aceventura3

I know there are opposing views on the causes of the crisis, however, I don't know many who disagree that the "securitization" of mortgage loans lead to excesses. I also pointed to the arbitrage opportunities created by regulators due to their attempts to manage the market and the economy. The Community Reinvestment Act serves as an example of Washington's folly in the area of regulating and trying to manage the market. And as I said this act probably had a "bigger" impact than banking deregulation not that this act was the sole cause. Your data does not contradict my post.

For those interested, here is a summary of what happened.

People with limited resources were enticed to borrow too much money to buy or re-finance real estate at a low initial rate and in some cases with a low or no down payment. Hence the subprime borrower.

Cheap money was readily available. After 9/11 the Fed aggressively lowered interest rates and made more credit available , on a real basis to unprecedented low levels.

With cheap money and raising home prices, lending standards were lowered.

Lenders relied on loan origination fees to make money rather than loan fundamentals. The initial lenders repackaged these loans and sold them to another who took a fee and repackaged the loans and sold them again, the loans were further sliced, diced and combined leading to a very active CDO market (collateralized debt obligations).

Debt rating agencies often gave these CDO's investment grade ratings. Buyer's assumed they were safer than they were. No one had "skin" in the game and everything was fee driven.

Then banks, investment banks, hedge funds, etc., actually started borrowing money to purchase CDO's. They would borrow at a lower rate than what the CDO's paid. Hence the arbitrage opportunity. The market followed the lead of Freddie and Fannie, these entities are highly leveraged. So they would borrow at let's say 5% and would receive 5.25%, net of fees of course. If you think this transaction has no risk, you do it really, really, really big. Wise people did not fall into this trap.

Then the market developed other derivatives, like CDS's (credit default swaps) of form of insurance for the debt holder, only without reserves. Again, fee driven. So today we have trillions of dollars in these CDO's, CMO's, CDS's, and probably a few others I can't think of right now. And we have Freddie and Fannie with trillions also.

So with all this leverage (the loan is leveraged in some cases 100% or more, the CDO's are leveraged and you have hedge funds and others using leverage to arbitrage and you have insurance that is not really insurance on a loan with no equity and a weak borrower) and then housing prices start to fall. So then you have everything start to collapse.

In my view, it is the "securitization" of loans that lead to all of this. If banking deregulation was the thing that allowed banks to "securitize" these loans and allowed for the arbitrage opportunity, I will accept that as the root cause. However, arbitrage opportunities are usually created when the market is not free to respond fast enough to changing conditions, this is usually the fault of excessive regulation not less.

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