Why did Wall Street engage in subprime lending, even aggressively encouraging people with no repayment ability to borrow money to buy homes?
Surely any bank could see the risks involved, yet why did these practices continue until the entire crisis erupted?
Had the collective intelligence of Americans dropped to negative numbers?
In later years, reporters investigated industry insiders, and the conclusion they reached was rather outlandish: the crisis was entirely caused by performance reviews, or KPIs.
Through the journalists' investigations, it was discovered that the directives from the senior management of various institutions actually demanded that their subordinates absorb as many creditworthy clients as possible; there was never any mention of relaxing assessment standards or anything of the sort.
However, the gravest mistake these institutions made was designing KPI metrics that required each employee to complete a certain number of loans per month.
As mentioned before, the number of people with repayment ability was finite. Initially, employees could still meet their KPI targets. But after a year or two, meeting these targets became an impossibility. Yet, the companies didn't care, as the subprime mortgage market grew hotter and the profits to be made became increasingly lucrative.
Thus, these companies completely disregarded the actual market conditions and instead continuously raised the work expectations for the next quarter. The result was that middle management in various regions kept increasing the KPI targets for their subordinates.
Failure to meet the targets meant not only no salary but also a high probability of immediate dismissal.
These employees had worked tirelessly to get into these large banks; how could they possibly be willing to leave just like that? Therefore, these employees naturally shifted their focus to customers who had no repayment ability, finding ways to encourage these customers to take out loans, thereby fulfilling one of their KPIs.
Initially, this task was not easy. Setting aside how to bypass various qualification reviews, those customers who lacked repayment ability were themselves well aware that they could not afford the repayments, so they were unwilling to burden themselves with a mortgage.
The work of these grassroots employees was extremely arduous, yet the pressure of KPIs weighed on them constantly. What was even more critical was that, since KPI targets cascaded from the top down, the regulatory bodies also had to bear immense KPI pressure.
Ultimately, a genius proposed a strategy to attract users with no repayment ability to borrow: the "equity release on property" scheme.
The strategy went something like this: first, they would encourage people with no repayment ability to borrow. If these individuals were reluctant, they would then state that once the loan was approved and the house was acquired, they would help arrange for another lending institution to mortgage this newly purchased property to them, thereby securing another loan.
If the original purchase price of the house was, say, one million US dollars, then upon the subsequent mortgage, they could obtain around five hundred thousand US dollars.
And this five hundred thousand US dollars would be paid out in full to these borrowers. This meant that with just one such transaction, these borrowers, who were initially penniless, would suddenly possess a fortune of five hundred thousand US dollars.
And with such a substantial sum of money, it would be impossible to spend it all in a short period. Whether this person intended to start a business or continue a life of extravagance, the money would likely last for two to three years.
Within these two to three years, this person would then have the capacity to afford the monthly mortgage payments.
In this way, borrowers could obtain a large sum of money in a short period, banks providing the mortgages could receive stable monthly repayments for several years, institutions taking the property as collateral could acquire a valuable property, and these employees could meet their KPI targets.
This was a win-win-win-win situation, a complete triumph.
Therefore, as soon as this strategy was introduced, it was met with unanimous approval from almost all frontline sales staff, and the regulatory bodies, in pursuit of their KPIs, turned a blind eye to it. As long as all the necessary documentation was provided, these institutions would not delve into the authenticity of these documents.
And what about the borrowers?
Naturally, they flocked to the opportunity. Even though they knew they might be saddled with massive debt of millions of US dollars.
But it didn't matter. They were already the dregs of society, the trash of this world and its society, possessing no more than a hundred US dollars in cash.
As long as they could now obtain a large sum of money, who cared how much debt they would incur later? After all, they had no money. Even if everything they owned was seized, and their very flesh and blood were rendered into oil, they would only have assets worth a few hundred US dollars. There was no way to extract even a single cent more.
And they could still receive welfare benefits or food stamps from the federal government each month. No matter how much you tried to collect, if you could extract even a penny from them, that would be your achievement.
They were not afraid of going to jail, as jail offered free meals. They were not afraid of death either; living as they were, they likely had little motivation to continue living. You could do whatever you pleased.
With this mindset, these penniless people began to borrow money frantically to buy houses, and instantly began to enjoy a happy life of homeownership, wealth, and rampant consumption.
This, in turn, led to rapid economic growth in the entire United States in the preceding years.
The first sector to grow was real estate. After all, the number of people buying houses exploded, but the supply of housing did not increase, leading to a surge in housing prices.
The soaring housing prices further fueled the desire of the poor to buy homes. This was because buying a house itself did not require money; the funds were borrowed from banks. The higher the housing prices rose, the more capital they could obtain through mortgaging their properties, which in turn encouraged more poor people to buy homes.
Similarly, due to the rise in housing prices, the returns and total capital of subprime mortgages appearing in the stock market each year also continued to increase, making subprime mortgages the most high-quality investment product worldwide.
If it weren't for the sudden emergence of the "Western Mustang Fund" as an anomaly, subprime mortgages would undoubtedly have become the most profitable and risk-free financial collectible in the world.
On the other hand, as many poor people suddenly had money, they began to engage in compensatory consumption. This consumption, in turn, boosted market growth, driving the growth of various real economy enterprises.
The growth of real economy enterprises further spurred the growth of the entire stock market. As the stock market rose, Wall Street institutions and banks naturally became bullish as well. Thus, during this period, the entire economy was in a state of prosperity. The entire US economy received a boost from subprime lending, and the market was so good that everyone was shouting about the arrival of a great era.
Then, the KPI targets for the frontline business personnel of the mortgage companies were increased again. They had to find every possible way to get more poor people who had no repayment ability to borrow money to buy houses.
As a result, more and more unrecoverable mortgages flowed into the liquidity pools of various banks, almost depleting them.
Did these frontline employees understand the extreme danger of their actions?
Of course, they did. After all, anyone working in these financial institutions and banks, even the most junior sales staff, had at least a bachelor's degree. They clearly understood the magnitude of the bomb they were setting for the future.
But with KPIs on the table, and promotions and salary increases within reach, were they supposed to abandon their own career advancement and KPIs for the sake of the company's future?
It was impossible!
Besides, everyone else was doing it. They were merely going with the flow. If problems truly arose later, it wouldn't be their fault. Was it wrong for them to want to make money?
What about the middle management then? Could they not see the crisis?
Of course, they could. But they also had KPIs, and they needed promotions and salary increases. Furthermore, they possessed even greater desires and needs than the frontline staff.
Moreover, since everyone else was doing it, if they didn't, it would be seen as not aligning with the masses, a case of blending in with the crowd.
As for what to do if things blew up in the future... well, since things could blow up at any time in the future, they should seize as much money as possible now.
Then, when the real explosion occurred in the future, they could simply take their savings and walk away. After all, they were on salary, and the company's future debts would not fall on them.
Finally, what about the senior management of various institutions? Could they not see clearly?
Initially, they were probably indeed kept in the dark. After all, the larger the company, the more rigid the system, and the harder it was to understand the grassroots situation. Perhaps in the first year, these big bosses genuinely didn't know the absurd things that were being done at the lower levels for the sake of performance.
But they knew that the company's performance was increasing year by year, its profits were growing, its stock price was soaring, or rather, the global economy was experiencing an unprecedented boom. This was a great situation!
However, by the second year, even the most insular companies should have sensed some problems at the grassroots level. Then, the company's senior management was faced with two choices.
The first choice was to address these issues urgently, to cut off all these non-performing assets, and to retrain the grassroots staff, resolutely preventing such lending to credit-deficient individuals from happening again.
This choice seemed sound, but cutting off these non-performing assets would mean immense losses of tens or even hundreds of billions of US dollars. If these were written into the financial reports, what would happen to the company's stock price and shareholder dividends?
Furthermore, if all industry peers were doing this, and other competitors were all experiencing soaring profits while their own situation plummeted, it would be natural to be crushed into pieces by the wave of the general trend.
The second choice was to pretend not to know about these situations and let them continue to develop. After all, it would take several more years for the bubble to burst, and perhaps by then, they would no longer be in charge of this company, and the problems would not fall on them.
And even if problems did arise, they would deal with them then, thinking "we'll cross that bridge when we come to it!"
Now, five years have passed since the first wave of unrecoverable loans. During this time, countless bad debts and non-performing loans have accumulated that are simply unrecoverable.
And these secrets hidden deep within the world, along with the underlying logic, were exposed by various media outlets through intentional indulgence, appearing across almost all publications, allowing all Americans to understand, almost overnight, the absurd events that had transpired in their own country.