Tuesday June 24, 6:00 am ET
It's a classic Wall Street “whodunit," complete with a collection of greedy investment bankers, slow-witted policymakers and numbskull Florida home buyers. But with so many suspects, how will Americans ever figure out who killed the once-vibrant and cheery U.S. economy?
"There were a lot of people who contributed to the real estate bubble and the easing of lending standards that led to the subprime debacle," says Ethan Harris, chief U.S. economist at Lehman Brothers. So many, indeed, that he and other pundits find it difficult to point the finger at any single player.
You can, though. Play the Portfolio.com brackets and pick your own culprit.
Real estate speculators took foolish risks because lax lenders such as Angelo Mozilo's Countrywide Financial let them; mortgage bankers and investment bankers allowed greed to override caution; credit-rating analysts and central bankers alike relied on risk-management models that proved inadequate to the task at hand.
"Bubbles grow because nearly every player pitches in to make them grow," argues Tobias Levkovich, market strategist for Citigroup.
Of course, at the core of any bubble is an apparently rational demand for a rational good or service that at some point tips over into irrationality. So the quest to assign blame should start with whomever it is that is demanding the free lunch—the purchasers of tulips, dotcom stocks, or, as is the case today, townhouses in Naples, Florida, or on the outskirts of Phoenix.
"The speculative fever that swept through the ranks of home buyers was quite astonishing," says Jason Trennert, co-founder of Strategas, a market-analysis firm. "Everyone wanted to cash in on what they saw as a one-way ticket to riches by buying real estate."
The problem wasn't just the greed of the buyers, however. Lenders were equally hungry for quick profits and all too willing to satisfy that buyer's need for immediate gratification, waiving the requirements for income or job verification in exchange, of course, for only slightly higher interest payments on the mortgage.
No down payment? No problem. Suddenly, there were few true obstacles to borrowing; after all, minimal percentage points of extra interest would compensate for the added risk of lending to these subprime borrowers, rationalized the banks and other lenders doling out the cash.
But perhaps those lenders wouldn't have been quite as eager to throw their traditional rules out the window if creative savants toiling at investment banks hadn't found a way for them to quickly remove any risk they were taking from their books and dump it into the laps of other investors. Some, like Merrill Lynch's ousted chief, Stan O’Neal, jumped headfirst into the risky business.
The folks who ran those portfolios, says the freshly indicted Ralph Cioffi of Bear Stearns, eagerly snapped up those securities without questioning their outsize yields, all too willing to accept the risks as benign and remote.
After all, analysts at the credit-rating agencies such as Moody's and Standard & Poor's were awarding these collateralized-mortgage obligation securities and other such packages far higher ratings than they ultimately deserved. No one was able or willing to delve far enough beneath the surface to realize how risky the investments actually were, or how much investors stood to lose if housing prices started to dip or interest rates started to climb.
Does the blame spread to Ben Bernanke and the Federal Reserve? Was a lack of vigilance on the part of policymakers responsible for the bubble and thus, ultimately, our current economic plight? What about Hank Paulson at the Treasury? Shouldn't the former Goldman Sachs boss have felt the ill winds blowing?
"Tighter monetary policy would have been helpful," concedes Lehman's Harris, before adding that "it's very hard to identify an asset market bubble, and frankly, this was a big problem that had a lot of participants." Ultimately, though, he's unwilling to pin too much blame on Fed chairman Ben Bernanke or his predecessor, the once-revered Alan Greenspan.
"Everyone was eager to take the risks when things were going well; it isn't until it all starts going wrong that we look for someone to blame," says Levkovich. "But if we're honest with ourselves, it's far easier to have perfect hindsight than it is to buck the trend when a bubble is taking shape."
