Subprime: Let the finger-pointing begin!

The banks and mortgage companies never would have made all those loans if they'd had to keep them on their books. But they didn't have to, thanks to the remarkable mortgage machine Wall Street's investment banks and hedge funds concocted.

Until two months ago U.S. banks were able to package billions of dollars of mortgages as bonds and sell them to investors, which included other banks, pension funds and mutual funds. Foreigners were huge buyers of U.S. mortgage paper. And hedge funds scarfed up some of the lowest-rated, highest-yielding stuff in a cynical bid to boost returns.

The result was seemingly bottomless demand for whatever Wall Street could put on the table. Naturally, the amount of subprime mortgages soared. In 2006, subprime-mortgage origination amounted to $600 billion, 20 percent of total mortgage originations, massively up from 2001, when $160 billion of subprime mortgages were issued, representing 7 percent of total mortgage lending, according to Inside Mortgage Finance.

And they're going bad at a frightening rate. Over 17 percent of all subprime mortgages were more than 60 days past due at the end of June, double the number a year earlier, according to research firm First American Loan Performance.

But Wall Street was hooked on the profits. For example, Bear Stearns, which recently suffered huge subprime losses in two of its hedge funds, earned $2 billion in 2006, a huge jump from the roughly $600 million it made in 2001. It's a safe bet that mortgage products made a big contribution to the gain. The same goes for, say, Goldman Sachs and Lehman Brothers.

With all that money rolling in, no one was going to question whether it was right to be exposed to subprime. Lehman got so caught up in its desire for subprime profits that it bought a subprime-mortgage-origination firm, BNC Mortgage, which it recently shut down.