“The Chain of Blame” is a thrilling account of multiple aspects of the financial crisis associated with mortgages. Admittedly, I am still a neophyte trying to understand the various “financial instruments” that have been used during the last three decades. It is hard to believe that securitizing mortgages into bonds was “invented” in the 1970’s by Lew Ranieri. Over time, investments became more sophisticated through Collateralized Debt Obligations and Credit Default Swaps. Needless to say, reading such a book does not make one an expert.
However, I have some observations:
(1) I could never have survived the mortgage business model that surfaced when the brokers were no longer generally attached to banks and when mortgages were securitized. The incredible pressure to sustain the model, i.e., getting mortgages as fast as possible on whatever terms could be underwritten in order to secure funding associated with the securitization of the mortgages, made many, many very, very rich, but the price was extraordinary. It takes a different type of person than I am to do this type of work.
(2) It is amazing how one change tends to lead to another, and then another. After mortgages were securitized, then the next step materialized, the Collateralized Debt Obligations, and then, the Credit Default Swaps. And as these instruments developed, rules were changed to facilitate more and more mortgages (including refinancing).
(3) It seemed that the right hand did not want to “know” what the left hand was doing. Mortgage originators had their work reviewed by organizations checking on compliance with the rules. However, the major lenders (investment banks) were not checking on whether the work of underwriting was correct.
(4) As usual, when the mortgage industry started to fail due principally to the subprime mortgages, blame was readily assigned but seldom accepted.
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