The Financial Crisis : Greed Accumulation

Its not a news that Investment Banks created those complex financial products/securities backed by the mortgage based products.They became underwriters and placement agents for these products and gained not only from the success of these securities but also from their failure (making profit from the same products which caused loss for their clients - they reversed their transactions and started selling the same products to their clients which they bought once they saw decline of the mortgage market coming up). What caused this  increasing level of risk appetite and conflict of interest (greed?) in the Wall Street?

Before 1994, U.S banking industry was more of a fragmented , localized and decentralized cluster which prevented an undue collation of financial power and provided adequate risk spread in the financial system. With authorization of inter-state banking in 1994, it became more easier to open bank branches throughout the nation. The repeal of Glass-Steagal Act in 1999 enabling the normal banks , securities firms, investment banks and insurance companies to operate as a single merged entity. And hence the rise of too-big-to-fail financial institutes. 

They started producing new instruments with no prior performance history making it difficult to analyze and predict the associated risk. In 2002, the US treasury reduced the capital reserve requirements for securitized mortgages depending on the credit ratings of the securities which created incentive for the credit rating agencies to portray an optimistic risk assessment of the mortgage pools and hence the created opportunities for banks to reduce their capital asset ratio. Thus , mortgaged backed securities started gaining in demand which promoted more and more lending promoting lenders to issue mortgage to high risk subprime borrowers as well. The higher the loan amount was , the higher was the commission for the mortgage broker, the higher was its initial profit and price in the secondary market for the lender and the higher was the source of revenue stream for the wall street firms.

Since the lenders were able to securitize almost all of their loans, credit ratings took a back seat and the volume and speed of lending plus securitization became the key. As the risk of non-payment was finally being passed to third party, the lenders lost the interest in loan eligibility and determining whether the sold load would ever be repaid. These volume of loans got defaulted and paved the way for tough times.