The 2008 financial crisis was not a mortgage crisis. It was a complexity crisis. Ed Zitron's latest piece opens with a precise mechanism: 5,500 mortgage bonds referenced in CDOs over 36,000 times, creating a system where a single default could detonate across dozens of instruments simultaneously. That multiplier effect, not bad loans alone, is what turned a housing correction into a global catastrophe.
The historical detail here is worth reading in full. In July 2005, Euromoney named Lehman Brothers, then leveraged 25.3x, 'one of the more conservative credit derivatives houses.' In January 2008, nine months before Lehman collapsed, Risk Magazine gave its internal risk system 'In-House System of the Year.' The awards kept coming. The warnings, like IMF economist Raghuram Rajan's 2005 Jackson Hole presentation, were called 'misguided' by Larry Summers. The piece reconstructs how institutional validation became camouflage for systemic rot.
Zitron traces the ignition point to a global savings glut in the early 2000s that pushed Treasury yields down, forcing capital into mortgage-backed securities as a substitute. Low post-dot-com interest rates dropped mortgage rates to generationally low levels, and loosened underwriting standards filled the pipeline: by 2006, 20 percent of all new mortgages were subprime. The piece is building toward something beyond history. The title is 'The Subprime Data Center Crisis.' Read where he takes that parallel.
[READ ORIGINAL →]