“How did things go so wrong?”

From the New York Times:

Banks Gone Wild
Published: November 23, 2007

“What were they smoking?” asks the cover of the current issue of Fortune magazine. Underneath the headline are photos of recently deposed Wall Street titans, captioned with the staggering sums they managed to lose.

The answer, of course, is that they were high on the usual drug — greed. And they were encouraged to make socially destructive decisions by a system of executive compensation that should have been reformed after the Enron and WorldCom scandals, but wasn’t.

In a direct sense, the carnage on Wall Street is all about the great housing slump.

This slump was both predictable and predicted. “These days,” I wrote in August 2005, “Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn’t seem like a sustainable lifestyle.” It wasn’t.

But even as the danger signs multiplied, Wall Street piled into bonds backed by dubious home mortgages. Most of the bad investments now shaking the financial world seem to have been made in the final frenzy of the housing bubble, or even after the bubble began to deflate.

In fact, according to Fortune, Merrill Lynch made its biggest purchases of bad debt in the first half of this year — after the subprime crisis had already become public knowledge.

Now the bill is coming due, and almost everyone — that is, almost everyone except the people responsible — is having to pay.

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5 Responses to “How did things go so wrong?”

  1. Mike Elliott says:

    “The point is that the subprime crisis and the credit crunch are, in an important sense, the result of our failure to effectively reform corporate governance after the last set of scandals.

    John Edwards recently came out with a corporate reform plan, but it didn’t receive a lot of attention. Corporate governance still isn’t regarded as a major political issue. But it should be.”

    Unfortunately, even fewer people trust the federal government to affect real reform, and with good reason. Foxes and henhouses metaphors come into play.

  2. Confused In NJ says:

    Amen!, to Foxes and Henhouses Metaphors.

  3. JD says:

    Burn baby burn. I feel no sympathy for the people who bought these houses during the boom with such flimsy finances and they are now being foreclosed on. They jacked up prices so people who didn’t want to overextend themselves couldn’t afford houses. I want to buy my first home in the next couple of years and have saved up over $300K by renting and living within my means – something most of these people don’t understand how to do.

  4. ja says:

    Living within your means meaning living in grams’ basement? :/

  5. kt says:

    yea, I have the same Q as ja… JD — it’s impossible to save in NJ w/100k (wife & 2 children). I’m renting 1.6k per mo, and I can barely save (only 9k over 7 years). You must be living at your parents? Tell us whats gives??

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