About 6 months ago I did some research for a presentation I was asked to do for the board of directors and senior management of a large credit union. The topic they wanted a briefing on was the causes and implications of the subprime crisis on Australian lending institutions.
I concluded that the following were the root causes:
1. Extremely low interest rates (enabled people to borrow who could not otherwise service a loan; this also tempted investors to chase higher yields, unfortunately in products they didn't really understand)
2. Fierce competition in lending (encouraging lenders to take more risk to drive growth)
3. Incentives which worked very well (mortgage brokers earned commissions so they were incented to write the loans; investment bankers got large bonuses for packaging them up and selling them to people who didn't really understand the risks of the products)
For a number of years the sales people and deal makers were in charge and now the risk people are in charge.
The pendulum will eventually swing back but not before quite a bit of pain has been inflicted, quite a bit of it on innocent bystanders.
But I am optimistic. Down markets and times of fear and panic are great opportunities for clever buyers!
That of course is a view from a long way off - here in Australia. But the repercussions in Australia have been heavy with a few companies (RAMS Home Loans, Allco) coming undone that had a dependence on securitization and wholesale funding.
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