New research suggests that financial workers involved in the mortgage-securitization business -- ground zero for the misaligned incentives that are supposed to have helped inflate the bubble -- were true believers in the housing boom.
In 2006, there were 1,760 registered attendees at the American Securitization Forum's conference in Las Vegas -- the major annual confab for the securitization industry. Screening out people who didn't work in mortgages, and making sure to oversample firms that worked at large financial institutions, as well as institutions that played a prominent role in the financial crisis, like Lehman Brothers, economists Wei Xiong at Princeton and Sahil Raina and Ing-Haw Cheng at the University of Michigan's Ross School of Business came up with a list of 400 mortgage-securitization professionals.
These were basically midlevel managers -- the people directly involved in the slicing and dicing of mortgage loans into the myriad of mortgage securities that institutional investors were lapping up during the boom years.
Using the LexisNexis database of legal documents, the economists collected data on all the properties the people on their list ever owned, including location, time of sale and price. They then created two control groups to repeat the exercise with. The first was a list of equity analysts who worked for a similar set of finance firms as the securitization workers, and who didn't cover housing companies. The second was a list of lawyers who didn't work in real estate law -- a wealthy group that reflects how people outside of finance behaved during the bubble.
The economists found that the securitization workers showed no awareness that housing was about to become undone. To the contrary, during the peak of the bubble, they were far more apt to swap into more expensive homes and buy second homes than the control groups were. And workers at firms like Bear Stearns and Lehman Brothers were among the most aggressive with their own home purchases.
To the argument that the aggressive home purchases of securitization agents might have reflected the higher bonuses they received during the boom years relative to, say, the equity analysts in the control group, Mr. Xiong points out that if were true, if they had any sense that their future income was at risk they would have plowed their money into something other than houses. Indeed, after the housing bust came, the securitization agents were far more likely to put their houses back on the market than the control groups, which suggests they were getting forced into sales.
The upshot, says Mr. Xiong: "These guys might have had bad incentives, but there's no sense they knew about the bubble."
