delphipsmith (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
delphipsmith) wrote2009-02-17 10:58 pm
delphipsmith) wrote2009-02-17 10:58 pm
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The house of cards that insanity built
Watched a fascinating two-hour piece last night on the financial meltdown and how it happened. Turns out the number of bad mortgages exploded not because unscrupulous lenders wanted to screw home buyers, but because very rich people in places like China and Asia were eagerly hunting for places to put their money; American mortgages seemed like a good idea; therefore there was a growing demand for more and more mortgages; therefore more and more had to be created to meet this demand. The demand trickled down to the mortgage brokers, who of course were happy to supply that demand. Eventually they'd done mortgages for all the good-risk people but still needed more mortgages to sell to Wall Street so they started making riskier and riskier loans. The demand was so hot, and Wall Street was so desperate for mortgages that they could turn around and sell, that lenders went off the deep end. One guy they interviewed said he was loaning $5 billion A MONTH on mortgages for which he required no proof of income, no proof of employment, and no credit score.
So Wall Street took the crappy mortgages and sliced and diced them into little pieces and mixed then into composite things called Mortgage Backed Securities; these MBS's got rated AAA (very very safe investment grade) because a) the companies doing the ratings were being paid by the people who had MBS's to sell and b) nobody really understood what they were selling and c) the people with the MBS's proved to the ratings people how safe and awesome their MBS's were by using math that assumed housing prices would keep going up 6%-8% every year FOREVER. Now how stupid is that?
So then, when the lenders had sold all the crappy mortgages of the regular type that they could possibly talk borrowers into, they came up with a new beyond-crappy positively-insane version where the borrower paid only part of the interest he owed each month and none of the principle, and the unpaid interest got added to the balance of the loan. So (follow me on this) as a borrower, you paid every month and the amount you owed continued to go UP. And people took these mortgages! And even then (here's the really crazy part) Wall Street was happy to buy these worse-than-crappy-actually-insane mortgages so they could slice and dice them into MBSs and sell them.
What part of this makes any sense whatsoever? Like a giant game of Hot Potato, as long as you could keep selling the things fast enough, everything was kosher. Once the beyond-crappy-and-into-surreal mortgages started to default, that made ALL the mortgage-backed securities suspect because nobody knew whether they were made of good mortgages or bad ones (because they were all sliced and diced), so they all tanked. And several hundred billion dollars vanished into thin air. And the problem doesn't end, because the banks STILL don't know what they own and whether their MBSs are worth anything or something or nothing.
These would be the "toxic assets" we've been hearing so much about.
So now I understand it, and I'm even more horrified and appalled than I was before.
So Wall Street took the crappy mortgages and sliced and diced them into little pieces and mixed then into composite things called Mortgage Backed Securities; these MBS's got rated AAA (very very safe investment grade) because a) the companies doing the ratings were being paid by the people who had MBS's to sell and b) nobody really understood what they were selling and c) the people with the MBS's proved to the ratings people how safe and awesome their MBS's were by using math that assumed housing prices would keep going up 6%-8% every year FOREVER. Now how stupid is that?
So then, when the lenders had sold all the crappy mortgages of the regular type that they could possibly talk borrowers into, they came up with a new beyond-crappy positively-insane version where the borrower paid only part of the interest he owed each month and none of the principle, and the unpaid interest got added to the balance of the loan. So (follow me on this) as a borrower, you paid every month and the amount you owed continued to go UP. And people took these mortgages! And even then (here's the really crazy part) Wall Street was happy to buy these worse-than-crappy-actually-insane mortgages so they could slice and dice them into MBSs and sell them.
What part of this makes any sense whatsoever? Like a giant game of Hot Potato, as long as you could keep selling the things fast enough, everything was kosher. Once the beyond-crappy-and-into-surreal mortgages started to default, that made ALL the mortgage-backed securities suspect because nobody knew whether they were made of good mortgages or bad ones (because they were all sliced and diced), so they all tanked. And several hundred billion dollars vanished into thin air. And the problem doesn't end, because the banks STILL don't know what they own and whether their MBSs are worth anything or something or nothing.
These would be the "toxic assets" we've been hearing so much about.
So now I understand it, and I'm even more horrified and appalled than I was before.