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Sub Prime

The availability of the cash from the banks allowed more and more first time buyers to purchase homes or qualify for larger loans. A portion of the buyers did not have the credit rating, employment history, or qualifications for the loan; therefore causing a sub-prime mortgage. “Sub prime lending is the practice of lending, mainly in the form of mortgages for the purchase of residences, to borrowers who do not meet the usual criteria for borrowing at the lowest prevailing market interest rate.” (Wikipedia/ subprime_mortgage_crisis )

Keeping the cash available required the assistance of the accounting professional and their translation of accounting professions code of professional conduct. In order for the banks to keep cash ready for lending they sold loans to investment banks. The investment banks secured the investments by pooling the loans and categorizing them into three different levels. For more risky pooled loan, the banks offered credit ratings and even bond insurance. The riskier loans had a higher return on investment, coupled with bond insurance made them an appealing investment to investors. The pooling hid fair market value from the investors and true value was never accurately reflected on the financial statements. The true value was estimated at the original value a conscience decision made by the accounting profession. The failure of conservatism on the financial statement made it difficult for the investor to make an informed decision. (Walters, P. D., PhD, CFA. (May 2008))

When the loans were secured the banks would transfer, not sell, the loans to another entity that was responsible for collection of the debt. The transferred asset transactions were never recorded and the banks financial statements reflect inaccurate assets allocation. Yet another failure by the accounting professional was to achieve the highest degree of accuracy for the investors. Investors relied on the financial accounting “to provide information about its...