Aside from arguing in vain with Barney Frank about potential problems with Fannie Mae, the Bush administration didn’t address the subprime mortgage issue, probably because it didn’t understand what was going on. No one except the most inside of insiders knew that the mortgage bond hedge-fund process was, as one insider told Lewis, “insane.” Short explanation: While some in the mortgage industry were giving mortgages at subprime rates (i.e, lower than normal, often with no down payment), just to tempt people to buy homes they couldn’t afford, others were packaging and selling these poor risks and some were betting that they would default. And eventually they did. Insurance companies couldn’t cover the losses.
Since companies you don’t usually associate with mortgages got caught up in these unwise investments, the stock market as well as the bond market became infected. All together, they were “too big to fail” and the government (Congress and the Bush Administration) stepped in with a bailout — theTroubled Assets Relief Fund, or TARP.
The revelation in the book that most intrigued me was the role played by the rating agencies, especially Moody’s, with which I’d had my own run-ins as they testified against state and local tax cuts. It seemed to me that all Moody’s cared about was making sure the state government had unlimited tax dollars to pay back its lenders; the long-term viability of the state economy wasn’t on its radar screen. So I wasn’t surprised to read in “The Big Short” that one reason Wall Street firms bought these mortgages was that their packages were getting the highest bond ratings from Moody’s. Lewis quoted one Goldman Sachs trader, “Guys who can’t get a job on Wall Street get a job at Moody’s,” where “the asset-backed people are basically brain-dead”.