December 29, 2008

Missing the point at the NYT

This is one of the dumber articles on the credit crisis I've seen published so far. In this one, it's all about Bush's focus on expanding homeownership.

Of course, that had little if anything to do with it. His desire to expand homeownership and the increase in it was more coincidence than result of a detailed and well thought out plan. Further, the article completely misses the ability of the IB's to lever to infinity on short term debt that, when it dried up, froze their access to funding. Without that funding, their capital structures and leverage were unsustainable and they collapsed. As they collapsed, it constituted a credit event which triggered counterparty claims on CDS and triggered (for example) AIG's need to raise collateral which would have forced them to sell already depressed securities into an already depressed market.

All this was because someone lied about their income? Or bought more house than they could afford? No, the credit markets collapsed because no one ever reserved for losses and a bubble was created by cheap money, largely unregulated. Not to mention the fact that many people paid A credit prices for C credit risks, a poor proposition in the best of times.

This was, purely and simply, a lack of regulation and common sense on the part of regulators and the players, many of whom are taking home large bonuses even this year. It was in that environment that a few defaults can lead to more and more defaults and ever larger, more robust losses that eventually overwhelm an individual bank or even an economy.

It would be AWESOME if some members of the so-called financial press would actually, you know, get it right.

Posted by mcblogger at December 29, 2008 09:00 AM

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