It started innocently. Around the turn of the century Congress decided to make home ownership accessible to more Americans, on the idea that owning a home made families happier, more prosperous and more law-abiding. It put Alan Greenspan in charge of supervising more liberal bank mortgage lending but–he later said in Congressional testimony–told him not to look too hard at what was going on.

Banks of all stripes had long since learned that although they might want to hold some mortgage loans on their books the real money would be made by fees from processing loans that would be put into large packages and sold to institutional investors. So they amped up their efforts when they got Washington’s encouragement. Trouble started when the banks exhausted the most creditworthy mortgage applicants. In order to keep the fee income rolling in, the mortgage industry did the following (my analysis/perception of what happened):

–banks lowered their credit standards and began to focus on apparently lucrative “sub-prime” borrowers

–lenders began to take mortgage applications with little credit information on them/independent mortgage brokers began to be, shall we say, less vigilant in putting down accurate information about the borrower on applications

–banks split large packages of mortgages into tranches according to perceived risk levels, using academic theory to argue this magically made all the tranches less risky

–as the quality of these packages deteriorated, issuers successfully pressured credit rating agencies to override their normal assessment protocols and issue over-optimistic ratings

–the financial press reported that toward the end, banks were using bait-and-switch tactics to resell mortgages to institutional clients, showing them one list of mortgage security contents before sale but delivering instead an inferior set. I have no direct knowledge of this. It is the case, though, that at some point these transactions, even involving a US seller and US buyer, began to be executed in London rather than in New York. My, cynical, take is this demonstrates that the banks knew clearly that what they were doing violated the law in the US but was apparently permissible under the “regulation lite” regime in the UK

–in mid-2007, seriously overborrowed consumers began to fall behind on their loan payments and to default. By early 2008, it was clear that despite having laid off much of their exposure to the ultimate dumb money in world banking, Continental European heavyweights, the overall US banking system was in tatters and needed to be bailed out by Washington

–press reports from 2008 show that Washington decided it couldn’t simply bail everyone out and pretend that nothing bad had happened. So it chose Lehman, an avid participant in sub-prime mortgage trading, but not a firm crucial to the US financial system as a whole, and allowed it to fail.

How does this differ from Evergrande in China? We’ll see as the facts about Evergrande come out. As things stand now, Evergrande appears to me to be one company pushing the boundaries of the Party patronage system. Its calculation was that no matter how high its financial leverage might be, the mayors and bank presidents who arranged its loans would continue to provide it with more money. Its mistake, I think, was to make itself so much of an outlier and to borrow large amounts from the individuals who bought its condos. This last likely violated unwritten rules of conduct and made it more of a social threat.

The sub-prime mortgage crisis in the US, in contrast, is, to my mind, not a case of one reckless company, but rather of large-scale, systematic fraud.