Let me touch on the other aspect of our financial crisis; Wall Street.
Billions of dollars in bad loans are at the heart of our problem but our problem is now a global financial problem thanks in part to the whiz kids on Wall Street.
Those whiz kids “invented” financial instruments called “collateralized debt obligations” or more plainly, “mortgage-backed investments”.
Normally, a mortgage is a “contract” between a lender and a borrower; once the borrower pays-off the loan, the lender hands to the borrower, the deed to the home property; plain and simple.
Sometimes, a lender will sell the mortgage contract to another lender if it needs cash but the mortgage contract remains intact as a contract between a lender and a borrower.
Wall Street managed to combine hundreds if not thousands of these individual mortgage contracts into saleable securities (bonds) with practically incomprehensible rules.
The way I understand this, since 1983, investment banks created “special purpose entities” that owned “pools” of mortgages and would issue shares based on the value of the mortgages in these pools.
A $300,000 mortgage at 6.5% (30 years) would issue 300 $1,000 bonds at 6.0% or at a rate lower than the rate of the mortgage, with 0.5% or so, going to the servicing institution (where you send your payments). Buyers of these bonds would earn a good interest rate and get the principle back when the mortgages were paid off. These bonds were marketed as super safe because they were backed by U.S. mortgages, up to now, safe investments.
When people started defaulting on their loans, the bonds based on those very mortgages now became, what can I say, at risk? Not only the interest payments ceased but the principle became endangered as properties were foreclosed on and sold at auctions for cheap!
It appears that these investment vehicles were sold and re-sold globally and now, many financial institutions holding these bonds are stuck with investments that are very suspect and cannot be sold or even valued properly thus the “toxicity” of those investments.
And our government wanted to buy these from institutions? How utterly stupid !!!
This house of cards would never have collapsed if it was not for the subprime mortgages, so it still goes back to the beginning and our government and its lax lending policies.
With all the brain power on Wall Street you would think someone would have noticed the potential risk. I think they did not see the risk because they did not want to; they pocketed their commissions and bought their Bentleys and never looked back.
Capitalism does not like regulation and functions best with minimal regulation. If that is so and we want to remain a capitalist economy, then we need to allow individuals and institutions to financially perish. Let holders of these worthless bonds take the sellers to court to re-coup their money or just take the loss.
I guess we are not prepared to do that and so we will inject more socialism into our system and add a lot more regulation to the system to prevent this from happening ever again.
Is this the end of capitalism; we shall see.
Billions of dollars in bad loans are at the heart of our problem but our problem is now a global financial problem thanks in part to the whiz kids on Wall Street.
Those whiz kids “invented” financial instruments called “collateralized debt obligations” or more plainly, “mortgage-backed investments”.
Normally, a mortgage is a “contract” between a lender and a borrower; once the borrower pays-off the loan, the lender hands to the borrower, the deed to the home property; plain and simple.
Sometimes, a lender will sell the mortgage contract to another lender if it needs cash but the mortgage contract remains intact as a contract between a lender and a borrower.
Wall Street managed to combine hundreds if not thousands of these individual mortgage contracts into saleable securities (bonds) with practically incomprehensible rules.
The way I understand this, since 1983, investment banks created “special purpose entities” that owned “pools” of mortgages and would issue shares based on the value of the mortgages in these pools.
A $300,000 mortgage at 6.5% (30 years) would issue 300 $1,000 bonds at 6.0% or at a rate lower than the rate of the mortgage, with 0.5% or so, going to the servicing institution (where you send your payments). Buyers of these bonds would earn a good interest rate and get the principle back when the mortgages were paid off. These bonds were marketed as super safe because they were backed by U.S. mortgages, up to now, safe investments.
When people started defaulting on their loans, the bonds based on those very mortgages now became, what can I say, at risk? Not only the interest payments ceased but the principle became endangered as properties were foreclosed on and sold at auctions for cheap!
It appears that these investment vehicles were sold and re-sold globally and now, many financial institutions holding these bonds are stuck with investments that are very suspect and cannot be sold or even valued properly thus the “toxicity” of those investments.
And our government wanted to buy these from institutions? How utterly stupid !!!
This house of cards would never have collapsed if it was not for the subprime mortgages, so it still goes back to the beginning and our government and its lax lending policies.
With all the brain power on Wall Street you would think someone would have noticed the potential risk. I think they did not see the risk because they did not want to; they pocketed their commissions and bought their Bentleys and never looked back.
Capitalism does not like regulation and functions best with minimal regulation. If that is so and we want to remain a capitalist economy, then we need to allow individuals and institutions to financially perish. Let holders of these worthless bonds take the sellers to court to re-coup their money or just take the loss.
I guess we are not prepared to do that and so we will inject more socialism into our system and add a lot more regulation to the system to prevent this from happening ever again.
Is this the end of capitalism; we shall see.
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