5 ms·

> The banks lent money they didn't have. I don't get this. Banks must always do this, they exist because everyone else wants to lend short term or borrow long

> The banks lent money they didn't have. I don't get this. Banks must always do this, they exist because everyone else wants to lend short term or borrow long term. Anyone who acts as the counterparty to that is automatically a bank or bank-like. I guess what you mean is that when the banks borrowed short term (as they must), they did it using home loans as collateral, and that more of those loans defaulted than was expected. How does that justify defaulting?

soVeryTired 9y ago
> I guess what you mean is that when the banks borrowed short term (as they must), they did it using home loans as collateral But that's not really what happened. Banks made a lot of poor quality loans, then packaged them up and sold them on, taking a spread in the process. Some banks (e.g. Bear Stearns and Lehman) kept some of that risk on their books, but others (Goldman) didn't. This wasn't a case of banks using their mortgage book as collateral, it was banks originating and actively marketing a dangerous product. It's also worth noting that some banks knew that the products they were selling were low-quality and likely to default. Then the US government stepped in and propped up the instigators of the crisis. People who made poor borrowing decisions had a part to play in the crisis too, but I think it's fair to argue that the pain could have been distributed more evenly. Under the circumstances, I can see why it might seem fair to walk away from an obligation like the author's mortgage.
- mlrtime 9y ago
  Neither Bear, Lehman nor Goldman 'make' loans. They created CDOs,CDSs,MBSs and sold them to other credited investors.
  - soVeryTired 9y ago
    Yeah, fine - that's a simplification. They bought third parties' loan books and securitised them. But it was that flow of money that encouraged the bad lending practices. If you know you can make a crappy loan and sell it on to Goldman for a profit, you'll make the loan.
maxerickson 9y ago
The way to look at defaulting is the way the bank would. As a business decision. The bank wouldn't bother justifying themselves if they walked away from a deal, they would just pay the penalty and move on.
face_mcgace 9y ago
On a basic level, yes, banks need to lend money. But saying more defaults came in than were expected is a vast understatement. Banks lent so much money, and were so exposed to risk, that any market correction could have, and did, destroy well established financial institutions. I mean, we're talking razor thin protections from financial ruin basically predicated on the need that housing must always go up. It is literally insane levels of over exposure - not just small leverage to help build a small housing community. How can you expect people to not default in a system endemic with corruption and rife with irresponsibility?

soVeryTired 9y ago

> I guess what you mean is that when the banks borrowed short term (as they must), they did it using home loans as collateral But that's not really what happened. Banks made a lot of poor quality loans, then packaged them up and sold them on, taking a spread in the process. Some banks (e.g. Bear Stearns and Lehman) kept some of that risk on their books, but others (Goldman) didn't. This wasn't a case of banks using their mortgage book as collateral, it was banks originating and actively marketing a dangerous product. It's also worth noting that some banks knew that the products they were selling were low-quality and likely to default. Then the US government stepped in and propped up the instigators of the crisis. People who made poor borrowing decisions had a part to play in the crisis too, but I think it's fair to argue that the pain could have been distributed more evenly. Under the circumstances, I can see why it might seem fair to walk away from an obligation like the author's mortgage.

mlrtime 9y ago
Neither Bear, Lehman nor Goldman 'make' loans. They created CDOs,CDSs,MBSs and sold them to other credited investors.
- soVeryTired 9y ago
  Yeah, fine - that's a simplification. They bought third parties' loan books and securitised them. But it was that flow of money that encouraged the bad lending practices. If you know you can make a crappy loan and sell it on to Goldman for a profit, you'll make the loan.

maxerickson 9y ago

The way to look at defaulting is the way the bank would. As a business decision. The bank wouldn't bother justifying themselves if they walked away from a deal, they would just pay the penalty and move on.

face_mcgace 9y ago

On a basic level, yes, banks need to lend money. But saying more defaults came in than were expected is a vast understatement. Banks lent so much money, and were so exposed to risk, that any market correction could have, and did, destroy well established financial institutions. I mean, we're talking razor thin protections from financial ruin basically predicated on the need that housing must always go up. It is literally insane levels of over exposure - not just small leverage to help build a small housing community. How can you expect people to not default in a system endemic with corruption and rife with irresponsibility?