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I work(ed) in lending. I discussed the situation at length with superiors and clients. I attended numerous talks about what happened. I had to revise credit agreements to fix the issue that arose because LIBOR was completely fucking fraudulent. I discussed mark-to-market valuation vs income stream on this board ad nauseum. We talked about capital requirements and what would happen if another bank failed. We talked about the Chicago School and how bonus culture renders it dead fucking wrong. I could go on and on.
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I don't know why you insist that I disagree with your argument that letting another bank fall could have lead to dire circumstances. I've not said that. I've said most of the big banks
deserved to fall. And they did. And part of me would like to see whether the doomsday scenario projected would actually occur if another bank fell. But I agree with you that the risk of catastrophe was too high. But did many - most - of the banks who did not fail
deserve to fail? I think absolutely.
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Sebby's recollection of anything that happened at the time is so fucking off that it makes me think he was in a coma at the time.
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My view on housing being a house of cards the fallout from which no MBS could be structured to avoid accrues initially from representing a subprime lender in the early 2000s. The model was utterly predatory (regulatory nightmare) and I was astounded it could be used to purchase cars, let alone homes. I was obviously quite unlearned.
Fast forward to just before the crisis. I was involved in purchasing and collecting debt. We did well on the refi boom before the crisis, and took the chips and left. The data we had been getting on borrowers was ominous and the price of debt was getting way too high.
Once that entity went into run-off, I went back into practicing part time (while doing a few other things). By happenstance, I handled a few foreclosures, then a few more, and then I had a mill running (they were cookie cutter, took no thinking, and referrals were swift... whole neighborhoods were going under at a time). The easiest way to hold up a case was to request all kinds of obscure shit from servicers (pooling agreements, servicing agreements, etc.). Doing that lead me to people looking at bringing class actions against servicers. I burned a bunch of time researching the stuff and reading white papers and talking to people at numerous levels. The picture one acquired from having read white papers on this shit was that, yes, you are correct - a lot of people in the big banks were clueless. But a lot of them were not. The loans underpinning a lot of the MBS at the frothiest point of the housing run-up were so bad, underwriting so lax, that no one couldn't see a problem coming. Did they think it was "contained" in subprime as Greenspan said? Maybe.
I think one had to have a more generalist view to actually understand what happened in 2008, because there are a lot of moving pieces. And one has to keep his eye focused exclusively on the cash flow from start to finish. If you knew a lot of loans were shit, jobs growth was anemic, and housing was turning into a bubble, which we knew as early as 2005, you then needed only run the numbers forward a bit. Ask yourself, "What happens when all this shit is packaged?"* Is it structured in such a way that it can withstand a number of loans defaulting? And what's the impact of an increase in defaults in a market unaccustomed to them? If the broader r/e market falters, what impact will that have on the economy (the r/e market at the time being one of the only bright spots in the economy). Will a correction in housing cause broader economic problems?
I don't know. I'm not "in the industry." But the friends and family I had on Wall Street all said the same thing. "These people are either incompetent or fraudulent, and I don't think they've been paying attention to shit." Almost none of them worked in MBS, or went near lending, so they tended to sound really annoyed about what they saw as some really dumb or craven fucks fucking a lot of shit up. (One I know did work near the MBS mess... he was part of the group that Baum bet against within his own firm.) But I do know this: Very few - a number so small it hardly bears discussing - of the people involved in packaging, selling, and rating MBS, or brokering loans, or buying houses they couldn't afford - can call themselves true "victims" of unforeseen circumstances in 2008.
But again - none of this is an argument against your point that allowing another bank to fail appeared to carry way too much risk. Though many more deserved to fail, we couldn't allow it.
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* I wonder how much MBS was impacted from the refi boom in 2007. When rates are cut and loans paid off early, this impacts value, no?
