Obama’s Ersatz Capitalism - DealBook Blog - NYTimes.com

First off, he writes, banks got themselves, and our economy, into trouble by overleveraging. That is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations, he notes.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently, he says. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off-balance sheet” financing, Mr. Stiglitz says.

Obama’s Ersatz Capitalism - DealBook Blog - NYTimes.com