If venture capital, hedge funds, and private equity didn't create the credit crisis, who did? Some might blame banks or bankers, but a former president of the Dallas Federal Reserve, Bob McTeer, says most of the bankers are victims:
Most of the subprime loans were made by nonbank and unregulated mortgage brokers who sold them to major New York investment banks for securitization and resale as mortgage-backed securities. The commercial banks implicated in that process were mainly those who had previously merged with investment banks or mortgage companies. Citi and Chase come to mind. You can probably count them on the fingers of one hand.
Virtually all of the 8,500 or so banks in the country were victims of the "mess" rather than the cause of it. Many had purchased MBSs as liquid, conservative investments that yielded a bit more than Treasury securities. By the way, they were rated AAA, and the bank supervisors approved. As trading in MBSs froze because of the toxic mortgages in the underlying mortgage pools, too-strict application of mark to market accounting rules forced drastic write-downs that destroyed billions of dollars of regulatory capital. Many failed unnecessarily. And, since FASB didn't make its modifications of mark to market rules retroactive, many more may fail because of that. Bankers were the victims of the mess, not the villains.
The whole concept of "the bank supervisors approved" illuminates the way that regulation can sometimes make things more dangerous rather than safer. Because "the bank supervisors approved," bankers stopped taking responsibility for the risks they were taking. FutureOfCapitalism.com doesn't necessarily agree 100% with Mr. McTeer on this, but it's intriguing enough to be worth passing along.
