Thursday, September 20, 2007
House Of Cards
Barry Ritholtz over at The Big Picture provides the key to understanding the real danger of the subprime meltdown:
Alan Greenspan's 1% rates created what looked like a huge Housing boom. But what it really created was a credit boom, which then in turn led to a derivative boom and ultimately structured finance boom.
Thus, the so-called sub-prime crisis was merely the match that ignited a much wider breakdown.
What's also important to keep in mind is that everyone now getting burned by the flames of these high-risk loans was busy cashing in on them while the run lasted. That includes individual buyers (the ones who managed to convert unstable credit positions into solid leverage, anyway), as well as the institutional investors who underwrote the high-risk debt. Kind of like the junk-bond schemes of the 1980's.
As usual in a pyramid scheme, the last folks in are the ones left holding the bag. I'm just wondering if anyone's going to play the Michael Milken role and do some white collar time on this one. Of course, it would be difficult to really pin the blame, given that the entire operation was Federally subsidized.