I don’t know that they “leveraged” bad loans as much as sold them. That’s normally what you do with bad paper. It’s not evil.
Borrowers came to the banks, not the other way around.
If you get a loan for a car and then decide you don’t want to pay it anymore, that’s not the bank’s fault.
“I don’t know that they “leveraged” bad loans as much as sold them. That’s normally what you do with bad paper. It’s not evil.”
Well, the banks sold the loans to Fannie and Freddie—that was Fannie and Freddie culpability. They agreed to buy crappy loans and brokers and banks whee happy to write ‘em and sell ‘em to F&F. F&F then sold them to investment banks who tranched them up. From there, leverage proceeded to turn $X in bad mortgage tranches into 10 or 100 time $X in bad derivatives. The derivatives were the assets on which the whole financial system relied for security and cash flow.
When the only thing with value in the system (the relatively small volume of mortgages—small relative to the value of the derivatives secured by them) were revealed to be bad, the whole system started to collapse.
“If you get a loan for a car and then decide you don’t want to pay it anymore, that’s not the bank’s fault.”
The original lending bank was not the problem. They were just making the loans that Fannie and Freddie said F&F would purchase. And the loans the CRA pressured them into. So that’s on Fannie and Freddie and Congress.
Where the banks got re-involved and where they share some blame is when they started creating derivatives out of the tranches they bought from F&F.