Why Didn’t the Fed See the Crisis Coming?

The must read commentary of the weekend is a Sunday NYT OpEd by Michael Burry — he’s featured in Michael Lewis The Big Short — titled I Saw the Crisis Coming. Why Didn’t the Fed?

Its another assault on Greenspan’s tarnished legacy:

“ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality.

It only gets worse from there . . .

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Source:
I Saw the Crisis Coming. Why Didn’t the Fed?
MICHAEL J. BURRY
NYT, April 3, 2010
http://www.nytimes.com/2010/04/04/opinion/04burry.html

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