End Of Wall Street's Boom

This little diddy was emailed to me today by an old co-worker. It's a really interesting look at how the past 20-30 years in Wall Street banking led to the financial crisis we've been hit with today. It's a pretty long article but definitely worth the read for some insight. It's written by Michael Lewis, author of Liar's Poker who is now being validated in his qualms about Wall Street 20 years after the book's publication. Much of this is relevant to the condition of the housing market today so I'll pick out a few such excerpts:

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.”

In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why.

He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

Read the full article here: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1