What the GameStop vigilantes get wrong about the 2008 financial crash
“In a 662-page report analyzing the ’08 crash, the Financial Crisis Inquiry Commission identified a broad cast of villains that caused or contributed to the crisis. They include 5 investment banks that at the time fueled a surge of trading in “toxic” mortgage-backed securities, and derivatives of those securities: Bear Stearns, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch. AIG insured billions of dollars of overvalued securities without the reserves to cover losses. Horrible underwriting standards at mortgage issuers such as Countrywide and Wachovia produced millions of loans borrowers were doomed to default on.
Bond-rating agencies such as Moody’s and Standard & Poor’s failed to identify the risk and rated mortgage-backed securities destined to blow up as safe as US Treasuries. Fannie Mae and Freddie Mac, the government agencies that securitize mortgages, became insanely overleveraged and collapsed. Regulators such as the Federal Reserve and the Securities and Exchange Commission did nothing to intervene until it was far too late. Years of federal policy meant to encourage homeownership allowed some buyers to borrow far more than they could afford. And a 1999 law that eased bank regulations allowed banks to take risks that ultimately threatened the entire financial system.
Hedge funds had little to do with this. There were two hedge funds run inside investment bank Bear Stearns that bet heavily on mortgage-backed securities and collapsed in 2007. But those weren’t the types of hedge funds run by independent operators mostly working with wealthy individuals’ money. A 2012 Rand report found that hedge funds played little role in the housing bubble that caused the crash.”