By Lauren | June 11, 2008
By now we’re all well aware that the subprime mortgage mess has done major damage to the economy, both in the U.S. and around the world. Until recently, however, I thought that the subprime lenders had just gotten a little too greedy, approving iffy loans on an individual basis without fully considering the long-term implications of dumping all of those loans on the market at once.
So imagine my horror when NPR reported recently that the subprime mortgage debacle may be the product not of innocent over-exuberance, but of outright fraud. According to NPR, outside auditors claim that some of the biggest investment banks on Wall Street were deliberately making ultra-risky loans to homeowners who were never likely to repay them, overlooking bad credit ratings, inflated salary claims, and other clear evidence that those homeowners were buying a lot more house than they could afford.
The banks then bundled the bad loans in with good ones, reselling the loans at appallingly profitable rates of return. Short term, the money poured in like water; it was only when the high-risk borrowers started defaulting left and right that the full impact of the banks’ shoddy lending practices began to be felt.
NPR likened the process to mixing bad apples into a barrel of good ones, then selling the barrels to unwitting customers. We all know what one bad apple can do in a barrel – imagine what happens when dozens of bad apples are mixed in. If it turns out that affluent Wall Street investment bankers lined their pockets by deliberately foisting off bad loans on innocent purchasers, it will make for a very ugly harvest indeed.