Stop Blaming Lehman and Banks, Congress Created the Collapse

NEW YORK ( TheStreet) -- Five years after Lehman Brothers ( LEHMQ) declared bankruptcy and gave us a new term called "breaking the buck," we are no safer from a banking crisis than we were before the whole mess started. In fact, we are worse off; at least most of us are with notable exceptions that include the usual suspects.

To be sure, you can make too much of Lehman, and if you don't follow the money all the way, you stop at the wrong entity to cast blame. Many claim the greediness of bankers caused their own demise, and while that's partially true, it's not the real question to ask because everyone, including you and I, are greedy too.

Greed is part of what makes us human and to pretend that some aren't motivated by self-interest is pure fantasy. If you set up a system that doesn't anticipate market participants to maximize revenue and profits, you're doomed for failure -- but that's exactly what the government did. The housing market wasn't the first time a government program had horrible unintended consequences and, unfortunately for all of us, it probably won't be the last. That is especially true considering few are demanding changes in the government.

When one bank collapses because of bad loans, we can all agree that management screwed up. However, when Bank of America ( BAC), J.P. Morgan Chase ( JPM), Citigroup ( C), Morgan Stanley ( MS), Goldman Sachs ( GS), and many others needed a capital infusion to keep the doors open because a housing bubble popped, it's the system, not the banks.

The housing crisis didn't start in 2008. It started years before when Freddie Mac and Fannie Mae were allowed to guarantee and promote high-risk subprime lending to buyers the "evil banks" would not loan to otherwise. It was government-controlled entities that distorted the market and set the table for banks to fail more than eight years before.

Nicholas Taleb understood the destruction of wealth Congress was creating, as he wrote in The Black Swan published in April 2007:

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. Not to worry though: their large staff of scientists deemed these events "unlikely."

Congress was creating a monster because most people started to believe that home prices increasing 10% or more every year was the new norm and, more importantly, that the risk was all but removed in housing. That's the real crime, creating a perception that the risk was gone.

How do you create a perception that risk is removed? You continuously increase the lending capability of Fannie and Freddie while simultaneously increasing the percentage of subprime loans over a decade. After a while, it becomes normal and expected. Add in congressional leaders including Barney Frank giving speeches that we're not in or creating a housing bubble and you complete the package.

Barney Frank is perhaps the greatest in-office politician, demonstrating extraordinary skill in performing the "Washington two-step" and deflecting blame from him and Congress. He didn't act alone, but he was in leadership, and if we don't learn from this lesson, we are doomed to repeat it.

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.

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