Shortsighted' investment pros blew it: Poole
By Rex Nutting, MarketWatch
Last update: 10:04 a.m. EST Jan. 9, 2008
WASHINGTON (MarketWatch) -- Investment professionals' "shortsightedness" led them to make fundamental errors that led to the mortgage crisis and credit meltdown, St. Louis Federal Reserve President William Poole said Wednesday.
"I can understand the mistakes many financially naïve borrowers made but have a hard time understanding how so many investment professionals could have been so wrong," he said in the prepared text.
"Many observers point to greed, but I prefer a different explanation. Shortsightedness rather than greed explains actions that led to losses of tens of billions of dollars and the failure of many financial firms."
Poole's list of five key mistakes:
*
Borrowers took on mortgages they could not afford.
*
Mortgage brokers put too many people in unsuitable mortgages. They knew, for instance, that adjustable-rate mortgages probably wouldn't be right for many borrowers if interest rates rose as the market expected.
*
Investment banks jeopardized their reputations by securitizing mortgages without doing due diligence on the underlying assets, many of which were based on "inadequate or spurious information."
*
Rating agencies put their stamp of approval on securitized mortgages without considering whether AAA ratings could be maintained if house prices fell.
*
Investors scooped up those securities without doing adequate analysis first. "Investors too readily accepted the AAA ratings at face value," Poole said. "A reach for yield with inadequate attention to risk in another basic lesson that apparently cannot be relearned often enough.
WASHINGTON (MarketWatch) -- Investment professionals' "shortsightedness" led them to make fundamental errors that led to the mortgage crisis and credit meltdown, St. Louis Federal Reserve President William Poole said Wednesday.
"I can understand the mistakes many financially naïve borrowers made but have a hard time understanding how so many investment professionals could have been so wrong," he said in the prepared text.
"Many observers point to greed, but I prefer a different explanation. Shortsightedness rather than greed explains actions that led to losses of tens of billions of dollars and the failure of many financial firms."
Poole's list of five key mistakes:
*
Borrowers took on mortgages they could not afford.
*
Mortgage brokers put too many people in unsuitable mortgages. They knew, for instance, that adjustable-rate mortgages probably wouldn't be right for many borrowers if interest rates rose as the market expected.
*
Investment banks jeopardized their reputations by securitizing mortgages without doing due diligence on the underlying assets, many of which were based on "inadequate or spurious information."
*
Rating agencies put their stamp of approval on securitized mortgages without considering whether AAA ratings could be maintained if house prices fell.
*
Investors scooped up those securities without doing adequate analysis first. "Investors too readily accepted the AAA ratings at face value," Poole said. "A reach for yield with inadequate attention to risk in another basic lesson that apparently cannot be relearned often enough.
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