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Wed, Nov. 20

Cantlon: Out-of-control banks at center of 2008 crash

Would you like a very simple, clear explanation of what led to the financial crash of 2008? I have one I can link you to.

At the core of it is a book that was written before the crash. Yes, before the crash. The big investment banks were already up to the lies and tricks at the heart of the crash years before, and Frank Partnoy wrote a book about it back then. Partnoy was not just anyone writing a book. He worked in the field of complex investments for Morgan Stanley, then founded “The Center on Corporate and Securities Law” at the University of San Diego, and is considered one of the foremost authorities on the complex games the banks play.

Further, this book was given to me as a way to understand the crash by John Danforth, a local retired senior vice president and director of research at the Federal Reserve Bank of Minneapolis, and a former associate economist of the Federal Open Market Committee. In other words, someone with a very good inside view of what happened.

The short version: The banks sold bundles of mortgages to investors and lied about the quality of those mortgages. Both federal regulator enforcement actions, and private lawsuits by investors, confirmed this after the crash. The banks ran out of mortgages to sell and so pushed the entire mortgage industry toward ever looser and even ridiculous mortgages, and flat out lies on the paperwork they created for them. Anything to generate ever more mortgages so they could bundle and sell them at a profit.

Then they added more lies to make more money. Like getting the companies that rate the quality of investment packages to claim these bundles, full of loser loans, were top notch. And like having these bundles covered by financial insurance so they could claim that investors couldn’t lose, that the worst that could happen is they would break even, except the financial insurance companies selling this didn’t have anywhere near the capital to pay on all the claims that were bound to flood in when the next normal downturn happened. Imagine a tiny Ma and Pa insurance company selling hurricane insurance to everyone on the Southeast coast, and then the predictable hurricane hits. Yeah, like that.

The real estate market would have been at a peak anyway, but it was revved up to a ridiculous pitch by the games of the banks. Even then, the downturn would have been more normal and tolerable but all the big financial players had built this enormous, fragile, house of cards, house of lies, on top of it. Like a skyscraper built on sand. Sand will shift, guaranteed. No big deal, unless you’ve built a skyscraper on it. Then what should be just a normal change becomes a catastrophe.

You and I got shafted so that the big financial players could make a bundle on lies. Regulators could easily have prevented it. Could have stopped the lies about what was in mortgage bundles when they started. Could have stopped the system of rating junk mortgages as top notch. Could have stopped the selling of financial insurance which couldn’t be delivered on. Could have. Didn’t. You know the price we paid.

Tom Cantlon is a local business owner and writer and can be reached at comments at

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