Ten years ago, things were mostly quiet. The crisis was staring us in the face, with a little more than a year before the effects of growing leverage and sloppy credit underwriting would hit in full. But when there is a boom, almost no one wants to spoil the party. Yes a few bears and financial writers may do so, but they get ignored by the broader media, the politicians, the regulators, the bulls, etc.
It’s not as if there weren’t some hints before this. There were losses from subprime mortgages at HSBC. New Century was bankrupt. Two hedge funds at Bear Stearns, filled with some of the worst exposures to CDOs and subprime lending were wiped out.
And, for those watching the subprime lending markets the losses had been rising since late 2006. I was following it for a firm that was considering doing the “big short” but could not figure out an effective way to do it in a way consistent with the culture and personnel of the firm. We had discussions with a number of investment banks, and it seemed obvious that those on the short side of the trade would eventually win. I even wrote an article on it at RealMoney in November 2006, but it is lost in the bowels of theStreet.com’s file system.
Some of the building blocks of the crisis were evident then:
So by the time that BNP Paribas announced that three of their funds that bought Subprime Residential Mortgage ABS had pricing issues, and briefly closed off redemptions, and Countrywide announced that it had to “shore up its funding,” there were many things in play that would eventually lead to the crisis that happened.
Some of us saw it in part, and hoped that things would be better. Fewer of us saw a lot of it, and took modest actions for protection. I was in that bucket; I never thought it would be as large as it turned out. Almost no one saw the whole thing coming, and those that did could not dream of the response of the central banks that would take much of the losses out of the pockets of savers, leaving bad lending institutions intact.
All in all, the crisis had a lot of red lights flashing in advance of its occurrence. Though many things have been repaired, there are a lot of people whose lives were practically ruined by their own greed, and the greed of others. It’s a sad story, but one that will hopefully make us more careful in the future when private leverage rises, creating an asset bubble.
But if I know mankind, the lesson will not be learned.
PS — this is what I wrote one decade ago. You can see what I knew at the time — a lot of the above, but could not see how bad it would be.