- The price of houses as collateral for loans inflated then deflated;
- The price of loans inflated beyond the borrowers’ ability to repay;
- The statisticians underestimated the credit risks of 1 and 2;
- The market participants created then transferred out the credit risks arising from 1 and 2;
- Investment banks and broker-dealers borrowed in excess of their ability to repay.
This summary account of the period’s systemic mis-pricing and risk creation by market participants, deep and wide, omits a root cause analysis, which might not have been relevant for the legal issues confronting J. Wheeler. However, official narratives, history books, etc. are prepared using just such accounts, leaving the reader with an ability to excel perhaps on an SAT test about these events but without any meaningful understanding of what happened, why it happened, how it happened, etc. The overarching issue is one of agency: Specifically, how could the well compensated, well respected individuals controlling the entities entangled in the mis-pricing and risk-missing of the instruments forming the essential parts of numerous debtor-creditor relationships get it so wrong? (Or did they?)
Explanations relevant to these issues are generally of the following forms:
- Independent rogue(s) did it (usually, the most popular explanation as it ordinarily absolves the reporting entity from expensive self-examination as it is analogous to the bad apple that may be found in a good barrel).
- Colluding / conspiring rogues did it (usually, the least popular explanation as it ordinarily generates expensive self-examination, including potential corporate integrity agreements, studies of internal controls, administrative / civil / criminal sanctions, etc.)
- Mostly everybody did it (usually, the second most popular explanation as it ordinarily absolves the reporting entity from expensive self-examination but may induce an enhanced regulatory response).
The Wheeler account fits into the ‘mostly everybody did it’ form of explanation. Perhaps, such account is accurate and deeply meaningful, though I normally reserve this form of explanation to a Reverend Jim Jones scenario. Alternatively, the Kool-aid motivating the human agents behind the systemic and defective evaluations of debtor-creditor relationships flowed from the opportunity to profit privately at someone else’s expense (cf. socializing / externalizing the risk), a less abstract principle that may not be discovered in the applicable SAT questions. Indeed, one reporting entity’s profit is ordinarily another reporting entity’s expense (cf. unrealized gains).