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Wall Street greed and the housing crisis
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Wall Street greed is the most often reason given for the collapse in real estate prices. It was one of the few things that John McCain and Barack Obama agreed about during their presidential campaigns.
"In short order, we are going put an end to the reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street.'' John McCain in Tampa during the 2008 Presidential Campaign
"We meet here at a time of great uncertainty for America. The era of greed and irresponsibility on Wall Street and in Washington has led us to a financial crisis as serious as any we have faced since the Great Depression. They said they wanted to let the market run free but they let it run wild, and in doing so, they trampled our core values of fairness, balance, and responsibility to one another."
Barack Obama in Greensboro, NC, during the 2008 Presidential Campaign
There is no question that greed exists on Wall Street, it exists almost everywhere. From the investors who bought houses to 'flip' for a profit to the product designers on Wall Street, greed runs rampant in our economy. The Wall Street greed that most pundits blame for the housing crisis is tied specifically to several types of securities; collateralized mortgage obligations, securitized mortgages, and mortgage and real estate based derivatives. All have several common features. They are all fairly complicated securities and have high expenses. They were also very profitable to the brokers who sold them, the broker-dealers and investment companies who created them, and the banks and mortgage companies that provided Wall Street with the mortgages upon which these products were based.
Unfortunately, they ended up not being profitable for their investors and were part of the reason that so much money went into real estate in such a short time. As a refresher, here is Robert Shiller's chart of the performance of real estate ending just prior to the meltdown.
There are numerous examples of the creativity that Wall Street used in designing investment products that were appealing to investors and very profitable for Wall Street. Bankers did very well during the early part of the decade as they profited from issuing the mortgage, and then, sometimes just a few days later, profited again from selling them. Generally speaking, bankers are a conservative bunch, I know since most of my career was in banking. But the banks and mortgage companies were unable to resist the demand for mortgages and the short-term profits this demand made possible.
In the next article in this series on the real estate meltdown, we'll discuss what created the demand for these mortgages.
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