Barry Ritholtz on Causes of the Financial Crisis

Barry Ritholz, dans The Browser, à propos du livre  The Big Short by Michael Lewis

"All this goes back to the Fed taking the rates to such crazy low levels, that every bond manager had to scramble [for yield]. Most foundations and charities and pension funds and large trusts – especially the not-for-profit entities – as long as they give away 5% of their assets every year, they are completely tax free, and oversight is de minimis. Five per cent doesn’t sound like a big number. Typically, over long periods of time, the market returns are anywhere between 6-10% if you include dividends, and over a similar period of time bonds give you between 4-7%. What took place after the 2001 crash is that first you had markets down a ridiculous amount every year, and secondly Greenspan took rates so low that the 10-year [US Treasury bond] followed. If equity returns are negative, and bonds below 5%, how is a foundation or trust going to make 5%? If you were smart, you’d say, “We made so much money in 1998-2000, we don’t have to take any additional risk. We’ll just give away the 5% out of those profits and not worry about it.” But that’s not how human beings operate. Instead, they panicked. “We’re not going to make 5%! We’re going to have dip into the corpus of the trust or foundation!” And every bond manager got a phone call. “Hey dude, go and get me more than 5% and if you can’t do that, I’ll fire you and get someone else.” So along comes this product from Wall Street, securitised subprime mortgages. It’s triple-A rated, just like Uncle Sam, but yielding much more. You could get your 5-6%. So everybody piled into that product. They sold out. The more they sold out, the more Wall Street went to these non-bank lenders, mostly located in California, and said, “We need more subprime loans to securitise, and by the way if you do this many we’ll give you this much of a bonus.” That’s how you ended up with these mortgage companies giving loans to people who could barely fog a mirror.
My favourite example was the two grape-pickers in California, who each made $14,000 a year and qualified for a $750,000 mortgage. If they took 100% of their salary and used it to pay the mortgage, they would still default. Also, by the way, these 30-year mortgages were sold with a 90-day warranty. You can buy a toaster that has a longer warranty than a 30-year mortgage! Your obligation, when finding a borrower, is “Just don’t default these first three months. Whatever you do after that is not my concern.”