Ok, to “Stimulate the Economy” due to the horrors of the Economic .COM Bubble of the Early 90’s the US government, namely the Clinton Administration and Financial Disciple Alan Greenspan pushed for every man, woman, child, dog and fire hydrant to have access to housing loans. Thus, they weakened the regulation of the mortgage market creating a tremendous increase in the sub-prime mortgage markets. This simply means, people who had no real means to pay for a $500,000 mortgage were offered Adjustable Rate Mortgages at a higher risk to the people offering them the money. This was originally funded by low interest loans from the Government. Lenders saw this as an easy way to make a buck, no matter the risk.
Stay with me now.... these semi-government loans were then augmented by capital infused by bundling of sub-prime mortgages into tradeable securities, thus the introduction of the sub-prime mortgage derivative.
Warning #1
Adjustable rate mortgages were lent to consumers who were barely able to pay them even at the low rates of the late 90's. These bundled sub-prime mortgage securities became the darlings of the early decade investment portfolios creating returns far above the market.
Warning #2
These bundled securities were so complicated that even the some of the most financially savvy investors weren't sure what they were investing in, and those who knew saw nothing but the high returns.
Foreign nationals seeing their home market value disappear (Japan, Indonesia, Malaysia) regarded these high performing US securities as "safe havens" to put their money so they did, with absolutely no idea what they were investing in. It was difficult enough to understand these subprime derivatives in English, try translating into Bahasa Malaysian...impossible.
Warning #3 The Bubble Begins
So all this investment money is pouring in to fund Lending Organizations and their sub-prime mortgage offerings. Money is being given out to anyone who signs on the dotted line and is breathing, capable of repaying the loan or not. Due to this, housing prices increase at an exponential rate, US median household income increases much more slowly, (can we say bubble.) Meanwhile George Bush is looking for WMD's and blowing up the rest of Iraq while the most dangerous Weapons of Economic Destruction (WED) is beginning to smolder back home.
Smart CFO's in large, major corporations, Lehman Brothers, Bear Sterns, Morgan Stanley etc, cannot ignore the returns that are being realized in these dangerous bundled market securities, so they invest...and invest heavily. Rating agencies give these questionable securities a Triple A-rating. These ratings seduce investors to throw even more money at the sub-prime derivatives. These securities are bundled again and again and again until no one knows who owns what... the securities become a considerable part of almost every large corporation, AIG, GE, GM, Etc, investment portfolios. Foreigners invest just as heavily, banks, corporations, co-operatives all investing on what is basically, Joe Shmoe in Topeka Kansas ability to pay his mortgage. It permeates our entire Global Capitalistic Society. Even the Economic gods and their Apostle Alan Greenspan see the carnage to come but shrug with a non-committal "nothing I can do about it!" response. The Bush Administration is happy because “we have more people owning homes then ever before.” No matter what the cost.
Meanwhile, Joe Shmoe is not only getting one mortgage, but two or even three home equity loans as the house values continually increase. The money is used for everything from building pools to paying for the family vacation or re-financing the original mortage to make the payment. Lenders are more than happy to dole out the cash because they get transaction fees and are giving out other peoples money, namely investors from Taiwan, Beijing and Singapore…you remember the commercials, pay off your credit card bills, take that trip, build that extra room with an easy credit home equity loan. An entire sub-economy develops that is entirely and completely based on home equity loans of houses that are financed by investors investing in those sub-prime market derivatives. This works as long as the housing prices keep going up.
Warning #4
Housing and Constuction become the leading economic sector in many cities. Housing projects are being built like weeds in a garden, and these homes are being bought by the same Constuction workers and support staff that built them. In 2006 we hear the first rumblings of what is coming…. Crude Oil increases even more in price during this time. The US starts to see signs of inflation as the housing market is saturated. There are little buyers out there anymore. Apostle Greenspan reacts by raising the Fed interest rate to slow inflation. Oooops, no more easy credit. The rumblings turn into roars. The ARM’s which were at lower interest rates do what they were designed to do, the rate increases. Get it “Adjustable Rate Mortgage”, what did they think that meant. Joe Shmoe in Topeka can’t afford the new rate, can’t afford gas for their cars, can’t afford to lose their jobs due to higher fuel prices and competition from China, Taiwan and India that closed the factory he works in. He starts to look for refinancing but the Financial Press Christened St. Greenspan raised the Fed so Joe can’t get the refinancing. He forecloses…. So do John Smith, Jose Gerrardo, Lin Kim Chee, Butu Mambata and a larger and larger percentage of the sub-prime mortgage market.
The Financial gods burst the bubble and the World falls
The housing projects are still being built, but these sub-prime mortgage failures terrifies lenders and they don’t lend to sub-prime mortgages, healthy mortgages or any other lender of any sort, thus no one can buy. The once extremely lucrative housing markets of Florida and California start to lose value by 10, 20, 30 percent. Reno housing construction begins to resemble ghost towns, once promising Resort, Hotel and Retail projects in Hawaii and New York stop mid-stream. The entire US feels the pinch.
Then, in 2007 the smaller mortgage lenders start going bankrupt. These are the same businesses that were making returns of over 500% 3 years previously.
Bear Sterns, Goldman Sachs, Lehman Brothers and the working cornerstone of the US and World-wide financial markets start feeling the incredible weight of these sub-prime market derivatives. No credit, no buyers, no way to make a return on these securities they begin to see their investors flee in panic. So now no more cash coming in. The de-regulated, financially irresponsible, greed induced “Ponzi” scheme is unveiled. The roars of the financial earth turn into what no one but a select few knew was coming, the economic ground under which the entire world economy is based cracked and opened in a gaping financial fissure and some of the strongest companies in American and World History are swallowed in the malevolence.
The once darlings of the Western Financial World, the sub-prime mortgage derivatives receives a new name, one much more ominous, the “Toxic Financial Instrument” is born. Problem is good loans were mixed with bad loans and these loans are still out there, but in the mayhem of the securities bundling process, its not sure who owns “good” loans and who owns “bad” loans. Also, by this time, there are so many Corporations that have these derivatives as a large part of their capital reserves, the failure of these securities will result in the failure of untold US and World Corporations leading to the loss of an untold number of jobs world wide. The Clinton and Bush de-regulation fiasco rears its ugly head and once Saintly Alan Greenspan is burned in apparent effigy on the Wall Street Market floor as he calmly states, “by the time we knew, nothing we did could have stopped it.”
Ummmm, the exact same thing happened before 1929, (uh, the Great Depression, I know you knew that!) The financial mortgage derivatives failure that is, but that’s for another time.
“Change is coming!”
The lame Duck Bush Administration does the only thing it feels it can do, under the auspices of President Elect Barrack Obama, the Fed Lowers Interest Rates even more, and begins to throw money at the market like a rampant pervert at a strip tease. The Toxic Financial Instrument, now exalted to capital status, runs like termite holes through America’s financial markets, so the US Government tries to fill these holes with silly putty using a spatula and a blind fold.
No one knows where the holes are, but no one seems to care, as 650 Billion dollars will fill any hole. The money disappears as the Bush administration asks “oh, where did it go, oh where did it go?” The American public is used to Bushisms so it just laughs and waits for Brother Obama to rescue us from the carnage.
It was thought at the time that if the markets were funded, credit would ensue as the financial markets were cured of the Toxic Financial Instruments. However, these Toxic Instruments are so prevalent in the Capital Structure of Major corporation that the infusion of capital does nothing but make accountability worthless and in the hole of the Sub-prime Mortgage Derivative, the World Economies grave site is discovered.
Credit is not created, businesses are still festering with toxic capital and cannot sell this capital for a dime. Nether can they sell any other Financial Instrument without taking a gigantic loss so credit is non-existent, selling off stock is a negative transaction and they can’t offer stock to create capital, but they still try as Bear Stern, Washington Mutual, and bank upon bank goes under. GM, GE and giant Citibank’s stock price plummets to unbelievably low levels as the sub-prime mortgage derivatives and the overall slowing of the economy destroys their balance sheets.
Oil is now cheaper than in years, to bad no one needs it now.
Barrack, oh Barrack he chants, we must do something now! But the question is what? Bernanke is offered as the sacrificial lamb as he stands in front of Congress and blames AIG and Executive Bonuses for the current crisis, poor guy, must feel like the prettiest boy in the prison shower. Geitner, um….do I really need to say anything else?
