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If a bank is poorly run and requires a bailout, it has been run poorly and it is a failed business. BUT: If a bank is not poorly run and is caught up in a banking run and requires a bailout, that does not mean it has been run poorly and is a failed business. It means there has been a banking run.
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None of the banks - particularly the investment banks - were adequately prepared for the risk of a housing bubble bursting. And they all knew it was a bubble. They believed, quite wrongly, that they could flip the loans rather than keep them in portfolio, and blend the garbage loans with good loans in securities, to pass off risk. They knew that even a small uptick in delinquencies would set off a disastrous chain reaction.
And they knew the fundamentals behind the loans were lousy. A majority of the bubble was people replacing jobs they could no longer find or hold with income from flipping. People were sucking equity out of homes to survive. It was a fucking joke even the least astute watcher of r/e and economics could plainly see. Built to collapse.
And yet almost all of the big banks played along with the charade: Housing will never go down.
So yeah, I have sympathy for those who faced a run for no fault of their own. But in 2008, those banks were about 10% of banks. And 0% of investment banks.
Oh, and the shmucks who bought that credit default coverage from Cassano? They deserve to eat it the most. They all knew he was writing that which he couldn't possibly cover. Reporting on the crisis included multiple interviews with people who wondered how he could write so much.
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You are right that part of the problem was that some of the bank's assets were overvalued. If that were the only problem, all of this would be much simpler. But banks are not bookstores.
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The banks were so leveraged, and skepticism about the stability of the residential r/e market so high below the surface (despite the financial media's attempt to paint a rosy picture), a small loss was a big loss. I think it was a mere 3% increase in defaults on loans one tier above subprime that started the whole mess.
The banks knew they'd created a bubble and it'd burst, badly. Among the things that happens when bubbles burst? Bank runs. They should have planned for that given the size and fragility of the bubble they'd been knowingly creating.
