Friday, October 03, 2008

The "Bailout" and Greed

Another respectable bloglodyte doesn't like Palin's reference to "greed" on the mortgage/bailout issue.

Anyone who denies "greed" is either dishonest or really, really, really under-informed.

Let's go from the top.

Mortgage-backed securities (MBS) were invented by Bear Stearns, Lehman Bros., and Goldman Sachs (among others). They were bundles of mortgages, largely sub-prime or "Alt-A", but also including straight-up normal "prime" mortgages.

The originations of most of the sub-prime instruments were mortgage BROKERS (not Banks); and those mortgage brokers made a LOTTA MONEY in commissions for those instruments.

Bear/Lehman/Goldman also made a LOTTA MONEY by packaging, slicing/dicing, and re-selling the mortgages as "MBSs".

The reason there was a lot of money? Simple. Higher risk=higher reward. Bear (et al) were able to market those MBSs to lotsa places which wanted higher returns than were available from US Treasuries, State-issued bonds, etc. (See, e.g., the Whitefish Bay School Board.) Ironically, that includes banks who may never have actually originated such loans in the first place.

It was greed, all around.

What about the banks? They issued SOME of the loans--but by no means the majority:

50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. (Ever hear of Countrywide? GMAC?)

No question that HUD, Fannie, and Freddie were complicit. But don't be Pollyanna.


Anonymous said...

I agree that greed was a component. What I didn't like about Palin's response was that she put all of the blame on "corporate greed." She should have mentioned it, but also mentioned government's and the borrowers' role in the fiasco.

- Owen

Dad29 said...

Her response was inadequate, yes.