Meltdown was avoidable

A mythology has taken hold about the financial disaster: That only a select group of economists and money managers saw it coming. That everybody else was in the dark because the debt products being bought and sold on Wall Street were so indecipherable. In truth, lots of alarms were being sounded - it's just that conventional wisdom in 2005 and 2006 would not recognize the possibility that disaster was looming. And absent any 5,000-point plunges in the Dow, no one was willing to take the worry-warts very seriously. The AP explores those prescient warnings of a financial meltdown - much of it centered in Southern California and involving Countrywide, IndyMac and others.

Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false. In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:

--Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.

--Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.

--Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.

--Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.

--Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.

The AP story also notes how Pasadena-based IndyMac criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70 percent of the company's 2005 mortgage portfolio. Option ARMS, of course, will prove to be one of the most misguided maneuvers in mortgage history.

The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess. It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency's former deputy comptroller.