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It Was a Housing Bubble, Stupid

Stocks in this article: MS GS DB XLF

"Our analysis shows little evidence of securitization agents' awareness of a housing bubble and impending crash in their own home transactions," they concluded. "Securitization agents neither managed to time the market nor exhibited cautiousness in their home transactions. They increased, rather than decreased, their housing exposure during the boom period through second home purchases and swaps into more expensive homes. Our securitization agents' overall home portfolio performance was significantly worse than that of control groups."

The researchers stress that their conclusions "do not contradict the existing evidence that bad incentives caused loan officers and securitization agents to relax lending standards in the subprime borrower market."

The paper does suggest that Wall Street may have relaxed credit standards without expecting it to have an impact on the wider housing market.


The research suggests that these players were caught up in the bubble when making decision about their personal finances. "Our evidence suggests that certain groups of agents - those living in bubblier areas, working on the sell side, or at firms with greater exposure to subprime mortgages - may have been particularly subject to potential sources of belief distortions, such as job environments that foster group think, cognitive dissonance, or other sources of over-optimism. Changing the compensation contracts of Wall Street agents alone, for example through increased restricted stock holdings or more shareholder say on pay, may be insufficient to prevent the next financial market crisis," according to the paper.

--Written by Shanthi Bharatwaj in New York



>To contact the writer of this article, click here: Shanthi Bharatwaj.

>To follow the writer on Twitter, go to http://twitter.com/shavenk.

>To submit a news tip, send an email to: tips@thestreet.com./script>

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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