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The Fed Was Not Looking Where It Needed To

in 2007 and early 2008, the Fed was too narrowly focused on housing to see the full risk it faced

By Joel Ross | Updated on October 24, 2015

I have been reading the Bernanke book which is a moment by moment description of events leading up to the crash on October 2008. It made me recall a lunch I had on May 9, 2007 with four other senior capital markets executives at a ULI conference. At that lunch we all were in a position to be intimately familiar with what was really happening on the ground in CMBS and the markets in general. The group unanimously agreed that the end was near, the collapse of the CMBS and other markets would begin in late July, 2007 and that the crash would be the worst we had ever known. All of those predictions were on the money. It was not that we were so smart, nor that we had some special knowledge. It was simply that we had all been around for over 25-30 years and we knew from experience that what we were witnessing with the deteriorating underwriting, covenant lite, and the way pools were being constructed and financed could not have any outcome but total collapse. What struck me in the Bernanke book is how clueless the Fed and Treasury were as to what was really happening before and as it was unfolding. The Fed was focused on housing and subprime mortgages and seemingly never even paid much attention to CMBS. In summer of 2007, they noted the housing market was deteriorating rapidly and they knew that would have negative affects on the economy, but they completely ignored what many of us knew was the complete deterioration of CMBS quality and the predicable outcome that would lead to.

 

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