Comments on: The Financial Crisis: Who’s to Blame?

By: Ckrob

Ckrob — Mon, 23 Mar 2009 18:59:00 +0000

“A leverage ratio of 30 means that 30% of a bankâ€™s total capital is debt.”

If Diana Wolf actually believes this she shouldn’t be published on your site. Let’s just agree to assume that we cannot rely on what she says since it is at such variance with reality. A leverage ratio of 30 means something quite different than what she says.

By: Ryan

Ryan — Sun, 28 Sep 2008 00:04:54 +0000

The SEC was actually established by the 1934 Securities Exchange Act. The Securities Act of 1933 required a Prospectus to be distributed prior to an IPO but did not establish a regulatory board.

Part of the reason behind the inaccurate ratings is the .com boom. Moody’s and S&P both using accountants auditing companies transactions to determine the companies risk and establish a rating. Due to the .com boom, these companies had to rapidly hire additional accountants and were forced to allow inexperienced accountants determine the ratings on investments.

As some investments with high ratings began to fail, it lowered consumer confidence across the board…after all if one company is mislabeled how many more are.

Consumer confidence is dangerously low…the lowest it’s been since 1929, and I think we all know what happened in 1929.

By: Jamey

Jamey — Fri, 26 Sep 2008 14:20:18 +0000

What? Discussion about the mortgage crisis void of knee-jerk partisan filtering and blame-shifting? Amazing. This thing is way too complicated (and frankly too serious) to point one judging finger in one direction. There’s a stack of greedy people and bad decisions a mile high and we’re all taking a hit because of it.

By: NicoNico

NicoNico — Fri, 26 Sep 2008 02:50:53 +0000

To be fair, some of the homeowners who got subprime mortgages were pressured into them. I know this partially because I was buying a house during the boom (found a great deal, though, house barely lost any value) and the mortgage broker tried to talk us into a lower rate. We didn’t accept, and it turns out that lower rate was an ARM, one that would’ve adjusted to a higher rate around now. Many people weren’t talked out of that rate, or were told that, yes, they could borrow with no money down.

Then again, there were also those people who really shouldn’t have bought at that point in time.

By: Mike

Mike — Fri, 26 Sep 2008 02:17:26 +0000

You forgot the Community Reinvestment Act which required lenders to make the risky loans to those who really can’t afford the homes they were buying. Once the act was strengthened by the Clinton administration in 1995 to the point that lenders were forced to enter loans that they normally would take the risk of entering, these businesses were operating outside of acceptable risk and Fannie Mae and Freddie Mac were created to prop up the entire industry.

The Bush administration attempted to correct this in 2003 but the legislation was blocked along party lines and went nowhere.

I remember speaking to a small bank loan officer about two years ago and she was telling me they are required to enter into a certain amount of home loans with JOBLESS people per year and report their compliance to the Community Reinvestment Act to the FDIC. What business would be willing to enter into such a significant investment as property and a house with someone who has absolutely NO means of giving the business the return on their investment?

By: Mike

Mike — Fri, 26 Sep 2008 02:14:13 +0000

The Bush administration attempted to correct this in 2003 but the legislation was blocked along party lines and went nowhere.

By: european

european — Thu, 25 Sep 2008 19:31:21 +0000

Leverage ratio doesnt measure amount of debt to total amount of capital (=total assets), it usually measures debt to total amount of equity. So a levereage ratio of 30 actually means that for each 1 unit in equity it has 30 units of debt, which means that 97% of total assets is debt (1/31 is the equity/total assets ratio..). So banks are heavily leveraged and their investments really can’t go too sour before they go bankrupt.
I would actually say that both rating agencies are to blame because they gave too good rating for the Special Purpose Vehicles. For instance MBOs and CDOs were actually seen as as risk free as government bonds due to their structure, which naturally wasn’t the case with a hindsight.

But I wouldn’t want to blame risk management and rating agencys only, i think that Greenspan (and here in europe ECB) as they have kept the cost of money too low during a huge economic boom due to low inflation, which was caused for instance by chinese imports. Keeping money cheap lead that investors needed to take more risk in order to get better return, which led to demand for risk, which lead that people didnt care that they took too much risk for too little return.

By: Noah

Noah — Thu, 25 Sep 2008 19:06:44 +0000

You forgot homeowners for buying homes they couldn’t afford. Wall Street wouldn’t have been able to package the mortgages had the mortgages not existed in the first place.

By: David

David — Thu, 25 Sep 2008 18:58:04 +0000

I blame all you idiots who bought stuff they couldnt afford. And now the homeowners are looking for handouts??? Hahahah, what a joke. I hope you all get whats coming to you. (Read: homeless) Next time understand what your doing and getting in to before you make a $100,000+ deal.

By: Amy

Amy — Thu, 25 Sep 2008 17:51:43 +0000

Brilliant article! Very informative. Way to summarize some really complicated and confusing information. I love Mental Floss!

Amy