Securitization Was As Much To Blame As AnythingI created thefirst hotel CMBS programs in March, 1993 so I have a lot of firsthand understanding of what happened. Low interest rates and highmortgages were not the cause, just the manifestation of the crisis.While many things and people all came together to create thecrisis, the underlying thing that made it all come together wassecuritization. If there is no wide availability of capitalto loan, then low rates alone cannot have a major impact. Housingand the irresponsible lending could not have happened if there hadnot been the excessive lending capacity made possible bysecuritization. While there was gross ethics failure byBarney Frank covering up for Raines producing phony financials, andpushing subprime lending by Fannie, it was the ability tosecuritize any mortgage with no real underwriting which really blewthe top off the subprime lending market. Wall St enabled thecrooked mortgage brokers who were encouraged to make any loan, andto produce even more volume to fill the securitized pools. If itwere not for securitization, the warehouse lines would not havebeen available to the mortgage brokers to make the bad loans. Thisthen flowed over to commercial mortgages where filling thesecuritized pool became the only goal, not underwriting quality,which was thrown out entirely near the end. If I can sell it, Iwill loan it, became the mantra.Subprime lending was not new. Ithad been around forever. Except that it was done by veryexperienced small lenders who knew how to judge the risk of a cabdriver or waiter who earned money off the books. Risk was carefullycontrolled and volume was relatively low. It was only whensecuritization arrived to provide the fuel, along with Barney Frankpushing home ownership for all, and the CRA rules againstredlining, that subprime got out of control. It was easy then forWall St and mortgage brokers to move on to over lending to everyonein order to fill the pools with more and more loans. All it tookwas someone falsely claiming that house prices never went down inthe US, and the party was on.When we created the originalsecuritized programs in 1993, the underwriting was very tight,there were only a few tranches, there were no CDO, SIV's, no mezz,and no CDO indexes or other esoteric derivatives dreamed up by abunch of quant kids who had never developed so much as a birdhouse, but who were allowed to create models of how real estaterisk was to be assigned and priced. They had zero understanding ofreal estate, and they became enamored with their computeralgorithms. The truth is, nobody can really slice and dice amortgage or piece of real estate in so many tranches and have anyreal understanding of the relative risk and pricing of the riskwith any degree of reality.In November, 1993, two of us had adiscussion of how we had just created the next S&L crisisexcept it was going to be far worse. We knew then that Wall Stwould not be able to resist the temptation to take securitizationto ever riskier levels and volumes, and eventually the whole thingwould collapse. The outcome was very predictable for those of uswho had been around the Street for a long time. We also knew then,that the servicing protocol would never work in a crisis.The crisiswas the fault of everyone-the regulators, politicians, Wall Stbankers, crooked mortgage brokers, irresponsible borrowers and themedia insisting that everyone should own a home, or that commercialreal estate prices were in a new paradigm of cap rate compression.Had it not been for securitization to provide the fuel, thedisaster would have been far more contained.