Against the "Evil Rapacious Bankers Wut Did It" View of Financial Crises

Gillian Tett:

For if you look at the personal financial decisions of the bankers involved in securitisation in that period – at the very heart of the credit bubble – it seems many believed their own hype. Many of them not only bought large quantities of housing stock at the worst possible moment (ie in 2005 and 2006), but also did so in some of the most “bubbly” markets, such as southern California. They then failed to sell those properties in time – and thus were left nursing losses after 2007. Or to put it another way, the bankers who were repackaging housing loans not only lived by the mortgage sword, but suffered under it too. ...

[The researchers] started by combing through the published lists of bankers who attended the 2006 American Securitisation Forum’s annual conference in Las Vegas and randomly selected 400 mid-level securitisation bankers from organisations such as Citigroup, Lehman Brothers and Wells Fargo. They then cross-referenced the names against publicly available data – extensive in the US – on subsequent real estate transactions and mortgages, and analysed whether those people had been trading properties, and whether they made or lost money.

Next, the three economists repeated a similar exercise for a randomly selected group of 400 lawyers and 400 Wall Street equity analysts who were not involved in housing analysis. The aim was to see whether patterns among those real estate transactions were unique to the housing experts – or just reflected something that all wealthy professionals tended to do.

The results were striking. Before conducting the research, the economists had expected that securitisation experts would be good at judging when to sell properties and how to avoid housing market losses; after all, they were close to the front line of the mortgage industry and supposed to know all about real estate. But in reality, the number-crunching showed “little evidence of securitisation agents’ awareness of a housing bubble and impending crash in their own home transactions”, as the paper says. The supposed experts “neither managed to time the market nor exhibited cautiousness in their home transactions”. Furthermore, they actually suffered bigger losses on housing than the random “control” group of lawyers who were not “experts” on housing at all.

Here is the underlying research. The question I have is whether the top-level executives behaved differently from the mid-level folks. I doubt it, but it's certainly possible.