Thread by @ritholtz

Despite all the books, documentaries, writings, people still misunderstand exactly what happened.

I have 1000 words on this, but this tweet storm is the short version.

10 Things People Still Get Wrong About the Financial Crisis

1/

bloomberg.com/view/articles/…

Lehman’s collapse caused the crisis

Nope.

Lehman like Bear Stearns before it had too much junk paper / used too much leverage had too little capital/deficient risk controls.

$LEH was just the most over-leveraged & under-capitalized of all banks.

2/

If not for X, we would have been OK:

The "Pet Peeve" approach to analysis. People use this to push their favorite issues. Complex economic factors and not one single thing drove the FinCrisis.

Economic reality is rarely so simple as THIS caused THAT. 3/

I had found 7 broad categories of factors:

Fed’s ultra low rates, post dot-com economic weakness, housing boom + bust, huge leverage, poor mortgage securitization, derivatives, reckless deregulation.

See graphic in “Bailout Nation.” 4/

Repeal of Glass-Steagall:

After the Depression, Wall St crises didn’t spill onto Main St. 87 crash, Asian Contagion 97, LTCM 98, dotcom implosion.

But-for test: Would crisis have occurred if GS still in place? Yes. Repeal made GFC bigger, but it would have occurred anyway. 5/

Bailouts were only option

Other options = painful + req'd foresight: Prepackaged bankruptcies for insolvent banks, Uncle Sam provides DIP financing. Pvt institutions buy X% to set prices; Government picks up rest at same price.
More difficult ST, economy much healthier LT. 6/

Taxpayers were repaid in full and even made a profit:

Nope

TARP + other loans/ bailouts MOSTLY repaid. But Feds waived NOLs + gave other stealth bailouts worth 10s of billions.

Give me (and just me) a $10B tax break - I will appear to be much financially healthier also! 7/

This does not count the HUGE RISK taken by Uncle Sam. When the recovery happened and financial markets tripled, its hard to say that almost getting all of your money back is a win.

That’s not counting all of the moral hazards we created. 8/

ritholtz.com/2012/09/how-go…

No Crimes Were Committed

Ugh, so many crimes were committed, from Mortgage underwriting to Accounting fraud to Insider Trading to Foreclosure fraud.

People who say none = clueless. Criminality infected the entire financial system. 9/

ritholtz.com/2018/09/crimes…

Note Jesse Eisinger does a great job in “The Chickenshit Club,” explaining how DOJ lost the will/skill to prosecute. 10/

ritholtz.com/2017/07/mib-je…

Borrowers were as blameworthy as lenders:

Credit used to be granted based on borrower’s ability to repay. It shifted to underwriter’s ability to sell mortgages to securitizer.

Imagine 30 Year with a 90-day warranty How could that go wrong? 11/

ritholtz.com/2010/01/bubble…

BTW, if you offer people free money -- Surprise! they take it. However, we expect bankers and other industry professionals who borrow money from the Fed to understand managing risk and behave much more better than the unwashed masses should. 12/

Poor people caused the crisis:

GSEs, HUD, CRA even Acorn got blamed for the crisis. Wrong, desperate and more than a little racist.

Post-crisis, I challenged all comers to show data that proved this – I even put up $100k for a debate about this – no takers... 13/

Why? Crisis, boom & bust were global. If poor people + related policies were cause, crisis would have been centered in S Philadelphia; Harlem; Oakland, Atlanta instead of burgeoning suburbs of Las Vegas, Southern California, Florida and Arizona. 14/

Fed stepping in Prevented Congress from Acting:

US Congress should have responded aggressively to crisis. But they didn’t, so Fed felt obligated to avoid a total meltdown. But that created congressional moral hazard, and allowed Congress to shirk its responsibilities. 15/

We don’t know how the world would have looked like if that hadn’t happened, but we can imagine significantly different than it does today.

Imagine if Fed didnt? Congress gets voted out en masse. Impacts Tea Party, Bernie Sanders, Occupy, even DJT traces back to this. 16/

Lehman could have been saved:

Perhaps the most delusional of all claims.

Why? Cause Lehman was insolvent. Repo 105 proved that. David Einhorn reached same conclusion 2 years before Lehman went bust; the Fed made clear it wouldn't/couldn’t take on Lehman’s losses. 17/

When people stubbornly refuse to acknowledge facts + stay married to own faulty belief system, it becomes very challenging to respond with sound policies.

As a society, the sooner we reckon with reality, the sooner we can begin to avoid disasters like the financial crisis. 18/

Most intriguing aspect of 2007-09 financial crisis is how little understanding there is of what actually occurred. Some of has to do with complexities of the event & how hard it is to identify forces lurking below the surface that had built up over the years. BUT... 19/

Even a decade later, many people still cling to false ideas about the underlying causes (there wasn’t just one, folks!) of the crisis.

All are the result of bias, ignorance, laziness or bad faith. 20/END

bloomberg.com/view/articles/…