Why Were Mortgage Warnings Ignored?

Tran said that investment bankers who pared back on their subprime investments would have seen, in the short-term, smaller returns than those of their competitors and risked losing their clients.

"If the markets are still performing well, then the incentive to stay with the winning strategy is very strong and people who prematurely took the opposite view were penalized by market performance," Tran said.

Too Little and Too Much Information: Tran said there wasn't hard data available in time to back up the early warnings about the mortgage market.

It would have helped investors, government regulators and others to ascertain early on how much exposure the banks had to risky mortgage investments, he said.

Wright, meanwhile, said the general glut of information makes it difficult for bank leaders to pinpoint valuable advice and analysis.

"A responsible executive at these investment banks -- who should they listen to when there are a hundred bloggers out there and 50 analysts and they're not all saying the same thing? There's a lot of noise," Wright said.

Wright said that at the top levels of the investment banks, there might have also been a lack of understanding of how some complex mortgage investments worked.

"I can see scenarios where some hotshots came in with some fancy math and the older executives didn't understand the math but they didn't push it," he said. "What boss wants to say to an employee, 'I don't understand what you're talking about here?'"

The Government Safety Net: The term "too big to fail" has become a common catchphrase on Wall Street these days – it refers to the idea that the government, worried that the failure of a large financial institution would have wide-reaching, disastrous effects, will step in to save the day when necessary.

The government-backed purchase of the failed investment bank Bear Stearns by the financial firm JPMorgan is considered by some to be such a bailout, although others point out that Bear Stearns shareholders still took massive hits to their portfolios as part of the deal.

Wright said that Freddie Mac and Fannie Mae, which were established by the federal government but are owned by shareholders, have "the most solid and clearing backing" by the government and, therefore, "have tremendous incentive to take risk."

Recently, the government ironed out its support for Fannie and Freddie in a new housing bill. The bill, which was signed by President Bush last month, allows the Treasury Department to lend money to Fannie and Freddie and to buy stakes in the companies if they need to raise more capital.

In its statement Tuesday, Freddie Mac denied that the prospect of government intervention played a role in its investment decisions, adding "we have an obligation to balance safety and soundness, mission and our fiduciary duty to shareholders."

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