Another excerpt from my book:
The official verdict on the 2008 crisis in the US-government commissioned 663-page “The Financial Crisis Inquiry Report” was :
“ While the vulnerabilities that created the potential for crisis were years in the making, it was the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages— that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008.”
And it’s nine main conclusions were:
- This financial crisis was avoidable
- Widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets
- Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.
- A combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
- The government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
- There was a systemic breakdown in accountability and ethics.
- Collapsing mortgage-lending standards and the mortgage securitisation pipeline lit and spread the flame of contagion and crisis.
- Over-the-counter derivatives contributed significantly to this crisis.
- The failures of credit rating agencies were essential cogs in the wheel of financial destruction.
The above sounds perfectly reasonable given the facts around the 2008, but begs the question of why if it was avoidable was it not avoided? Particularly as all the influential parties lost out from the crisis.: Wall Street profits collapsed, regulators reputations were tarnished, and the politicians who were around lost office.
The paradox is best exemplified by Lehmans. It was headed by Dick Fuld. He was named America’s top chief executive in 2006 by Institutional Investor magazine. He held a significant equity stake in Lehmans, which was worth over $1 billion at one point. But come 2008, his firm was holding much of the “toxic” mortgages that had spread around the world and the firm went bankrupt. His equity was worth $56,000 by the time of the bankruptcy and he became a pariah in the financial community.
With hindsight it’s easy to construct a narrative to explain a crisis, and argue that it could have been avoided, but it’s never that easy. The question then is why did bankers not only issue but also hold on to toxic mortgages themselves? Why did regulators not enforce rules more stringently? Why did central banks not raise tighten monetary policy sooner? Why did people take 95% or 100% loan-to-value mortgages?