Where can we lay the blame?

As U.S. taxpayers hurtle toward paying $700 billion to bail out the nation's credit markets and avoid a job-destroying recession, the inevitable game of who's to blame begins in earnest in the nation's capital, on Wall Street, and on Main Street.

Is it the clarinet-playing Alan Greenspan, formerly of the Federal Reserve, who believed in the invisible self-correcting mechanisms of free markets?

Or is it Richard Fuld at Lehman Bros. Holdings Inc., who leveraged his investment bank to the hilt?

Or Securities and Exchange Commission Chairman Christopher Cox, who seemed disengaged from Wall Street as the global markets burned?

Or the two hedge fund guys from the Bear Stearns Cos. Inc., Ralph Cioffi and Matthew Tannin, who were indicted this summer on charges that included conspiracy, securities fraud, wire fraud and insider trading?

They and countless others are to blame, economists said last week, for the financial system's careering wildly off track in the housing boom. The nation's system has, in effect, overrun a 1930s regulatory framework and will have to be modernized.

"We've met the enemy, and he is us," said Robert Dye, senior economist with PNC Financial Services Group. "There is no one person who had enough individual power to create this problem."

In what seems like a New York minute, an intractable housing slump has morphed into the mother of economic turmoils. Credit markets have seized up, and the potential for soaring unemployment, on the scale of the double-dip recession of the early 1980s, motivated the U.S. House to pass the bailout Friday after rejecting it Monday.

So far, the nation has lost 760,000 jobs this year, including 159,000 in September. Two economists, one of them R. Glenn Hubbard, former chairman of the Council of Economic Advisers, warned that homeowners were staggering under the loss of $565 billion in home-equity values.

Yet, the economic calamity has had one missing element: an iconic villain along the lines of Michael Milken, who became the face of junk bonds in the 1980s, or Kenneth Lay, who personified the Enron Corp. scam.

The voters seem to hunger for one, or more. They dialed Washington with phone calls by the thousands opposing the bailout.

The FBI is searching for wrongdoers with 26 bureau investigations of institutions tied to the mortgage debacle, according to two sources familiar with the developments.

In June, as part of law enforcement investigations, Ralph Cioffi and Matthew Tannin, two senior managers of failed Bear Stearns hedge funds, were indicted. They have denied the charges, and their case is pending.

The SEC has opened 50 investigations into disclosure and valuation of housing-related investments at banks, insurers and credit-rating agencies, Cox told the Senate Banking, Housing and Urban Affairs Committee last week.

But the simple fact is that many who pushed the limits, or bent the rules, will not likely be punished. It was part of the business at the time.

"It's built into our psyche. We are greedy, and we are not above being deceitful when making money. And we are overly optimistic when it comes to finances," said William Stull, chairman of the economics department at Temple University. "We are herd animals. We get into panics, and everybody does the same thing at the same time."

Some deserve more blame than others. For decades, elected and appointed leaders have broadly deregulated the financial system. Former Fed Chairman Greenspan, who took the helm of the central bank in 1987, was one of biggest proponents. The central bank failed to issue, until this year, final mortgage regulations under a 1994 law.

Greenspan said he believed, in general, that regulations were unnecessary because buyers of mortgage securities - high-paid investment advisers and analysts - would make sure those mortgage securities were of high quality.

They didn't.

Other deregulation supporters included former President Bill Clinton, who aggressively promoted homeownership to lower-income and minority buyers in the 1990s. This led to a loosening of loan standards.

As deregulation reigned in politics, financial institutions were developing new exotic investments: things called SIVs, CDOs and credit-default swaps. Many times, this alphabet soup of financial instruments was overly complex and interconnected in ways few people realized until recently.

The amount of money sunk into CDOs - or collateralized-debt obligations, which can be backed by all sorts of debt, not just home mortgages - soared from $83 billion in 2002 to a peak of $532 billion in 2006, according to Thomson Reuters data. But a lot of it, investors later learned, were flawed products.

Securitization, or packaging loans, was a big practice, and many people got into the game. One was Christopher Ricciardi, the New York-based chief executive officer of Cohen & Co., a Philadelphia investment manager. He probably deserves as much acclaim as anybody for the growth of CDOs.

Ricciardi, while at Prudential Securities in 1999, was part of a team that created the first CDO based on mortgages and other asset-backed securities, according a news release issued when Cohen hired Ricciardi in February 2006.

Ricciardi, who earned an M.B.A. in 1997 from the University of Pennsylvania's Wharton School, moved to Credit Suisse First Boston in 2000 and to Merrill Lynch & Co. Inc. in 2003. Each of those companies would become top issuers of CDOs. The aftermath was ugly for Merrill, which in July sold its CDOs - with a face value of $30.6 billion - for $6.7 billion.

Nobody at Cohen & Co. has commented to The Inquirer, despite repeated requests since 2007.

Ratings agencies, thrilled with their fees from the new CDO business, slapped "AAA" ratings on the new investment products, which some later said contained "junk."

In July 2006, months after the housing market started to weaken, Harold McGraw III, chairman and chief executive of the McGraw-Hill Cos. Inc., which owns Standard & Poor's, one of the nation's most-respected ratings agencies, talked about the importance of CDOs to the company's performance and touted their value to investors.

"Collateralized-debt obligations are an excellent example of the financial market's ability to innovate," he told analysts, according to a copy of his remarks posted on the New York company's Web site.

Now, CDO investors, such as Sovereign Bancorp Inc., are taking losses. Sovereign sold its $750 million portfolio of CDOs last month. It got 20 cents on the dollar, according to Albert Savastano, a bank analyst with investment bank Fox-Pitt Kelton Cochran Caronia Waller.

If the late 19th century came to be known as the Gilded Age for its ostentational excess, the recent era could be called the Leveraged Age for its borrowing excess.

Investment banks, hedge funds, and other financial players took on massive amounts of debt to increase returns at a time of low interest rates and easy credit.

Broker-dealers, such as Bear Stearns and Lehman, were helped by the SEC under William H. Donaldson in 2004, when the agency changed the rules for calculating leverage ratios, said Christopher Whalen, managing director at Institutional Risk Analytics, an advisory firm.

"He allowed the nonbanks to double their leverage at the same time they were marketing this crap," said Whalen, referring to CDOs and other securities.

Even though Bear Stearns, under James Cayne, and Lehman, under Richard Fuld, appeared to push risk off their balance sheets, effective leverage at the now-defunct firms approached 50-1, Whalen said. That means they borrowed $50 for every $1 of their own.

Leverage works wonders when prices are rising, but it is disastrous when prices fall - it amplifies losses.

Extremely high leverage coupled with the complicated nature of widely held CDOs and credit-default swaps has made it impossible for government and industry officials to assess how much damage was occurring in the financial system until it froze.

At the street level, it was just the way business was done.

Michael Frolove, a Philadelphia appraiser, said he stopped doing work for two of the most prominent home lenders, Washington Mutual Inc. and Countrywide Financial Corp. - two troubled banks closely identified with bad mortgages.

"To their loan officers, you were a nice guy as long as your appraisal got them a deal. If you did your job properly and the deal wouldn't work," Frolove said, "they'd scream at you and say you'd never get another job from them."