Why???

[Columbia_Student]

<p>From the Chairman of the Blacstone Group, if you have WSJ online
[Maybe</a> Someone Does Have a Clue - WSJ.com](<a href=“http://online.wsj.com/article/SB122231160991774325.html]Maybe”>http://online.wsj.com/article/SB122231160991774325.html)</p>

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Stephen Schwarzman. The chairman of Blackstone Group was part of a roundtable of roughly 30 finance luminaries at the Waldorf-Astoria on Tuesday afternoon, hosted by the Yale School of Management and co-sponsored by The Wall Street Journal, and he kicked off the audience-participation segment with a nearly all-in-one-breath summary of the causes and effects of the credit crisis:</p>

<p>"It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.</p>

<p>Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting. </p>

<p>When they started defaulting, out of bad luck or bad judgment, we implemented fair-value accounting…You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system. </p>

<p>In the face of those losses…you needed to raise new equity…which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system…It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. …Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.

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