Let me see if I got this right. Joe six-pack lies about his income, it’s never verified, and then gets an inflated appraisal - (Liar loan). Meanwhile Katy Con-sumer takes out a 500K second mortgage on a house only worth 350K, buys a BMW, a wide screen, and a bunch of crap made in China. The loan broker fails to mention the balloon payment due in two years and the fact that the monthly payment will re-set at three times the original amount. Issues the loan with no down payment. (Sub-prime) and cares less if the buyer is qualified, after all, he's just going to collect his fee as soon as he sells the loan to someone else. He’s covered in the fine print. So far - everything on the up and up – you bet – that’s how it’s done - everybody’s doing it
The loan broker sells the loan to a financial institution who then bundles these doomed to fail toxic waste loans together with more toxic waste (CDO - collateralized debt obligation) and some slightly less toxic waste (Alt-A low money down vacation home loans), credit card debt, car loans, student loans, and even throws in a few prime loans (20% down, income verification required) to make the whole thing smell good. Nobody knows exactly how much toxic waste is in the bundle. Then the mixed bag of debt is presented to a rating agency (Moody’s), which knows that if it doesn’t give a AAA rating (after all – there are some prime loans in the bag) the bag holder will go across the street (S&P) and pay them to get a AAA rating. These ratings amount to unregulated fraud and set up the crisis to follow.
Now we have a bundle of toxic waste with a AAA rating which means it’s as good as US government treasuries - you bet - now they can be sold with out requiring any collateral (Important point). The bi-laws of most investment institutions like pension funds require investments be made only in AAA rated securities. So no one looks in the bundle, accepts the AAA rating and dives in. Fees are collected and the bundle of toxic waste is sold to a hedge fund or another investment bank (a form of unregulated bank no longer in existence) that has been collecting money from banks, pension funds, municipalities, insurance companies, universities, foreign investors, lots and lots of foreign investors, etc., etc. The hedge fund managers take their 20% to 50% fee. They also buy insurance (credit default swaps - a form of derivative) for 5 cents on the dollar from (AIG) just in case the whole thing goes south. AIG says "Hey, what the Hey, it's AAA" - can't possibly fail - easy money.
This bundle of toxic crap then gets sold and resold 20 or 30 times. Each time exorbitant fees are collected. People are getting rich. Since no collateral is required (it’s AAA rated after all), this bundle of toxic waste gets leveraged up to 70 to one. That means one dollar of actual cash (from your pension fund) is controlling 69 dollars of (bad) debt. Everything is going great. Everybody is making a fortune.
Two years later the loans reset – Joe six-pack and Katy Con-sumer can’t make the balloon or the newly monthly mortgage payment. Neither can the other 3 million sub-prime borrowers. They can't even renegotiate. Their mortgages have been bundled up and sold 30 times. Some Chinaman owns them. They learn the house is only worth 65% of what they paid for it. Mental midgets who overpaid & shouldn't have been allowed a seat at the table, start to default and walk away as most have no skin in the game anyway.
Now there is a rip in the bundle holding the toxic waste, green slimy stuff is dripping out, and it’s starting to stink. More and more investors wise up and decide its time to get out. The hedge fund or investment bank tries to sell the bundle, but there's that green smelly stuff, and no one will touch it. Banks and investment firms claim the bundles of toxic waste are worth what everybody wants them to be worth. The real value is unknown because nobody from day one ever bothered to look - no one knows how much green smelly stuff is in the bag. The banks continue to claim the fantasy value and no losses are posted on the balance sheets - which is perfectly OK with existing regulations.
Investors in the hedge funds start wising up and start demanding their money. The the hedge funds are forced to sell the bundles of toxic waste for pennies on the dollar. The losses are “written off”. Billions of investor’s money is up in smoke (Bear Stearns and following collapses) Fearing liability, the ratings agencies downgrade the remaining bundles of crap. Institutional bi-laws require that the "no longer AAA rated securities" must be cashed in. This forces more selling at "pennies on the dollar" and the write off's accelerate. Money is being sucked out of the stock market to cover losses. The vicious cycle begins.
The banks now don’t trust each other anymore (credit crunch). Plenty of government money available (liquidity) to lend but the banks have taken the bail out money and used it to shore up reserves. It's not being loaned out as intended. It’s not a liquidity issue; it’s a solvency issue. Most banks are insolvent – they have everything invested in the bundles of toxic crap - which are no longer acceptable collateral.
Stock selling drives prices down. Investors panic and start bailing. Businesses lose market support and also can’t get loans from banks. Lay-offs start. Nobody can get a loan - business, homes, cars, nada. The mortgage refinance ATM is now closed. People out of work or fearing loss of their job stop spending. Cycle starts feeding on itself. Economy flounders.
The insurance company has taken the $5 it collected from selling credit default swaps and invested it in the bundles of green slimy stuff. Guess what? There is no money to cover the failed investments. In fact, there isn’t enough money in the entire world to cover the bad derivative bets. We’re talking over 600 trillion in unregulated derivatives issued world wide. The numbers are beyond human comprehension. This unwind is next and will ultimately be the proverbial straw.
The government starts buying the bundles of slime at inflated prices (Bail out) to save the financial institutions responsible for creating the mess. Then switches to bailing out the banks - many of which issued the bad loans to begin with and now fraudulently hold their losses off balance sheets. It also throws billions into the AIG insurance derivatives bottomless pit. The government has a couple trillion to play with. There are over 600 trillion in derivatives (bets) waiting to fail. Guess who wins this stand-off? Sorry, there is no fix. None. Nada. It’s just a matter of time.
The “unwind” is just starting. It's global. It's non-stoppable. The world as we know it is over. You can bet "change" is coming - change beyond your wildest dreams.
Thought it apropo to release the missive at this time, as we sense, just beginning our journey to the dark side are we.
Copy & paste to friend: (Click inside box; Ctrl + C to copy; Ctrl + V to paste)
|
|
read more blogs!
|
ceecee1952
|
Nov 25 @ 11:48AM
|
|
I have an awesome garden. Many things regenerate annually on there own. The asparagus, the strawberries and raspberries. A small freezer keeps the annual zucchini breads year round and the tomatoes for use. Fishing is fun too.
....but yeh, the economic is bleek, survival is strong.
|
|
Peabianjay
|
Nov 25 @ 1:17PM
|
|
Ironically, in purchasing my first home, after sorting through all the fine print, documents & complications, I told the loan officer:
Me: "So, what you're saying is, for about $5000 up front, and an additional monthly fee of $50, in addition to more interest, you'll approve a mortgage that I can't afford?"
Them: "No, no...the insurance is to protect you in case you can't pay. This added fee is to apply for the --"
Me: "Gotta go. Bye."
The insurance was a clear indication the bank was not confident that I could keep up payments and the property value was not a suitable security on the loan. They wanted to protect their interests....and didn't care about mine.
|
|
|