed before the CRA, and the "sound lending practices" turned out not to be so accurate, its almost tautological to claim that these were the cause of the problem...Indeed it would beif I were if I was attributing the problem to these as causes. I am not. It is my view that sub-primes only bacame a problem when the resposability for the lending was taken away from the lender by the purchasing of the loans by the GSEs. This was exaserbated by political pressure on the GSEs to accept increasingly riskier loans. The loans were sold by the GSEs for profit in the same way as the lenders sold the loans to the GSEs and so a lot of people looked the other way. The relieving of resposability on the part of the lenders caused the collapse of "sound lending practice"...no risk...no restraint.

I must leave for work...will pick this up later.

This has to be short cuz I have to run to a meeting this afternoon. I'll post more later

Furthermore, if if both Sub-Prime loans existed before the CRA, and the "sound lending practices" turned out not to be so accurate, its almost tautological to claim that these were the cause of the problem...Indeed it would beif I were if I was attributing the problem to these as causes. I am not. It is my view that sub-primes only bacame a problem when the resposability for the lending was taken away from the lender by the purchasing of the loans by the GSEs

But this is where your arguement goes off the rails. The GSEs had been packaging loans for over 2 decades with no problems. What GLB allowed was for NON-GSEs to get into the same game. The problem was that the NON-GSEs did not have the same packaging restrictions that the GSEs did, but they used modified versions of the risk functions the GSEs were using to "justify" the "safety" of the investments.

These NON-GSEs are the same investment banks that Gramm-Bliley allowed into the mortgage market. Had they not been allowed into the mortgage market, we would never have gotten SISA and NINJA and liar loans.

There is an excellent investigative journalism piece on this can be found in an audio version here. It underscores how it was not the GSEs but instead the Solomon Bros who drove this market

Degs: Thanks for the NPR link, I listened to the piece this morning so I am running short on time for writting. I am familiar with Mr. Glass, not so much with Mr. Blumberg. As far as Ira Glass goes, he is definitely left of center, I have a great deal of respect for the integrity of his work and so I only point this out to say that on my part I will be evaluating this piece through his lense as well as mine.

I am not in any way saying that the report is skewed, rather, it seems to me at first blush to be omitting something. This may or may not be the case...it will require some thought and possibly a second hearing to see if my instincts are correct...there is just some kind of hole in it all that I am unable to put my finger on at the moment. I usually make notes of my questions which I did not do this morning.

Overall, this was a very powerful piece maybe due to the amount of emotionalism that was mixed with the facts...and I say "facts" because I believe that is what they are.

If all of this is the case, then it seems to me that The Masters Of The Universe up there in the World Monetary Fund are a rather incompetent bunch...it's enough to make one join the Black Helicoper crowd...but then, there is much insanity to go around at all levels.

Stay in touch Degs, I hope there are others following this thread.

Blumberg is a financial journo that does the show Marketplace. Which is a business show. I agree there is emotionalism mixed in with the facts.

As for the WMF being incompetent- there was an interesting interview with the most recent Nobel Econ prize winner Krugman. He was asked exactly about this. And his answer was along the lines of "we didn't MISS the crisis - we've been talking and warning about it for a good 5-6 years. We just missed how dire it was going to be".

So there is a touch of incompetence there. And more than a touch of Hubris, which often works out as the same thing. These guys on Wall street are bright. And no question brighter than most. But The Brightest? Not necessarily. Of the team that I worked with in the early days of one of the very succesful PC startups, the one guy that left to go be a financial analyst after our company went public, was not the best and brightest in the group - not by a long shot.

Degs: I found a timeline on Wikipedia today...and yes, I know Wiki is not the most sterling source of info out there in some regards. However, there are many contributors who do excellent work for the site. I stumbled into it while doing some research on my lunch hour. The timeline is very detailed as to events and is well referenced. I had time to look it over, as well as check some of the references and it looks pretty near to what I had in mind for my own...I guess I can move on to another project now.

Oddly enough, it has all the elements of your position as well as all of the elements of mine....go figure. You can find it under the title Subprime Crisis Impact Timeline.

I am reformulating my position somewhat on this topic. I am not accepting that G-L-B was totally to blame for this, but I am abandoning the position that the corruption of the GSEs and misuse of the CRA are the total heart of the problem as well. As most complex problems go, the answer seems to be a combination of the two.

If I was to to state the root cause...and this is today...I may adjust my position as I keep going into this. I would say that the problem lies in having no set or legal standard defining "sound lending practices". The Fed has the power to set those standards and it seems that it totally ignored the situation. Had those standards been in place...ones that allowed for the responsible subprime lending that occured for years...no changes to Glass-Steagal, the CRA or the holding percentages of the GSEs would have created risk. The securities that were being sold would have been every bit as solid as they were reported to be, foreclosure rates would have remained manageable and the housing bubble may have never been created.

In short, it was not deregulation that created the problem but a lack of it in an area where it was needed.