Insane Levels of Leverage by the Too Big to Fail Banks – Not Deadbeat Borrowers – Caused the Financial Crisis

The Cause of the Financial Crisis: Fraudulent Creation of 3,000 Times Leverage On House Prices by the Big Banks

We’ve repeatedly noted that fraud by the big banks – more than anything done by the little guy – caused the financial crisis.

And we’ve repeatedly noted that excessive leverage helped cause the Great Depression and the current crisis.

Reader McFid – who has been a breach of fiduciary duty expert since 2003 – sent me the following article (edited slightly) which provides a new angle on both themes.

This article disabuses the notion that “deadbeat borrowers” caused the financial crisis. And offers an answer to the question that still lurks in the mind of every American; whether black, white, native American, asian or Hispanic; whether educated or not; whether English, Spanish, or Mandarin speaking.

Taking a big step back, and looking at it like a business process: “How could so many Americans ALL have made the same ill-advised mortgage borrowing decisions?” The answer lies in what did they ALL have in common…

It was all about leverage
What is leverage?

Leverage is a way to control more of something when you can’t pay for it in full. We do it all the time; when we buy a car — except few of us actually buy the car, we finance it or lease it. We also do it when we buy a house — except almost no one pays cash for a house, we finance the purchase with a loan; it’s secured by a mortgage on the property.

Example of 5 times leverage:

When we buy a house and put 20% down, we buy a house worth 5 times as much as the down payment. If we put $100 thousand down we can buy a house worth $500 thousand. $500 thousand divided by the $100 thousand we put down equals 5 times leverage.

100 times leverage:

By the same calculation ZERO down mortgages were suffice it to say, 100 times leverage, it’s actually more but that’s a discussion for later. Repeat after me, no money down mortgages equal 100 times leverage.


Who controlled and approved EVERY leverage decision?

Leverage Approval #1 by:

TBTF Banks (ultimately) approved every one of these loans and bundled thousands of others like them initially into mortgage backed securities (MBS).

Leverage Approval #2 by: [the key, little known fact]

In the past, TBTF Banks used to sell them off (remember that word) to investors like mutual funds, insurance companies and pension plans. In the 2000’s TBTF banks issued almost $17 Trillion of MBS, but did not sell all of them OFF to 3rd parties. They held massive amounts of them to turbo-juice their bonus checks in a 2nd set of books (legally) in OFF balance sheet, special purpose entities. As a refresher Enron did the same type of thing. In the decades, make that for over 60 years before the 2000’s TBTF banks’ leverage was around 12 times; however when they concealed trillions worth of MBS — their leverage increased to over 30 times. Remember 5 times leverage? It was based on how much the house was worth right? And when TBTF banks add more leverage on top of the borrower’s leverage we don’t just add it — we ______? You guessed it — we multiply it.

3,000 times leverage on house prices:

100 times leverage on the borrowers side times 30 times leverage on the TBTF banks’ side is 3,000 times leverage ON house prices.

Lather, rinse and repeat — 100 times 30 equals 3,000 times leverage. Lather, rinse and repeat.

100 times 30 equals 3,000 times leverage.

Remember what I first told you about leverage?

Leverage lets you (or TBTF bank) control something that you can’t fully pay for. Well the TBTF banks’ way of financing them in the Asset Backed Commercial Paper market began to dry up in August 2008, so they couldn’t pay for these assets. This is the direct cause (but not the root) for the Fed and US Treasury to (have to) step in and pay CASH for them in the bailouts of 2008, and again in 2009, and again in 2010 and yet again 2011 via the Fed’s QE trifecta to the tune of over $20 Trillion dollars.

The interactive portion is about to begin:

Is it any surprise that the assets backing the commercial paper were ________? You may have guessed it — MBS.

Is it any surprise that the Fed created a new category to track ABCP in_______? You would be correct if you guessed 2006; just two swift months after Ben Bernanke was appointed chairman of the Federal Reserve by President Bush.

Is it just a random coincidence that almost $17 Trillion of Mortgage Securitieswere created by TBTF banks from 2001 to 2008?

What was that word I asked you to remember?

Oh, right it was OFF.

When TBTF banks’ CEOs, executives or prop traders got their year end bonus check did we hear reports that anyone said it was OFF (or that it was too much)? Nope.


The top 12 reasons + one
TBTF banks, before 2008 created a hidden, secret “market” for MBS:

  1. As stated above TBTF banks changed from financial intermediaries into speculators via their proprietary (for the house only) trading desks;
  2. Hiding (the FDIC used the word “concealed”) trillions of MBS off balance sheet;
  3. Allowing their own internal prop traders to value #2 (legal under the SEC’s 2004 Consolidated Supervised Entity (CSE) program) despite the fact few if any, of #2 had EVER seen the light of any “market” trade as one between arms-length parties;
  4. Why? To maximize same prop traders’, managers’ and CEOs’ cash bonus checks;
  5. All based on the assumption (almost a religious belief) that national median home prices had NEVER gone down — true, as you may recall;
  6. BUT the past was under a 60 times house finance, prudently underwritten leverage regime (20% down payments, verified job, income, assets and 12 times bank balance sheet leverage);
  7. TBTF Banks’ single handedly created 3,000 times leverage on house prices, the underlying collateral of any MBS, CDO, etc.;
  8. 3,000 times leverage is the product of Zero down loans; 100 times leverage for the borrower and 30 or more times TBTF bank on and off balance sheet leverage;
  9. Mr Bass testified to the FCIC in January 2010 that TBTF banks’ leverage at the end of 2007 — yes end of 2007 (see page 13) shows almost all TBTF Banks were over 30 times, Citigroup at 68 times leverage; meant an adverse swing (in the value of the underlying collateral or obligations) of as little as 1.5% wiped them out completely — insolvent;
  10. And we know that leverage worsened in 2008…and we know from Goldman Sach’s 2007 to 2008 collateral call dispute with AIG that MBS valuation marks (not even CDO’s) were south of 90;
  11. It’s not about Fannie or Freddie either; they were downstream of information from the TBTF banks — again TBTF banks held trillions of MBS, in secret OFF balance sheet; I’m not saying it was necessarily illegal but it was fraudulent; as it was knowing, willful and intentional fraud upon the other side to the mortgage — the borrowers. And it only went on as long as it did — BECAUSE they were hidden;
  12. And we know it’s not about CRA as home ownership peaked in 2004 nor can we blame it on the variant of “homeownership for all” as just a few too many houses were not primary residences but 2nd, 3rd, 4th and 5th homes and condos — each time the loan was approved (ultimately) by TBTF banks;
  13. Last, 3,000 times leverage on home prices represents a 50 fold increase over the 60 times historical norm; more importantly shows that TBTF Banks’ violated requirements of their banking charters; i.e. to operate according to “safety and soundness”.

[TBTF Banks on LSD indeed; massive amounts of Leverage, Swaps and Derivatives.]


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  • russ

    Can you say Community Reinvestment Act?

    Then again liberals are always looking for someone else to blame when their stupid ideas crash and burn and end up costing the taxperys billionss…

    • joulesbeef

      This tired crap again. I suggest you read the CRA, and then notice that most of the failures and the first failures came from banks not regulated at all by the CRA.

      The CRA is about red lining, not loaning to the poor. See in the south, white people with great credit, could not get loans for businesses they wanted to open in minority neighborhoods. It was a way for republicans(then dems) to keep the uppity negro down.

      the CRA simply said the banks could not refuse lending based on the neighborhoods where the project or home was located. AND IT ALSO SPECIFICALLY SAYS, that they can not make loans outside the sound operation of the bank.

      Read somewhere not biased on the causes, here is wikipedia

      here is the CRA, I suggest you actually read it.

      Notice this man is saying the government forced the powerless banks to loan to the poor when they didnt want to. Get that? do you think the banks are powerless? Do you think they would put their own corp in danger and remain quiet?

      Also before the 90’s loan sharks were illegal due to our usury laws. You couldnt lend to the poor because the interest rates you need to set to protect yourself, were banned by law. WE didnt have cash for titles, we didnt have payday loans, we didnt have subprime lending, we didnt have credit cards with 40% interest rate and a yearly fee. ALL THIS WAS ILLEGAL. Until the banks lobbied for people to be able to get credit across state lines. This lead to massive deregulation in the states and the destruction of the usury laws. Banks werent forced to lend to the poor, THEY DEMANDED IT. Thats why you see them peddling their cards on lower end college campuses, offering free pizzas to people who sign up for their 40% interest cards. They LIKE IT WHEN SOMEONE CAN BARELY PAY THEIR BILLS. THEY MAKE BANK THAT WAY. AND THEY LIKE IT EVEN MORE WHEN THE INTEREST IS SKY HIGH.

      Dont let the fascists blow smoke up your butt, learn some reality for yourself. Staff off the right wing and left wing blogs, and use your head. Banks arent powerless and the poor and the 30 year old CRA did NOT kill the economy.

  • Russ,
    Thanks for that comment; however tell me what does hiding (or as the FDIC stated “concealed”) plays what part in a capitalist, free (and OPEN) market system? Google FDIC TLGP March 4, 2011 testimony by Mr Jason Cave; then do control F – there you will see the word “concealed” several paragraphs down.

    It was not about the CRA – because if you read bullet point #12 above, it says, and many agree, that home ownership peaked in 4Q2004. The NY Fed recently came out with a partial spin the blame on the borrower – but even they focused (inaccurately in my view) on borrowers’ 2nd, 3rd, 4th houses (homes).

    The simple way to figure out which side caused several bubbles and now crises – is this:
    Which party was in a position to have said NO to:
    1) any mortgage loan application?
    2) to any MBS securitization application for rating to a ratings agency?
    3) to any sale of MBS to a 3rd party investor – LIKE Fannie oro Freddie? or CDO?
    4) to any holding of MBS on balance sheet?
    5) to any hiding of MBS off balance sheet? or off shore?
    6) to create any SIV (Qualified Special Purpose Entity) to hold derivatives INCLUDING MBS, CDOs etc?
    7) to cause those SIV’s to issue Asset Backed Commercial Paper (ABCP) so as to finance the long dated paper at short term rates?
    8) to collateralize the ABCP with what? MBS
    9) then when Money market funds figured out that the extra pick up in yield on the ABCP was not worth the risk – THEN who went crying to whom and asked for a _______? to be approved to become Bank Holding Companies?
    10) Then who gave cash to whom?
    11) And Russ, why did _________ need the cash?
    12) Because, Russ, the MBS that were in #6 above had not seen any sunshine of a market, as in arms-length trades in YEARS Russ.
    13) It’s called exploiting information advantages – Stiglitz was awarded the Nobel Prize in 2001 for it…
    14) And if you’d like a little more, go look up when the SEC created the CSE program and when they terminated it, and who were the former CSE’s…(Answers: 2004, September 26, 2008, and in the verbatim quote from the SEC’s 2004 hearing to approve the CSE “ONLY the largest, most sophisticated investment banks” were allowed to become CSE’s…
    15) and if you would like a little dessert, take a look at a former CSE’s annual report from when? 1998; and read what the former CSE had to say about models as in Roger Lowenstein’s LTCM tome “When Genius Failed” see page 235, “Merrill Lynch uses mathematical risk models to help estimate its exposure to market risk” as Lowesntein wrote, in a phrase that suggested some slight dawning awareness of the dangers of such models, the bank added that they “may provide a greater sense of security than warranted; therefore, reliance on these models should be limited”.
    Past, as they say, is prologue – thanks for reading and your comment.
    Ps: Said another way “No ONE ever put a gun to the head of any banker to approve a mortgage – or to do many of the items, if NOT all above (and there’s plenty more) – correct?”

  • This post is clearly correct. But we also know that experts can and do disagree on the same set of facts. Which brings on the jury for a verdict as to which expert is correct. I say the jury is with the 99%.

  • Paul Pugh

    Knowledge is power. Money begets power. Such sophisticated market manipulation requires a total
    disregard for the ethics of society. Then again those that would write themselves a $ bonus for their reward – should we expect anything less. Ignorance would prevent any of the regulators or enforcement agencies to unveil the truth and so to the “Appraisal Community”? Sum it up by saying “Greed is the root of all Evil”. How do you regulate that which is not on the table? There is plenty of blame to go around – but start with those that create and operate the system, not those that try to make a living and provide for their families within it. !

  • Conscience of a Conservative

    I would disagree with the statement caused the recession, a more apt title would be cause of the financial melt-down. I do wish to point out that leverage on the part of financial institutions despite being higher than that of households is a different animal. I’m not defending it, it was crazy, just that its different. Leverage for house-holds is not about putting 10% on a house, and borrowing 90% it’s about allocating too much of one’s base pay to service debt or to make a mortgage payment. That said, the sheer size , concentration and inter connectivity makes it more dangerous for the banks to be in a precarious state and these are institutions that often have an implicit federal guarantee.

    One last point, the banks were leveraged up in assets backed by the over-extended home-owner, so we’re really talking two sides of a coin, and even though the home owner was less leveraged, in many instances the debt was taken on to speculate on a home, or had to be refinanced before their mortgage reset to a higher rate.

  • Joe

    This speech (it’s short) is interesting.

    I know there isn’t one cause for the crisis. However I rarely hear the above mentioned.

    • Joe
      • 40,000 borrowers times let’s say $200k home price is a grand total of $8 Billion; times $250l home price bumps it to $10B; (it’s a small spot on a financial catastrophe) and that’s assuming EVERY such borrower defaulted AND the house / property itself became worth zero…Bailout costs for TBTF banks (including former CSE’s) Bloomberg News has recently reported is running upwards / over $7T…Director of SIG TARP estimated that bailout costs (direct and indirect, including that of GM and Chrysler) was/would be over $20T – correct.

  • Google: “RECKLESS HOMEOWNERS”. Remember Bush gave a speech about “RECKLESS HOMEOWNERS” causing the financial crisis and foreclosure crisis? I guess that’s like the “RECKLESS WATER DRINKERS” where frackers are ruining drinking water for folks.

  • Ola! Washingtonsblog,
    I take your point, The causes of mesothelioma has seen the focus mainly on only one material… asbestos, but there are other material with structures similar to asbestos that can cause people to develop the deadly lung disease, if inhaled. One such material is erionite, a not so common cause of mesothelioma of the pleura.
    I’ll be back to read more next time
    ~ Paul at

  • Charles A. Bailey

    I have a masters in finance and I could hardly make any sense out of some of these examples. The simple answer to this was the greed of the traders who were making millions on the”spread”, i.e. buy low and sell high. Our government bailed them out, with our money, because the politicians were repaying campaign contributions. Ever play musical chairs? With every set some one is left without a chair; holding the bag. But, when you are a politician you can buy a chair with electorate monet; taxes. In the end your taxes go into the p0litical pockets.

  • Denny

    As far as I can tell most people are avoiding the most obvious reality of not only the past year, but the past decade. Capitalism is now an anachronism. It is dead. I am not a Marxist, socialist or any other ‘ist’, simply an objective observer who understands from what I see what’s working and what’s not. The elites understand that capitalism as practiced historically in this nation is inapplicable now. They made it this way. That’s why they are engaging in the most egregious schemes to accumulate what wealth still remains. Jon Corzine anyone? They control not only the means of looting our wealth, but the media necessary to redirect our attention to other seemingly important ‘issues’. All and I mean ALL of their convoluted ‘explanations’ concerning the world of finance are simply created to keep us confused and vaguely hopeful that the capitalist system still works. Most of the decent people intimately involved in the finance system now understand that the tipping point has been passed and that if you’re NOT engaged in illegal and furtive activities to ‘Get Some’ then you will most certainly be left in the dust. The system does not work anymore for the larger majority of US. Corzine is simply the teeniest tip of the iceberg. A simple question – where can a trusting person put their money, assets, wealth anymore? There are answers, but they involve radical diversions from what have been traditionally safe options for almost all Americans. These answers involve the human virtues of trust, compassion, yeah, LOVE, accommodation (as in stepping up to create alternatives to the world that these madmen have created for us), fortitude, honesty, respect for life, all life. They want it all and will do ANYTHING to get it. Now they are preparing to kill Iranians and there is more than a good chance that nuclear weapons will be involved. These radical authoritarians are, indeed, insane and the defining danger of their madness is that they ultimately hold our lives in their hands. Want to affect it? I do and I know I will have to seriously, very seriously change my life and accept the truth that if I want sanity to return to earth then I will have to be prepared to make some sacrifices. BIG SACRIFICES. I hate having to involve myself in this kind of truth, reality, whatever, write about it, discuss it. It sounds kind of hopeless, but a day(s) of reckoning is(are) approaching and the maniacs soldier on into the jaws of certain destruction, a destruction which will involve ALL of us. This will become a pivotal year, a make or break time which will either lead to an ongoing darkness or the first shreds of light. Good fortune in the new year!

  • the title of the post says it all and it is true. there could not have been enough foreclosure to collapse the world economy if it was not for the extremely over leveraged banks and their desire to get out before the meltdown. As volatility grew the tbtf banks knew it was time to pull the rug out from the feet of the market. It had nothing to do with people defaulting. the small percentages of defaults could never collapse the system. That talk was all just cover up that allowed the banks to get bailed out as congress believed their lies. it is disgusting to know that Wall Street gets away with such egregious crimes as years of hard work by average Americans gets wiped out with no hope of a come back in the next 10 years if ever.
    glad someone sees the truth and is not believing the government and tbtf bank hype.

  • mmckinl

    The New York Times finally telling the truth?

    “Israel has already tried several false flags recently … India, Thailand, Georgia, Kenya, Cypress and Bulgaria … The NYT immediately blamed Iranian surrogates for the Bulgarian bombings … and more !!!

    Not too long ago the NYT printed this: “the Bulgarian blast would be the first successful attempt by Iranian operatives to kill Israelis in attacks abroad after a string of failed bomb plots targeting Israeli diplomats in Georgia, India and Thailand this year.”

    The problem ? None of it is true! All were false flags !!! India, Thailand, Georgia, Bulgaria, Kenya and Cypress … all Israeli Mossad operations …. From a previous post of mine …”The Indian and Thai authorities have linked the terror plots in their country directly to the Revolutionary Guards in Iran”~ No they have linked them to possible Iranians, probably MeK.

    The Revolutionary Guards in Kenya were set up by the Mossad through operations in Iraq, where the explosives were sent from, also base home of the MeK. These two have been released on $22,000 bail each pending their trial …Both the Burgas and Bangkok operations were botched … or were they? In both cases the explosives detonated too early. Looks like a setup to get rid of evidence while creating a terrorist attack.

    Just a theory, but could it be that MeK operatives are responsible for both the attacks inside Iran and the operations in Burgas, Tblisi, India and Bangkok? Looks like an Israeli crew that got too far along in Burgas … or maybe Netanyahu needed Israeli blood to start his war with Iran.

    The arrest of the Swedish-Lebanese in Bangkok that was supposed to be Hezbollah support for the “Thai Bombers” has been cleared of any charges in that case but faces charges on the chemicals he said were to be exported elsewhere. Another Mossad setup.

    And finally the Swedish National of Lebanese descent arrested in Cyprus … No bombing, No evidence against him though he probably was gathering intel for Hezbollah. Israel is desperately trying to put Hezbollah on the EU terrorist list as well as muddy the waters because of all it’s failed false flags that are now coming unraveled and the truth is coming out.

    I guess what is of most import is that all of these countries, India, Thailand, Kenya, Georgia and even little Bulgaria are not playing along with the US-Israel terrorism. Not too long ago this would have been a fait acompli. Now these countries are not playing along and are not amused.

    Is it a coincidence that the US just took the MeK off the its’ terrorist list?

    Will the New York Times report on the truth that is coming out about Israeli false flag operations in all these different countries?