Between 2000 and 2005 I found myself spending an increasing amount of time scratching my head. I had been researching and investing in financial-services stocks since 1992, but what I saw during that five-year span confounded me. Banks offered “ninja” mortgages—no income, no job, no assets—to any borrower brazen enough to walk into a branch and request one. I would ask bank management teams during my research meetings how they could justify such imprudent loans. “Housing prices are going straight up!” the executives retorted. Lenders saw no need to worry about a real-estate buyer’s ability to repay his loan when the value of the underlying collateral kept rising.
“But what if prices stop rising, or even fall?” I countered. Before they could answer, I continued with the inevitable conclusion, “If house prices decline you will be stuck with an insolvent borrower and an underlying asset not sufficient to cover the loan balance.”
Bank managers, without fail, brusquely dismissed my hypothetical concern with the bubble-era logic of the early 2000’s: “You just don’t get it.”
They had a point. I didn’t get it. At least I didn’t get it while real-estate prices shot to the moon on their early millennium tear. To our nation’s misfortune we now know that the bankers...