Subprime Mortgages: America’s Latest Boom and Bust


Last year, Edward Gramlich published an economic takedown of the mortgage industry, titled Subprime Mortgages: America’s Latest Boom and Bust.

Be sure to note the rooflines on the book cover — they are not so subtle arrows, referencing the "boom and bust" of the book’s subtitle. 

In addition to his substantial
knowledge of subprime
and predatory lending, Gramlich was the sort of academic who was able
to see through much of the nonsense within the lending industry.

That Greenspan
ignored his warnings of predatory lending and the coming subprime mess says as much about Easy Al’s tenure as FOMC chair
as it does about Gramlich ‘s prescience.

The NYT recently noted: "For more than a decade, even before he was named a governor of the Federal
Reserve Board
in 1997, Mr. Gramlich was warning of dangers in the housing
market, a stance that has made him a sought-after expert in the current

As chairman of the Neighborhood Reinvestment Corporation, he urged
legislators to better protect consumers against predatory lenders, and toughen
regulation of mortgage lenders and banks. Nonetheless, his efforts met
resistance within the Fed and on Capitol Hill, and even he admits he could have
pushed earlier for reform."


Last year, despite his advancing illness,  Gramlich spoke at length about potential solutions during a televised panel sponsored
by the Urban Institute, where he was a senior fellow.

You can listen to his lecture here.



Fed Governor Edward M. Gramlich
Patricia Sullivan
Washington Post, September 6, 2007; Page B07

Being Right Is Bittersweet for a Critic of Lenders
NYT, August 18, 2007

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What's been said:

Discussions found on the web:
  1. spcwby commented on May 8

    (Surprise, surprise, suprise: Look who is in the top ten. Hint #7,9, and 10)


    Who Has More Level 3 Assets Than Capital?
    Bennet Sedacca May 07, 2008 4:48 pm

    New accounting rules allow for trading assets to be divided into three levels. Level One assets are the most liquid assets and therefore the easiest to price. They make up less than a quarter of most firms’ assets.

    Level Two assets make up the majority of firms’ assets but rely heavily on the firms’ assumptions about things such as interest rates because they are far less liquid than Level One assets; according to regulatory filings by the five largest U.S. brokers and largest money center banks, there are more than $4 trillion in Level Two assets on their balance sheets.

    Finally, Level Three assets are the least liquid of the firms’ trading assets and therefore are valued using what are called “unobservable inputs.”

    Level Three assets include real estate, mortgage-backed securities, private equity investments and possibly even “undertakings of great advantage, but nobody to know what they are” (cf. South Sea Bubble).

    The three magic words that make an asset a Level 3 asset are “no observable inputs.” What this means is that not only are they hard to price, but nearly impossible to sell.

    Recently there’s been such deterioration in all types of mortgages that more and more assets are finding their way into this category. Also, this is the first time insurance companies have made the list. I think the list will continue to grow.

    Ten companies now have more Level 3 assets than capital. In order they are (as a % of total shareholder equity:

    1) Bear Stearns (BSC): 313.97%
    2) Morgan Stanley (MS): 234.88%
    3) Merrill Lynch (MER): 225.4%
    4) Goldman Sachs (GS): 191.56%
    5) Lehman (LEH): 171.18%
    6) Fannie Mae (FNM): 161.48%
    7) Northwest Air (NWA): 142.02%
    8) Citigroup (C): 125.06%
    9) Prudential (PRU): 119.36%
    10) Hartford (HIG): 108.52%

    So now we have insurance companies joining the party. Yes, the contagion is spreading and no, it’s not over.

    Not even close.

    C just had to pay 8.5% for $2 billion in preferreds. One of these days, there will be no takers.

    Cue the theme song……

  2. Winston Munn commented on May 8

    If the problem were only subprime it may well have been contained; however, the problem was simply “loose credit”, and subprime is only a symptom of the contagion that threatens to become a pandemic.

    We did indeed reach the Minsky moment – but we are far from the end of the collapse of Ponzi finance.

    The ever-resilient American consumer, in a last-ditch effort to salvage what is left of a miserable low-middleclass existence, spurned by HELOCs and other home-equity loans, has turned to the last bastion of defense – the credit card.

    When that avenue maxes out, Ponzi will be dead. Those who are calling for a short and simple recession only to rebound in the 3rd and 4th quarters are doing a great disservice to give false hope that these credit card bills will only have to be used temporarily – just a few months until good times roll back in.

    Collapse of this magnitue takes time, especially when all the central banks in the world are working together to keep Ponzi’s balls from shriveling – but it will be to no avail, as the great deterrent to debt expansion has drawn its line in the sand: solvency trumps expansion.

  3. Winston Munn commented on May 8

    Oh, beautiful for specious lies
    of rates that last two years
    For no doc loans, McMansion homes
    that never drop in price

    America, America
    Al shed his rates for thee
    and conned us good
    and neighborhoods
    from sea to shining sea.

  4. brasil commented on May 8

    Give me a break ..John Cusack ..anyone ever involved in Hollywood would certainly know a disgusting hypocritical absolutely fake unhealthy in every aspect ..way of life..$100 million for a movie..Iron Man cost $240 million plus …corruption and moral vacancy on every level..and yes in the movie A Few Good Men ..I thought Jack’s character the hero…interesting just like George Bush Sr first Gulf war the President had better than 80% plus approval rating …and then like spoiled children or maybe ignorant whores the electorate moves on to fun and games and make believe world of film making and American Idol..when patriotism is not fun anymore…95% of the country wouldn’t even know we were at war for 7 years if there was no news of it and being anti-Bush wasn’t considered hip…and for most in this country ..things have never been better..If you could remove the modern entertainment industry completely ..from TV to music to films it would do more good than any single idea … Why don’t any of these Hollywood elites ever move to Cuba..(cause it’s so great there) or is it like everything else with them ..The things they say and believe have no more foundation than a wish…and worse than all that the people who complain actually believe they are removed from all the things they rail against…maybe Cusacks next film will be with Snoop Dog ..the guy who helped make prison culture, porno and drug use mainstream hip for kids..and please before flaming ..refute the points…

  5. Winston Munn commented on May 8

    “..refute the points…”

    There were points?

  6. Dave commented on May 8

    Anyhow back to the article in question.

    Perhaps if Gramlich has been associated with a less flaky sounding organisation than the ‘Neighbourhood Reinvestment Corporation’, he might have been taken more seriously.

  7. Lanning Russell commented on May 8

    Darn. I was hoping I could blame the “Ownership Society” for the mess. But I guess the gestation predates even that sad empty little jingle.

  8. brasil commented on May 8

    ..need it numbered with a graph..?

  9. riverrat commented on May 9

    I’d be interested in hearing some opinions regarding the latest “bailout” plan for homeowners facing foreclosure thats in the news this evening.

    Like many others, I have sympathy for lower and middle income people who scratched together a down payment but got duped into a shady subprime loan by unsrupulous lenders. There are certainly many examples of that.

    At the same time, I don’t want my tax dollars going to bail out speculators that got caught holding the bag on mortgages they could not afford and did not expect to have to pay on for more than some months or a year or so, i.e. “flippers”.

    But drawing a sharp line between these two categories of mortgage holders facing foreclosure is impossible. It is somewhat of a continuum. Perhaps one place to start is to limit the bailout to those who are actually living in the mortgaged property. The bailout could also be limited to properties under a certain price ceiling, weighted for local markets, under the assumption that people buying pricier properties should have known better.

    My basic question is whether or not the plan being discussed right now is good policy. To quote BR, “what say ye?”

  10. Poopscooperforlife commented on May 9

    Hey Brasil

    Just because a guy works in an industry you find distasteful doesn’t mean he is wrong. Sometimes douchebags even can see the truth .Perhaps you should read the book “Confessions of an Economic Hitman” by John Perkins.. I have zero connections to Hollywood and I agree with Cusack on this issue.

  11. winslow commented on May 9

    I don’t care what aristocrats believe. We must have a government that protects the “average” citizen, not protection of corporations. We need regulation. The handwriting was on the wall long ago and still, on a daily basis, we witness plundering of assets. I have yet to see anyone that can really lead this country. I do know that the current administration is one of the worst in American history.

  12. catman commented on May 9

    brasil -thats that Terry Gilliam movie right?

  13. EasyAlsKingMidasTouch commented on May 10

    Yeah, well Ron Paul was making the same warnings way back before 2000 and beyond too but Easy Al wasn’t interested. Do we really believe Easy Al was too dumb to see the housing bubble coming and when it had arrived?

    I don’t believe it for one second. I don’t understand his motives but he definitely knew what the outcome would be.

    BTW – Barry why don’t you put up a review of Ron Paul’s latest book which is now #1 on the New York Times bestsellers list?

    BR: Because this isnt a political blog, its a merket and economics discussion. GYOFBM

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