I've seen a lot of stories about what caused the Mortgage Meltdown, the Credit Crunch, and the recession (some are even calling it a depression). On the drive in today, the REAL answer finally came to me.

As in all complex things in life, there wasn't one specific cause. Here's my general thought process on this topic.

People who want to get to the root of any cause always use a root cause analysis to determine the true cause of any issue. One of the practices that process improvement folks use is the fishbone diagram, where if you keep asking "why?" to a question you'll get to the root of it.

But this simple approach often neglects the contributing factors to an issue or a failure. For example, a barn might have caught fire and burned to the ground. The root cause might have been determined to have been a spark from a passing-by freight train.

But the contributing factors were that there was damp hay in the barn, along with kerosene, dry timber, a poorly-maintained exterior, and weeds that had grown rampant over the course of several years.

All of these things led to the fire. Of course, the fire could not have started if not for the spark. But the weeds, hay, timber, etc. allowed the fire to spread at such a rate that the fire crew could not stop it before the entire barn burned down.

Such is the case with the economy. There were many contributing factors: Declining home values, rising bad debt, companies trying to stay afloat cutting staff, phoney financial instruments dreamed up by mathematicians rather than business folks, etc. The list is literally endless.

But what was the root of it all?

As in any mania, it was the madness of crowds. Adam Smith's "invisible hand" and "pursuit of self interest" was the downfall.

Home buyers thought, "If I don't buy this house now, somebody else will."

"Or, if I don't buy this house today, it will cost me $60,000 more to buy this house in 6 months." (By the way, this was the rate of price appreciation for a below-median home price in the Bay Area in California in 2003-2006.)

Lenders said, "If I don't fund this mortgage, somebody else will."

Insurers surmised, "If I don't insure this asset, somebody else will."

Bottom line:

If I don't _____ this, somebody else will!

It was all about getting "it" before somebody else got "it." Or, in other words, what I call "relative greed."

It wasn't that everybody was greedy, in and of itself. It was more along these lines:

Scenario 1

You get a 10 percent pay raise. Your neighbor gets a 15 percent pay raise.

Scenario 2

You get a 5 percent pay raise. Your neighbor gets nada.

Do you know which one most people would take? Yeah, #2. It's getting "more" than your neighbor, co-worker, competitor.

That's what happened here, in my humble opinion.

It's also "the market" filling in voids. If Bank of America doesn't do this mortgage, Wachovia will. And Wachovia did. And did, and did and did and did.

BofA saw this and said, "We're losing market cap. And we're the biggest and baddest bank around." So, they got into the game, and then some!

People did it, too. If I don't buy a house now, I may never be able to afford one.

"Investors" did it, too. If I don't buy this duplex now and flip it, I may never get another golden opportunity like this.

Do yourself a favor: Read Extraordinary Popular Delusions and the Madness of Crowds You only really need to read any one of the stories. They're all the same, really.

Market goes up and up, creating self-fulfilling prophecy. Something happens. Market goes down and down, creating self-fulfilling prophecy. What stops it? Who knows?

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

As the Mortgage Meltdown spills over into the Credit Crunch and recession, most of us who own homes (or at least live in homes where we pay a mortgage) have seen the value of our home decline precipitously. Where prices rose the highest and the fastest, they've come down the farthest and the fastest. In some areas, real estate values have dropped by over 50 percent.

Side note: If you can get a loan, start thinking now about buying a home if you don't already own one. Prices may drop further, but not by much -- if, that is, the economy doesn't go into free fall. If it does, all bets are off.

In trying to cope with falling values, I suggest you look at your house purchase as a two-part purchase, the first being the intrinsic value of the utility a home provides (shelter), the second being the investment value.

I submit to you that in years past (prior to the run-up in house prices), the investment value of your real estate purchase was trivial, whereas the past few years it held the majority component of your purchase.

Let's use an example. The discussion below assumes you paid cash, for simplicity. Nobody does this anymore, so the leverage is much higher, and your return on investment is considerably higher than this cash method suggests. Keep that in mind.

Say you bought your house in 1990 for $100,000. Back then, in a "normal market" you could expect the value of your house to rise by 2-5 percent (depending on where you lived). I'd estimate, then, that 95% or so of your mortgage was the intrinsic value of the shelter you purchased, and 5% was the investment component. So, if your $5,000 "investment" rose in value to $105,000, you made 100% on your investment.

Not bad. In fact, excellent!

But how much did your "shelter" component rise? Let's say rents rose by 2% in a year. In a market where rents and mortgages were in line (we'll call it equilibrium), the value of your shelter, by definition, rose 2%. That is to say, if you could rent out your house, you could rent it out for 2% more this year than last.

So, in fact, the gain on your $105,000 house was $3,000 investment and $2,000 intrinsic value.

Still, a 60% gain on your "investment." Not bad at all.

Fast forward to 2005.

Your $100,000 house is now $500,000. If you bought it in 2005, I'd estimate that your investment component was around $390,000! In other words, at 2% per year growth in rents, your shelter component is only worth about $110,000!

That leaves a lot of room for investment losses!!!

In fact, if house prices fall by 50%, it is my contention that your shelter component barely moves. If anything, it has risen, simply because rents should be increasing as everyone moves out of "too expensive" homes to apartments -- the demand for rentals has risen dramatically through this mortgage debacle.

So, if your house declined in value by 50%, down to $250,000, I am suggesting that all of it was comprised of the investment component.

But, the intrinsic value of your house has risen.

I know, money is money. And you've lost a lot. But if you felt that your house was worth $500,000 in 2005, what makes you value it any less today?

Your loss is only on paper. If you truly believed that your home was worth the half a million dollars you paid for it, then it truly has gone up in value since then.

Of course, you cannot realize that gain right now. Or for quite some time for that matter.

Think of your house for a moment as you would the purchase of a stock. There's the future cash flow (dividends) and the capital appreciation. If the stock does not rise in price, but keeps paying out the same dividends, it's still worth what it was when you bought it.

It may be worth more to somebody else right now, or it may be worth less (this is all based on price). But to you, it is worth just the same.

If the price falls on the stock, yet the dividend remains the same, then isn't the stock intrinsically worth more?

That's what I'm saying about your home.

On paper, you may be suffering a "wealth effect."

But in real life, your home is providing the same utility today as it did when you bought it. In fact, it may be providing more. Rents have not fallen, they've only gone up in the real estate "collapse." Therefore, the shelter component of your purchase is worth more today than yesterday.

It is only the investment portion of your purchase that has taken a beating. Try to set that aside for a while. In time, you will recoup your investment, and then some.

Especially with the rapid inflation the Fed is building into the system. Don't be surprised, if in 5-10 years, your investment will be reaping positive returns!

Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

In perhaps the biggest stimulus program EVER considered, Congress is mulling over a plan to spend over $800 Billion, none of which it has. Kinda what got us here in the first place...

"Congressional Democrats are planning a stimulus package with a price tag that could approach $800 billion over two years. It will include a tax cut, aid to state governments and funding in five main areas: traditional infrastructure, school construction, energy efficiency, broadband access and health-information technology. Meanwhile, top Republican lawmakers are positioning themselves as guardians against excessive spending rather than outright opponents of the Democrats’ plan." (from Scottrade's "Tomorrow's News Today")

I like their style (I say this facetiously)! Seriously, I think the right things are getting the focus. Our decrepit infrastructure is in serious need of overhaul, and in this classical Keynesian economy, it's high-time the federal government talked seriously about a stimulus program.

I know, we don't have the money. But it's in this time where the government has to step in and take the place of private investment (who's doing NOTHING to help resolve the issue).

Once it's apparent we're heading out of the woods, the government then needs to step out of the picture and let private enterprise reap the benefits. That growth will undoubtedly trickle down to the individual level.

Might as well spend some dough on education, alternative energy, and the like. It's all on the table.

What do you think? Tell me in the comments.


Money isn't everything. It's the only thing. Wait. That's only for football.
Enjoy life. Spend time with your family.

Lehman Brothers cost of failure to foreign entities said to be $300 billion. Astounding.

The financial fallout outside the United States from Lehman Brothers‘ bankruptcy has been about $300 billion, the head of Germany’s financial regulator said on Monday (October 13 -- I'm a little behind in my reading).

Lehmans Failure Said to Cost Billion Abroad - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

If you are weary of the financial news, stay away from here for a few weeks because I'm going to offer different viewpoints from prominent money professionals. We know this debacle will last for many more months...

Here's Robert Reich's take on the crisis, taken from his blog: Why Wall Street is Melting Down, and What to Do About It

The sub-prime mortgage mess triggered it, but the problem lies much deeper. Financial markets trade in promises -- that assets have a certain value, that numbers on a balance sheet are accurate, that a loan carries a limited risk. If investors stop trusting the promises, Wall Street can't function.

But it's turned out that many promises like these weren't worth the paper they were written on.

That's because, when the market was roaring a few years back, many financial players had no idea what they were buying or selling. Worse, they didn't care. Derivatives on derivatives, SIVs, credit default swaps (watch this one!), and of course securities backed by home loans. There seemed no limit to the leverage, the off-balance sheet liabilities, and what credit rating agencies would approve by issuers who paid them to.

Two years ago I asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea.

Is this crazy or what?

That is the question.

So, which is true? There's some uncertainty about China and its banks. Will they lend to US banks or not? I, for one, would not lend any money to US banks until the Treasury bailout is agreed on. But I would not tell the US that I had made that decision...

China banks told to halt lending to US banks-SCMP | Markets | Markets News | Reuters

Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

China bank regulator denies report of lending ban to U.S. banks - MarketWatch

China's government moved to calm financial markets Thursday and denied a report that it had ordered mainland banks to curb lending to U.S. banks, a day after rumors of financial stability led to a run on a Hong Kong institution.

Anybody know? In international politics, I think the US could win this one. It might also start another war...

Hopefully by the time this is published, the "bailout" plan will have been approved by Congress and signed by the President. We can hope that Washington works, though we have our doubts.

Nevertheless, a step to take after the financial system stabilizes is to take a look back and see where things went wrong. I cannot even begin to start. It's too complex, lots of things went haywire, and greed surely factored into the equation. We can simplify, reduce mistakes and risk, but greed will never expire. So, we'll have to put up new, better rules that protect people from their own greed (all parties involved exhibited some greed).

The article below doesn't really address the genesis of all this. Rather, it paints the picture of why and how several large financial institutions failed in a matter of days (Fannie Mae and Freddie Mac, AIG, and Lehman. You can now add Washington Mutual to the list -- same problems).

It's interesting to see how things transpired. Suffice it to say that cash flow and loss of financing caused these big and established companies major issues. Issues that they couldn't solve on their own.

In the grander scheme, it might very well have been that the real estate euphoria finally wore off. The leverage that we all (homeowners, banks, mortgage houses, investment banks, hedge funds, and others) enjoyed led to our ultimate demise.

Diamond and Kashyap on the Recent Financial Upheavals - Freakonomics - Opinion - New York Times Blog

This is more a rant than a logical argument against honoring financial derivatives. Let me explain.

According to everything I've read about this, derivatives, based on underlying assets, significantly added to the financial woes we're currently experiencing. In fact, in Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask, Ben Stein claims that the losses are unlimited. Furthermore, none of these instruments were on anyone's books (sellers or buyers).

Here's an idea: Since the government is so adept and eager to take over financial institutions nowadays (presumably to avoid a financial calamity second in severity only to the Great Depression), why don't they just declare these instruments null and void?

Seriously.

If they're not on the balance sheet, and they're not "hard" assets like dollars or gold, to me, at least, they don't exist. They're like me saying you owe me money and you saying you don't. If they're a "contract," can't the government rule that they are illegal?

Nobody loses here, do they? After all, if they don't exist, then nothing was lost, right?

I mean, obviously, the institutions and individuals who are owed money lose, but hey, haven't we all lost a bit in the last few months? Shouldn't we all share in this, especially since a lot of us just wanted to buy a house? I certainly didn't want to profit off my neighbor's loss.

In the derivatives business, it seems like it's truly a zero-sum game.

Here's another one: If these instruments aren't on the books, then how are profits taxed?

Our government has been asleep at the wheel on this stuff. Seems to me like they condoned, if not encouraged, a black market on financial instruments; instruments, by the way, that are purely imaginary right about now.

Great (short) video from Jim Cramer on who is to blame for the collapse of the financial system.

Money isn't everything. Enjoy life. Spend time with your family.

Funny picture from Greg Mankiw's Blog. (MBS: Mortgage Backed Securities, a trigger of the current Mortgage Meltdown and subsequent Credit Crunch, and then the Financial Seizure.)

Next up: Burning trash cans OR My House Is On FIRE

Now that the cat is out of the bag, I'll tell you I work for WaMu. At least I did. I guess now my employer is JPM. At least for tomorrow. Time will tell how it all plays out.

Now, on to the important stuff. Your deposits are fine. In fact, they're safer now than they were yesterday. I implore you, though, to call your federal representatives about the so-called bailout and urge them to just get it done. Iron out the details later.

Read more about WaMu's demise here -- JPMorgan buys WaMu

Money isn't everything. Enjoy life. Spend time with your family.

I tend to agree with Pimco's Bill Gross, not just because he's smart, but because he's right on this one. I've been watching Cramer, too, and he seems to think the same.

We have to do this deal. The cost of not doing it is too high. And I do believe that the benefits will far outweigh the costs. Go find an 80 year old who lived here during the Great Depression. While they look upon those years (yes, years, as in a whole decade) with fondness, they would not choose to relive the pain wrought by an economy crippled with no liquidity, no credit, 25 percent unemployment, and picking peaches for 25 cents a box.

Our government froze then. Let's not freeze now. The time is to act. Let's not cut off our nose to spite our faces here. Sure, the officers of these companies do not deserve inflated compensation packages; some say they should be making furniture in a federal prison.

But we have time to deal with that later. Let's pass the darned bill and go to work!

Pimco's Gross says bailout to benefit Main Street: report: Financial News - Yahoo! Finance

A good illustration and explanation on where the money will come from to do this government bailout. For the record, I'm for the bailout, even though we'll all by paying for this for years to come. But it's better than the alternative, which, in my humble opinion, was going to be another Depression (with a 'D' not an 'R').

In that scenario, we'd all be paying but it would be a whole lot more painful and protracted.

Here's the quick explanation for the flow:

Think about what’s been happening in the markets. The public basically wants out of the private financial system and into Treasuries. But the financial system has been unable to meet that demand, because it can’t sell off toxic paper. Now, under the Paulson plan, the Treasury will buy the toxic paper, which will give the financial sector the funds to pay off debtors, who will use the funds to buy the Treasuries the feds will have to issue to finance the toxic-paper purchases.

Follow the money - Paul Krugman - Op-Ed Columnist - New York Times Blog

The current market mess we find ourselves in has a lot of blame to spread around. However, there are a few folks who might benefit from career changes. Some already have succumbed to early termination (Freddie and Fannie heads, for example).

I'm not one to get too much into politics on this site; I leave that to my alter-ego over at Rants for that (not for the faint of heart). This case, unsurprisingly, lends itself to a political perspective.

Way back in the '30s, the federal government put in measures to protect the market in cases of rapid sell-offs and manias. In essence, if the market rose or fell too fast, systems were in place to bridle the market's enthusiasm. The measures didn't necessarily stop the trend (though, in some cases, the market for a particular stock was shut down briefly), but it slowed them down. Over time, additional measures were instilled as market experts learned how to have a mostly "free market" with a lot less volatility than in the past.

AIG got into a big mess (a liquidity crisis) when its stock fell from about $20 to $1.43 in a matter of a few days. Word got around that the company was in dire straits and needed to raise money. Rather than a gradual fall in its stock price, AIG found its stock price falling precipitously, so much so, and so rapidly, that it couldn't possibly sell any of its $1 TRILLION in assets for anything near their worth. As an example, AIG closed at $12.14 on 9/12 and fell to $1.43 shortly after opening on 9/16. AIG lost 88 percent of its value in barely one full trading day, folks.

The stock, no doubt, was in trouble. So, too, was the company. The faltering stock market and economy didn't help, either. It was a perfect storm. But did the storm get out of hand? Could something have been done to stop it?

Perhaps.

Perhaps not.

We've had market crashes and falls before. I got my feet wet as an observer of a market crash in 1987. I wasn't around for the '29 Crash. The 90s saw some pretty good falls, too. We had some more in the early part of this decade.

But I've never seen companies crash and burn so quickly as I've seen recently. I wasn't really paying attention to the S&L crisis when it happened. But I have yet to hear anybody compare that era with this one in terms of the rapidity of failure.

• Lehman, bankrupt over the weekend
• Bear Stearns, bought for a cheap song over a weekend
• IndyMac, here today, gone tomorrow
• AIG, down and almost out, and perhaps on its way down again
• Freddie Mac and Fannie Mae, taken over by the federal government

I don't see the light at the end of the tunnel, but I know it's there, and I'm pretty sure it's not a freight train coming our way.

Times will get better. But I digress.

You want a scapegoat. So do I. It's you. And it's greed. And it's stupid guys put in office who are dumber than dirt.

Like Chris Cox.

Put in office as the head of the Securities and Exchange Commission by President Bush in 2005, Cox, who's resume looks not much better than Michael "Heckuva Job" Brown (former -- and disgraced -- head of FEMA during Hurricane Katrina, who's greatest claim to fame pre Katrina was as a horse judge, whatever that means):

From 1977 to 1986, Cox was first an associate and then partner with the international law firm of Latham & Watkins. At the time of his retirement in 1986 he was the Partner in Charge of the Corporate Department in the Orange County office, and served as a member of the firm's national management.
In 1984, Cox co-founded Context Corporation, which produced daily English reproductions of the leading state-controlled newspaper in the Soviet Union, Pravda. The publication was used chiefly by U.S. universities and U.S. government agencies, and was eventually distributed to customers in 26 countries around the world. The company had no connection to the Soviet government.
In 1982–83, Cox took a leave of absence from Latham & Watkins to teach federal income tax at Harvard Business School.

In short, Cox was a lawyer who didn't have any experience with the stock market, not even a small exchange.

Cox sought to make the stock market "freer."

So he stopped enforcing the rules and relaxed the systems put in place to protect the market from too much momentum.

It's the momentum that kills, not the downward pressure on prices. Let's go back to AIG. Had they enough time to sell off a few pieces of their business (remember, they had $1 trillion in assets), they could have met their short-term obligations and the government would not have had to come in to rescue them with a bridge loan.

You know who pays for government bailouts? You and me.

Specifically, the rules have been in place for a long time prohibiting naked short selling (according to Wiki):

Naked short selling, or naked shorting, is the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale. When the seller does not then obtain the requisite shares, the result is known as a "fail to deliver."

...Naked shorting is widespread and ... the SEC regulations are poorly enforced, although the SEC has denied these claims.

The "short sellers" have obliterated this market. They are to blame. Now, I'm not saying that they don't play a vital role in making the markets work; however, what I am saying is that left to their own devices, people with bad intentions, or not so good intentions, can effect bad outcomes.

They're jackals killing a wounded lion. I suppose for all the "free marketeers" that the stock market is like the jungle. But for most of us, whose retirements count on the stock market (after all, it's been the government whoring out the 401k and IRAs), it's not a jungle. Sure, it has its pitfalls, but there are rules to play by. 

And nobody's playing by them. Or, worse yet, the rules were changed and we didn't even know about it.

So, in short, President Bush appointed another friend with zero experience and intelligence in a high position of power and we got hosed because of it. "Brownie, meet Mr. Cox."

I'm not saying the market would be fine and dandy, but it surely would not have fallen so far so fast.

Of course, now that John McCain has announced he'd fire Mr. Cox, the media has jumped on the bandwagon. Here are some stories from around the 'net.

SEC's Cox Catches Blame for Financial Crisis
McCain says he would fire SEC head Christopher Cox
Fire Christopher Cox?
SEC Issues Temporary Ban on Short-Selling
Bush backs SEC's Cox after McCain says would fire him
Financial Crisis and Short-Selling

I work in the banking industry; I'm naturally skittish right about now (and have been for over a year now), darn it!

Today, my "out-of-left-field" thinking led me to the idea that a major bank (let's call it WaMu) would merge with Goldman Sachs. This quote from GS' CFO cements the deal for me (which I read after my epiphany and to which I've added my emphasis):

Chief Financial Officer David Viniar appeared to strongly rebuff the market’s growing sentiment that the fabled Wall Street firm should find a traditional bank with whom it can merge. “Most assets we have couldn’t be funded by deposits” at a traditional bank, Viniar said on a conference call with analysts to discuss Goldman’s third-quarter earnings. In the last six months, two struggling Wall Street investment banks have been acquired by large commercial banks - including yesterday’s purchase of Merrill Lynch & Co. (MER) by Bank of America Corp. (BAC) - and a chorus of analysts and investors have speculated that Goldman will enter a similar merger. Traditional banks typically enjoy more stable businesses, as well as the ability to borrow money inexpensively from depositors. As a result, these commercial banks have become natural merger partners for struggling investment banks, whose businesses are typically more volatile in nature, and much more vulnerable to negative market sentiment as well as the need to borrow capital at expensive terms.

So here's the deal: Goldman will do the opposite of what's been done recently: Rather than a retail bank buying an investment bank, the hunter becomes the hunted and the investment bank buys the retail bank.

Bank of America just became the biggest investment bank in the country with this deal:

Overnight, the deal will make Bank of America the county’s largest player in wealth management. It already runs the biggest branch banking network and it is the biggest issuer of small business, home equity and credit card loans. The Countrywide deal made it the nation’s biggest mortgage lender, too.

Goldman cannot afford to let BofA get bigger. Goldman had to say what they said today. Their stock had already taken a bath based on the horrible earnings announced today. They have to wait for several days before they can do anything because their deal will most definitely be a stock deal. First, they have to wait until their stock rises a few dollars per share. Then, they do a deal. Now, of course, I have no inside information and haven't bought anything, but I think a deal is imminent. It's a matter of who buys whom. The "if" is no longer a question.

This is a time of unprecedented consolidation.

Mark my words.

Either that, or Schwab buys WaMu. Either one works and broadens the market coverage of the dealmakers.

Money isn't everything. Enjoy life. Spend time with your family.

I think all of us "outsiders" feel a little like this today. First, Enron, WorldCom, and Global Crossing, now this. Screw You, Wall Street!

Maybe all this misery is just payback - The Bing Blog

The arrogance. The willingness to see hundreds, thousands, lose their
jobs as a result of their pronouncements and manipulations. Masters of
Business all, they have been taught to see corporations not as places
that employ people and provide a product or service, but as numbers on
a balance sheet, a balance sheet that serves only one group: Investors.

When my wife and I bought our house in 2004, the mortgage we negotiated was sold immediately to some company we didn't know. I knew this would happen, but it still bugged me. Here's a great article about why mortgage banks sell the loans they put together.

Yahoo! Finance

I wish a bank would adopt the slogans below:

I seriously doubt that any depository would commit to never sell its FRMs, but it is possible that they would do it for ARMs. The marketing possibilities are certainly intriguing. Here are some un-copyrighted tag lines: "We are your lender for life, guaranteed." "We don't abuse customers we plan to keep." "We believe in long-term relationships, not casual encounters."

Wouldn't it be great if somebody cared about their customers more than they cared about short-term profits? Besides, the greed in going after the profits really got the banks nowhere. In fact, many of them have posted significant losses, and some will fail.

I bet you didn't know that you could donate your house to a law enforcement agency and have the SWAT team demolish it for you, did you, as part of their training. Read more about this arcane provision of the tax code -- 

The Chuck Norris Home Deduction - The Home Front (usnews.com)

I'm the last guy to suggest that the current mortgage meltdown is solely the government's fault. I believe that borrowers, lenders, investors, and regulators are all culpable in this mess. However, our government is supposed to provide a safety net, and the story below shows us that the government was sleeping on the job.

Not many of you will remember the S&L crisis a few decades ago. Back then, there were 200 FBI agents assigned to mortgage fraud cases. During this last real estate boom, there were 100 agents on the trail of fraudsters. In fact, the FBI asked for a bigger budget for such things and they got even less than they originally had.

This points out one -- of MANY -- opportunity costs that fighting three wars presents (Iraq, Afghanistan, the War on Terror).

We simply chose to provide funds to fight wars rather than regulate our markets. This is not a judgment; it's a fact.

Much of the initial "sub prime" issue arose because of wanton fraud by both borrowers and lenders. Mortgage banks duped investors who bought the "securitized" mortgages, but investors should have known better.

FBI saw threat of mortgage crisis - Los Angeles Times

Officials said they began approaching mortgage companies and others in an attempt to raise awareness about the growing fraud problem. But the lenders had little incentive to cooperate because they were continuing to make money. Black says that in many cases, they were part of the fraud.

At the end of the day, it was all about greed: Borrower, lender, and investor greed. Greed is not one of the seven deadly sins for nothing!

Was Bear Stearns the last large financial company to fail? Will Freddie Mac or Fannie Mae fail, too (Answer: NO)?

Odds-on favorites to fail are Lehman (LEH), Wachovia (WB), and Washington Mutual (WM), according to this report: 24/7 Wall St.: Vegas Odds: Another Large Financial Firm Will Fail (LEH)(WB)(WM)

The remainder of 2008 is going to be really ugly and difficult.