Not wanting to appear to disagree with my esteemed colleague, I have found a slightly different take on the reasons behind the current actions by the Fed and the Treasury.
I found this link on Mahablog. The second graf says it all
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
The next graf sums it up.
And, to be sure, fraud is everywhere. It’s in the loan application documents, and it’s in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
We all know someone who got some kind of home loan in the last six or so years, where something was inflated, but everyone walked away happy. Fraud in the origination process is not going to be difficult to prove. Once you get one domino to fall, the rest will tumble willingly.
Maha's piece ends with
It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it….
The whole article that Maha quotes can be found here.