But they are derivatives-they are based on the soundness of the underlying investment and it's risk profile. If the underlying mortgage was sound the derivatives would be sound. The forcing of the banks to loosen their loan standards and taking the risk away is what caused them and everything else to go bad.
#37 | Posted by foshaffer
So your argument is the banks were forced to make loans.
Even that is suspect, as non-CRA loans had a higher rate of default than the CRA loans banks were "forced" to make.
But as you correctly pointed out, it's not the loans that were the problem, it's the risk.
Were the banks forced to claim that the loans they were making were less risky than they really were? No they were not. That's nowhere in CRA.
If your line of reasoning were to be followed faithfully, you'd properly end up blaming the ratings agencies who were vastly overstating the quality of these investment vehicles. For example, "According to the Financial Crisis Inquiry Report, 73% of the mortgage-backed securities Moody's had rated triple-A in 2006 were downgraded to junk by 2010" en.wikipedia.org
Moody's did that, all by themselves.
All told, the problem wasn't really that the ratings agencies were wrong (deliberately so, in my opinion) about the quality of the loans, though that was surely a contributory factor. It was that the banks took these loans -- that they should have known couldn't possibly perform as well as Moody's and S&P claimed, seeing as they were "forced" to make them by evil Democrats -- and leveraged those bets thirty times.
No leverage, no collapse. It's as simple as that. Nothing in CRA forced the banks to package loans as instruments. Nothing in CRA forced the banks to leverage those investment vehicles -- essentially using our deposits to buy more speculative investments based on loans they themselves should have known weren't of high quality.
Now, if you want to blame Congress for any of this, the closest you'll come is the repeal of Glass-Steagall in 1999. What did that do? It allowed the banks to do all this stuff. It did not require them to do it. See the difference? Keep in mind, banks were the ones lobbying for this change.
Blaming the derivatives is like eating a rotten ham sandwich and blaming the bread.
What happened is more like you ordered thirty shots of tequila, crashed your car into the ditch driving home, and now you're blaming it all on the bartender. If that's the way it's gonna be, then banks require regulation as they can't be trusted to act responsibly.