The subprime mortgage crisis — what Henry Blodget and Adam Gopnik get wrong

Henry Blodget in The Atlantic blames the people who got subprime mortgage loans. Adam Gopnik in The New Yorker blames — again! — George Bailey. (Sorry, Adam, you are a day late and a dollar short with this trenchant financial analysis.)

Blodget: “Still, except in cases involving outright fraud — a small minority — the buck stops with us.”

No, it doesn’t. I and millions of other homeowners didn’t speculate in real estate. I bought a house I could afford with a mortgage that I can handle. Yet because of the financial reality my savings and retirement planning have been beaten into a bloody pulp. Blodget’s analysis short-sightedly leaves out the vast majority — yes, the vast majority — of people who did not speculate in real estate or buy high-risk debt.

Adam Gopnik: “In It’s a Wonderful Life, George Bailey’s Building & Loan is, let us recall, the reckless banker of Bedford Falls, giving what would now be called subprime mortgages to people like Mr. Martini, who would be better off renting. … Potter, snarling and bald, was right. George was making a lot of imprudent loans.”

No, Potter wasn’t right. Gopnik is taking the stance that Blodget and everyone else takes, which is that people of modest means can’t afford any kind of mortgage at all, therefore any loan they get is subprime and thus high risk. But the problem is not middle-income borrowing or even lower-middle-income borrowing. The subprime crisis came about because the best way to create an investment product with a high enough return was to securitize high-interest subprime mortgage loans and sell a whole bunch of them. That had nothing to do with judicious application of credit or assumption of risk by a normal borrower.

Did individuals borrow beyond their means? Hell, yes. Was there fraud? Yes, indeed, and it wasn’t a minority. Was the fox (the SEC) guarding the henhouse (Wall Street), with the results we see now? Spectacularly so.

Now we turn to financial analysis done right. Read The End of the Financial World as We Know It by Michael Lewis and David Einhorn. They don’t mention “It’s a Wonderful Life,” not even once. It’s refreshing. Maybe Gopnik and Blodget should take a look too.