Many have been left scratching their heads as to what really caused the current subprime crisis. Although the statistics point to lowered home values, higher interest rates and consumers overextending their means, many analysts believe that the problem goes much deeper.
Chris Whalen, founder of the Wall Street consultancy Institutional Risk Analytics, blames Washington for the design of America’s mortgage industry. He said: “The real father of sub-prime is Congress for setting up Fannie Mae and Freddie Mac. Their existence effectively meant that the Government had the monopoly on mortgages. The banks had to scrabble around with what was left - and what was left were jumbo loans [big mortgages] and bad credit quality debt.”
He explained: “Because of the way the market was structured, the likes of Bank of America and JP Morgan between 2004 and 2005 were so hungry for mortgage assets, they took market share from Fannie Mae and Freddie Mac.”
Other analysts point to companies that got too creative in their loan process. Joseph Mason, associate professor of finance at Drexel University, argues: “Bear Stearns was the most innovative, and by innovative I mean ‘worst’, at creating these complex instruments. They had a cradle to grave mortgage structure. They originated it, pooled it and sold it on.”
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