Eric Petroff of Investopedia wrote a very objective and concise article entitled, "Who is to Blame for the Subprime Crisis?" Below are some important points that he raised:
1) There is no single entity or person to point the blame at, as anytime something bad happens, blame starts to be assigned.
2) When the dot-com bubble burst in early 2000 and the terrorist attacks followed in 2001, there was a great risk of recession. Central banks around the world tried to stimulate the economy by creating capital liquidity with lower interest rates.
3) Investors wanted higher interest rates than what were available and began to seek higher returns. This demand for higher returns was met with lendors who on took greater risks by approving subprime loans for buyers with bad credit.
4) Fueled by subprime loans, consumers drove the housing bubble to its peak in the summer of 2005 until it began to burst in August, 2006.
5) Mortgage originators (lenders) should shoulder most of the blame, as they were the ones who loaned money to people with poor credit and high risk of default. Conversely, lenders probably saw subprime loans as less of a risk than what they were because rates were low, the economy was healthy and people were making their payments.
6) Home buyers purchased houses they could barely afford, often with no down payment in the form of 2/28 and interest only mortgages. They hoped that prices would continue appreciating and that they would refinance at a later date with lower interest rates and perhaps even take some money out with their new equity.
7) The housing bubble finally burst and prices dropped rapidly.
8) Some lenders may have given the impression that subprime loans presented no risk to the borrowers as the costs were low, however, home buyers simply took loans that they could not afford.
9) The secondary mortgage market added to the problem, as lendors simply sold their loans to these entities, collected their origination fees, which freed up more money to continue the cycle.
10) Much of the demand for these mortgages came from pooling these loans into security, know as "collateralized debt obligations" (CDO's), which were then sold to investors.
11) Rating agencies (such as Moody's) and the underwriters of CDO's can also take part of the blame. There could be a conflict of interest here, because the rating agencies collect fees from the security's creator for assigning a risk rating such as AAA. However, this is the process in which bonds are brought to market.
12) Investors in the CDO's can take blame as well, as they were the ones that bought these securities at "ridiculously low prices over treasury bonds." Investors did not do their homework and merely took the AAA rating at face value and did no further investigation.
13) Hedge funds made the problem even worse by purchasing CDO's on credit, which pushed subprime interest rates lower. As soon as investors recognized that subprime loans were of inferior quality, Many of these hedge funds went out of business.
14) Finally, as you can see there were many participants in the subprime crisis. But, when all is said and done, it was human greed that fueled the crisis, which is what fuels all bubbles.
Who Is To Blame For The Subprime Crisis?