What was the true cause of the worst financial crisis the world has seen since the Great Depression? Was it excessive greed on Wall Street? Was it mark-to-market accounting? The answer is none of the above, says Jeremy Siegel, a professor of finance at Wharton. While these factors contributed to the crisis, they do not represent its most significant cause.
Here is the real reason, according to Siegel: Financial firms bought, held and insured large quantities of risky, mortgage-related assets on borrowed money. The irony is that these financial giants had little need to hold these securities; they were already making enormous profits simply from creating, bundling and selling them. "During dot-com IPOs of the early 1990s, the firms that underwrote the stock offerings did not hold on to those stocks," Siegel says. "They flipped them. But in the case of mortgage-backed securities, the financial firms decided these were good assets to hold. That was their fatal flaw."
Speaking in Philadelphia on January 20, Siegel, author of Stocks for the Long Run and The Future for Investors, provided a detailed analysis of the factors that fueled the worldwide financial meltdown. His talk was the inaugural lecture of a 15-session course on the financial crisis that Wharton is offering MBA and undergraduate students. Siegel's mission was to detail the factors that sparked the crisis that has caused the U.S. stock market to lose more than a third of its value in a year, while sending unemployment to its highest level since the 1980s. Siegel's lecture was on the same day that millions of Americans expressed optimism over the inauguration of President Barack Obama, even as the Dow plunged another 300 points.
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