Kevin Canterbury of Arizona is the Managing Director and Founder of Redstone Capital Management, headquartered in Scottsdale, AZ. In the article below, Kevin Canterbury, who is a financial advisor, examines the issues plaguing the American economy which led to the market turmoil of the day.
In a 600-page document of ignorance, unintelligible risks, hubris, incompetence, and eye-popping exposé, the Financial Crisis Inquiry Report meticulously details the blame holders of the economic meltdown. Kevin Canterbury of Arizona reports that it makes for a scintillating read of the nation's failures for like-minded, economically interested individuals.
From start to end, the Report points fingers and scrutinizes every decision made by supposedly trustworthy entities. Here are the highlights, distilled by Kevin Canterbury of Arizona.
The Beginning: Interest Rates and Securitization
The tale of the financial crisis begins in the unforgettable year 2000 when the Federal Reserve sliced interest rates. As the all-time low hit, homeowners refinanced their mortgages, causing debt to skyrocket from $460 billion to $2.8 trillion in just three years.
Kevin Canterbury explains that across the nation, people reveled in the equity they'd built for decades and splashed the cash on vacations, medical bills, luxury kitchens, cars, and more. You name it, they bought it.
Real estate investors and budding homeowners noticed the beginnings of the house-price climb. So, between 2000 and 2007, Kevin Canterbury of Arizona explains that residents took $2 trillion in home equity to purchase properties in brand-new subdivisions that were yet to rise above their foundations.
Enter Securitization
As laymen, things felt prosperous. People felt wealthy. People felt lavish.
But in reality, things were crumbling explains Kevin Canterbury of Arizona.
Like a disease that destroys from the inside out, tried-and-true market mechanisms were turning ugly. Wall Street worked fiercely to meet the massive demand, with unfamiliar loans-turned-investment products sold to money-hungry investors across the globe.
Everybody banked on two things — house prices would never decrease, and bill-payers would never default on their mortgages.
Kevin Canterbury of Arizona reports that the ease of loan qualification meant some borrowed far more than they could dream of repaying. In 2007, mortgage indebtedness rose to $10.5 trillion from 2005's $5.3 trillion.
The haphazard lending meant very few paper trails existed, and nobody truly knew who the lenders were. But investors didn't care — the CDOs (
collateralized debt obligations) were plastered with triple-A ratings and deemed "safe."
When Wall Street began making synthetic CDOs, and credit default swaps became the trend, demand for mortgages significantly decreased.
And Therein Lies the Crisis
Kevin Canterbury of Arizona explains that as the Financial Crisis Inquiry Report printed, over 26 million US residents were unemployed. Foreclosure saw roughly four million families lose the roofs over their heads, and 500,000 slid into the foreclosure process.
Approximately $11 trillion in household wealth disappeared. Communities will likely feel the impact of such catastrophic loss for decades.
So, Who's To Blame? The 11 Causes of The Financial Crisis
The following depicts several causes of the massive economic meltdown, some of which are more contentious than others according to Kevin Canterbury of Arizona.
- Federal Reserve Failed to Prevent Toxic Mortgages — Those in charge of America's financial system failed to notice the warning signs and manage the ever-changing risks in line with the public's best interest. They didn't cork the relentless flow of toxic mortgages, which could've easily been rectified by implementing prudent lending standards. The Reserve was empowered to change, and yet it didn't.
- Limited Financial Regulation and Supervision — Entities believed far too heavily in the self-correcting nature of the nation's financial markets and thus, failed to act.
- Regulators Chose Not to Utilize Their Power for Good — The Securities and Exchange Commission should've requested more capital and prevented high-risk practices demonstrated at large investment banks. Policymakers could've halted securitization.
- Governance and Risk Management Failed at Many Vital Financial Institutions — Kevin Canterbury of Arizona says the reckless actions of the institutions meant their focus shifted to increasingly risky deals with huge profits. They didn't fear the worst; they were too caught up in the immediate wealth gain.
- Overt Borrowing, High-Risk Investments, and Zero Transparency — The borrowing amounts meant people left themselves open to financial ruin. Plus, leverage amounts were hidden.
- Government Wasn't Sufficiently Prepared for The Meltdown — The key policymakers weren't prepared for the events of 2007 to 2008. They were off-guard and responded haphazardly.
- Breaks in Ethics and Accountability — Lenders packaged loans to borrowers they knew couldn't afford them, causing huge investor losses. In other words, they let greed take control.
- No Mortgage-Lending Standards — Lenders set the qualification bar low, without any regard for the borrowers' abilities to repay.
- Out-of-Control OTCs — The 2000 legislation that banned the regulation of OTC derivatives propelled the country toward crises. They spiraled out of control.
- Credit Rating Agencies Scrambled — The credit rating agencies approved all the toxic mortgages. After all, they couldn't be processed without their consent.
- The US Government Housing Policy — Those who disagreed with the commission's Report came to their own conclusion. The housing policies meant
The Bottom Line
Kevin Canterbury notes that the Report exists to keep events like these from happening again. But, of course, it doesn't address the hurt caused to ordinary citizens who were careful with their debt from the get-go.
