I forced myself to read of all of the Uptown paper of record’s account of Wachovia’s purchase of Golden West even though I was fairly certain that option ARMs would figure prominently after 60 Minutes set option ARMs up as original sin the week before. Sure enough, Rick Rothacker stuck close to the Pick-A-Payment meme, but did manage to document that Wachovia had not a clue what it was buying from the Sandlers back in 2006.

First, the reason focusing on option ARMs is a mistake is that is obscures the actual problem with the financial sector from 2004 thru even 2007. Namely, the Ponzi scheme nature of chasing huge margins by lending money out without regard to risk. The old rules of banking were out on their ear by 2006 and everyone knew it.

Banks were reporting completely fictionalized exposures and regulators were letting them. Sector analysts were accepting the most bizarre accounts of self-dealing and riskless portfolios. Business writers and journalists were plainly confused, or — like the Uptown paper — mesmerized by the “fairness” of mortgage rates offered consumers without bothering to consider the possibility that the correct mortgage a bank should offer some customers is none. By mid 2006 everyone paying attention knew that large chunks of the U.S. were experiencing real estate bubbles, aided to varying degrees by cheap credit and permissive banking policies.

Certainly by mid 2007 it was obvious that Golden West’s California exposure might be a serious problem for Wachovia. Afterall, the real estate market had only been able to sustain itself with new buyers by a steady lowering of the barriers to mortgage writing. And it is here where it is most obvious that Ken Thompson and crew didn’t care.

Even if you accept their tale that the bunching of Golden West’s portfolio in the lower segments of the California real estate market was somehow a strength at the time of the merger and not a blinking indication that GW was slumming the bottom-end of the credit risk pool with high-margin loans, certainly by mid 2007 it was bloody obvious to anyone with access to the portfolio’s default rates that the end was near. Recall it was at this moment that Countrywide was crashing and burning.

Yet Thompson and those who made the GW deal for Wachovia stood by and did nothing. Why? The best answer for them is that they really thought, despite any evidence beyond projections, that the loans would turn out to be tremendously profitable for the bank. The risk was huge, however. There could be no doubt of that. And they didn’t care.

The worse answer is that they knew almost immediately after they did the deal in 2006 that GW’s $121b. portfolio was garbage and ran out of time in trying to fix or hide the problem. In that case, Thompson and crew just didn’t care to do the right thing and fess up to problem as soon as they were aware of it. This latter answer might explain the unwillingness of Thompson and so many of his insiders to talk about what happened between April 2006 and September 2008.