This post was banker for a while and is a student of investment banking, especially how the same helps in nation building. The more important thing is have we learned from this.? It has been a decade and a half since the crisis and it seems we are facing another one, albeit from a different cause (covid 19)
For 2008 many experts believed that other causes were the
1. bonus system that rewarded more sales irrespective of the risks
2 the lack of supervision and control in a deregulated environment (the head of the Treasury was former head of another IB - Goldman Sach
Central to the crisis of September 2008 was the subprime mortgages
1. Bankers from all over thought that the Treasuries were too low and therefore went into mortgage backed securities. They gave higher yield than Treasuries The Mortgage Backed Security were nothing more than pool of mortgages packaged and sold as securities. and were sold from bank to bank. No one seemed to shoulder the responsibility or risk for the securities, which was present if the loan was underwritten by the bank alone and held into.
At that time real estate was booming in USA, and everybody across the world wanted a piece of that boom at least for MBS. If the borrower defaults, the house could still be sold at a profit.
2. There were prime and subprime mortgages The prime were good mortgages that passed the standards of poor credit (This post experienced this with instruction of going by formula lending, ie
Amount of monthly loan eligibility x 36 = loanable amount.) The credit worthiness and scoring went down to the gutter
3. Subprime mortgages were below par as per credit standards. These were housing to loans to people
who can ill afford to live within their means much less pay the normal amortization. The mortgage companies engaged in predatory lending ie that loans were offered with little amortization in the beginning to lure them into borrowing; But a year later the payments would balloon. The borrowers cannot afford and then default
The house would be foreclosed and cant be resold No one wants to buy the foreclosed house (or if the
neighborhood did not look prime)
4 These result in more defaults and the MBS became worthless or in the term of the IB toxic
5. First to notice this was BNP (Paribas) in Paris And soon the toxicity spread across Europe and the world. Eventually ending up with Lehman brothers who had large exposure.
We also note that some IB kept on selling securities back in forth to generate more turn over, (sales) and commission for the brokers traders At some point Lehman sold to Cayman banks (on a repo) MBS
worth almost $100 billion. Note this was not a borrowing but a sales (the repo tells you it is a borrowing). So no civil or criminal cases can be filed
The head of investigating team that held the hearings say that some products can be toxic over time And that is fine but not with sub prime mortgage which was toxic from the very start And no one, no one seems to bear responsibility to the quality of the toxic product: not the underwriter, or the packager, not the rating agency, not the auditor (if any) No one No one seems to care
May be we asked for it
The debacle caused loss of jobs for nearly 30,000,000 Americans, not to mention loss of money, loss of confidence in banking system and very harsh lesson for top execs of Lehman and other banks worldwide. Did we learn our lessons?
