James Pethokoukis

Politics and policy from inside Washington

A timeline for the financial crisis

January 4, 2010

Responding to Ben Bernanke’s defense of Fed interest rate policy, my pal Barry Ritholtz lays out a crisis timeline (the only thing missing is various US housing policy initiatives):

An honest assessment of the crisis’ causation (and timeline) would look something like the following:

1. Ultra low interest rates led to a scramble for yield by fund managers;

2. Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;

3. Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;

4. These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.

5. Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as TripleAAA.

6. That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.

7. Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;

8. More leverage took place in the shadow derivatives market. That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.

9. Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside. This (logically) led to increasingly aggressive and risky activity.

10. Once home prices began to fall, all of the above fell apart.

Comments

Interesting but ultimately worthless without the ‘missing US housing policy initiatives’. A casual reader of this article would get the impression that banking and private-sector greed caused this whole housing mess and were solely responsible for the resulting credit collapse. How about opportunistic politicians trolling for votes by making home onership available to all, cheaply too, and strongarming the banks into taking on junk mortgages? How about regulators getting it wrong, as usual? How about opportunistic politicians – AGAIN! – pushing Freddie and Fannie into buying all this crap? Really James, you can do better. Leaving out the political angle distorts the whole story, and allows politicians in Washington to fool the voters, once again.

Posted by gotthardbahn | Report as abusive
 

It is american never ending appetite for debt and unscrupulous rating agencies in us which caused financial tsunami.

Posted by feoze | Report as abusive
 

Perhaps those who are focused on “missing US housing policy initiatives” can explain why the housing boom and bust was global in nature?

How is it that the Britain, France, Switzerland, Spain, Ireland, Portugal, Norway, Korea, New Zealand, Italy Denmark China and Sweden had a simultaneous boom and bust with the US?

(See this chart http://www.ritholtz.com/blog/2009/07/glo bal-crisis-timelines/ )

Pray tell what caused the same boom and bust in these other nations?

Is it your positions that Fannie/Freddie caused the European housing boom? Did the CRA somehow cause Korea, CHina,and New Zealand’s housing market to go wild?

How is it that policies and laws that only applies to US citizens somehow resulted in the same, global, coordinated rise in prices?

For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

If you can’t answer that, why on earth should we pay any attention to anything else you say?

How about some intelligent independent thought ?

Posted by Ritholtz | Report as abusive
 

As of coming out of recession, there is an economic growth but slow. Financial crisis is prevented by Fed’s ability. It shows the impression that banking and private-sector is the reason behind this whole credit collapsed and mess.
http://www.mikeastrachan.com/

Posted by Nikkilarsson | Report as abusive
 

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