Who was watching, watchmen?

I remember working on a project for a private mortgage insurance company in 2003 and learning the difference between conforming and non-conforming loans and how loans were underwritten and submitted to Fannie and Freddy through their respective browser-based tools (Desktop Underwriter and Loan Prospector) and processed in a matter of minutes, and I thought: if conforming loans go to the GSEs, then where's the secondary market for all this other stuff?

The graph at right, taken from a very informative OFHEO whitepaper, gives us the answer we already knew: to the various banks. Just look at how they gobbled up sweet, sweet market share.

Now, I read a lot of financial press, and in the years 2005-7 I read a lot of articles about how the traditional 30-year fixed was faltering and everybody was taking out ARMs and no-income no asset and negative amortization and other exotics, thereby making ill-advised interest rate bets and somehow it didn't all add up. How could it work, the journallistic world asked? How could the whole world refi at just the right moment to get out of this pickle?

The question I didn't hear asked is: who's buying all this debt? Where are the secondary markets? Post-Refco there was a lot of catastrophic talk of counterparty risk and the crazy notional numbers of the CDS market, and some talk of CDOs and securitization this that and the other, but there was very little focus on the fact that mortgages of any sort had become a huge chunk of the banks' balance sheets. And I doubt it's because there weren't better journalists much better informed than I was, but instead because they bought in to the way the numbers were being crunched.

So where were the irreverent and inquisitive journalists and bloggers? Why so little skepticism and investigative vigor? Was everybody drinking the same quant kool-aid, is there a general deficiency in financial reporting, or are banks just that opaque?