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DISSENTING STATEMENTISSENTING STATEMENT
investment in high-risk mortgages. U.S. monetary policy may have con-
tributed to the credit bubble but did not cause it.
II. Housing bubble. Beginning in the late s and accelerating in the s,
there was a large and sustained housing bubble in the United States. The
bubble was characterized both by national increases in house prices well
above the historical trend and by rapid regional boom-and-bust cycles in
California, Nevada, Arizona, and Florida. Many factors contributed to the
housing bubble, the bursting of which created enormous losses for home-
owners and investors.
III. Nontraditional mortgages. Tightening credit spreads, overly optimistic as-
sumptions about U.S. housing prices, and flaws in primary and secondary
mortgage markets led to poor origination practices and combined to in-
crease the flow of credit to U.S. housing finance. Fueled by cheap credit, firms
like Countrywide, Washington Mutual, Ameriquest, and HSBC Finance
originated vast numbers of high-risk, nontraditional mortgages that were in
some cases deceptive, in many cases confusing, and often beyond borrowers’
ability to repay. At the same time, many homebuyers and homeowners did
not live up to their responsibilities to understand the terms of their mort-
gages and to make prudent financial decisions. These factors further ampli-
fied the housing bubble.
IV. Credit ratings and securitization. Failures in credit rating and securitization
transformed bad mortgages into toxic financial assets. Securitizers lowered
the credit quality of the mortgages they securitized. Credit rating agencies er-
roneously rated mortgage-backed securities and their derivatives as safe in-
vestments. Buyers failed to look behind the credit ratings and do their own
due diligence. These factors fueled the creation of more bad mortgages.
V. Financial institutions concentrated correlated risk. Managers of many
large and midsize financial institutions in the United States amassed enor-
mous concentrations of highly correlated housing risk. Some did this know-
ingly by betting on rising housing prices, while others paid insufficient
attention to the potential risk of carrying large amounts of housing risk on
their balance sheets. This enabled large but seemingly manageable mortgage
losses to precipitate the collapse of large financial institutions.
VI. Leverage and liquidity risk. Managers of these financial firms amplified this
concentrated housing risk by holding too little capital relative to the risks
they were carrying on their balance sheets. Many placed their firms on a hair
trigger by relying heavily on short-term financing in repo and commercial
paper markets for their day-to-day liquidity. They placed solvency bets
(sometimes unknowingly) that their housing investments were solid, and liq-
uidity bets that overnight money would always be available. Both turned out
to be bad bets. In several cases, failed solvency bets triggered liquidity crises,
causing some of the largest financial firms to fail or nearly fail. Firms were in-
sufficiently transparent about their housing risk, creating uncertainty in mar-