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TheStreet Open House

Lehman Blame Game Still Played Four Years, $12.8 Trillion Later

Stocks in this article: BAC C JPM WFC FNMA FMCC

Even the U.S. Treasury and the Department of Housing and Urban Development in their February 2011 report to Congress on Reforming America's Housing Finance Market said that "misbehavior, misjudgments, and missed opportunities -- on Wall Street, on Main Street, and in Washington -- all came together to push the economy to the brink of collapse."

Among the causes of the crisis cited by the Treasury and HUD were "poor consumer protections" that "allowed risky, low-quality mortgage products and predatory lending to proliferate;" and "inadequate and outdated regulatory regime failed to keep the system in check," and allowed "securitizers and investors... essentially to opt-out of the parts of the system with heavier regulation and use whatever underwriting practices they saw fit;" a "a complex securitization chain lacked transparency, standardization, and accountability;" "inadequate capital in the system left financial institutions unprepared to absorb losses;" and a loan "servicing industry that was ill-equipped to serve the needs of borrowers, lenders, and investors once housing prices fell."

So there's plenty of blame for Wall Street here too, but Washington and the regulators must share some of the blame for inadequate oversight as they and the two government agencies even placed some blame on consumers.

Bank regulators -- namely the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency -- have been repeatedly blamed by their own inspectors general for not taking serious action sooner, to force the management of troubled banks to address deficiencies in lending standards, capital levels and liquidity management.

The Bailout's Cost

In explaining its $12.8 trillion cost estimate for the Great Recession caused by the bursting of the real estate bubble, Better Markets says the enormous figure includes "the sum of actual GDP loss and GDP loss avoided because of emergency spending and actions by the Federal Reserve Board... for the period 2008-2018."

The organization also says in its report that "real household wealth declined from $74 trillion in July 2007 to $55 trillion in January 2009, representing $19 trillion of evaporated wealth" and that "although household wealth has regained some ground, the decline is still very substantial and has grave distributional effects, including permanent, lifetime losses suffered by many Americans."

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