This week’s collapse of major investment firms (and the ongoing government bailouts) prompted me to check out an episode of This American Life that examines the events leading up to the current credit crisis. I just finished listening to the show and it does an excellent job of telling the story from the perspectives of the people involved–the borrower with bad credit who took out a subprime mortgage that he couldn’t afford, the mortgage brokers who made these ill-advised loans and sold the debt to the investment banks, and the investment bankers who bought the debt and parceled it out to fund managers around the world. And what’s striking is that, even at the height of the lending craze, many of these actors realized that their actions didn’t make much sense at a granular level. It didn’t make sense to lend half a million dollars to someone without checking assets or income. It didn’t make sense to sell these loans as safe, triple-A securities. It didn’t make sense to expect housing prices to rocket ever skyward.
But as the report points out, everyone else was doing it and there was piles of money to be made. Most of that money went up in smoke and we’re all on the hook for the debt that is coming due. So much for letting the invisible hand of the market do its thing.
Long time viewer – First time commenter — That TAL piece was the single best explanation I’ve found — I’ve talked to multiple fancy Wall Street bankers and none of them are able to describe the situation so eloquently. Last Friday’s TAL also touched on the SEC’s (mis)handling of the mortgage backed securities meltdown. NPR has consistently been the only media outlet to present these topics in a manner that is in anyway helpful…