I am copying an email my brother sent me to try to explain in plain layman's terms what in his humble opinion and observation has happened in this financial crisis. I hope it serves you in some way.
Sandy Let me explain to you what appears to have happened to cause this financial crisis in a way you can understand more fully. The first part many now know about. But the second and far worse part, most Americans and so-called financial advisers don't know or don't want to know. It's now well known that many mortgages were sub-prime (or what I call sub-crime) or exotic non-fixed 30 year and the people who sold them shouldn't have and the people who bought them now wish they didn't. This was bad enough and would have led to a downfall anyway but not anything remotely close to what the so called "brilliant" minds on Wall Street came up with. They first decided to package these sub-prime and exotic mortgages and sell them around the world to people seeking higher interest rate products than one couldn't find in money markets, regular bonds, etc. Nothing would be wrong with that providing the buyer realized the borrowers of these mortgages may not be able to pay it back. This risk was not highlighted to the buyer but even if they weren't, that's still not the big problem. The crisis was caused by what the Wall Street bandits, oh excuse me, professionals decided to do. They went to the buyers of these packaged mortgages and said how would you like to protect yourself from losses on these packages? We have what is called a "Credit Derivative Swap or CDS. They were told that the CDS was "like' insurance in that people who buy them are "insuring" you that they will pay you if the mortgages default. Not bad, right? WRONG!!!! The people who were suppose to stand behind these CDS's were mostly the investment houses and companies like AIG, who never ever sent up reserves to pay if they were called upon. Sandy, that's why Wall Street used the word swap and not insured or insurance because if they had done so, it would have fallen under regulations all insurance companies must follow. Your home, fire or auto insurance company must put aside a required amount of money to "insure" payment for claims. These folks knew this and instead created the swaps because they were unregulated. You hear about the leverage problem. Here's where the fun really starts. When they sold the CDS, they sold it at maybe 10 cents on the dollar. Translation- for every actual dollar being "insured" you only had to put up 10 cents and do so every year for maybe 5 or 10 before the mortgages are paid off or a good portion are. So, the seller of the CDS effectively sold one dollar coverage for 10 cents. So when these things started to fall apart (Bear Sterns was the first), it came known that there may be as much as $70 trillion (that's with a T) of CDS that only about one-tenth could be paid off. To understand $70 trillion, know that China has the largest cash reserves in the world- just one trillion. So the investment houses are guilty but two other parties have escaped public wrath so far. The first is the rating agencies like S & P and Moody's. They had the Gaul to rate these products triple AAA. You see Sandy, many of the institutions that bought these products couldn't have if they weren't rated triple AAA. These agencies had to know but turned a blind eye because of how much they depend on Wall Street for business. But the other party who should be exposed is certain members of Congress and the Senate. Ironically, John McCain introduced a bill to reign in Fannie Mae back in 2005 but Congressman Frank killed it saying the working class must be able to buy homes. It now appears that Fannies Mae was totally corrupted. A side note of interest- Barney Frank's partner had a very high position at Fannie Mae at the time. Senator Dodd received a sweetheart loan from fannie and it's now being reported that Fannie Mae paid $2 million to a lobby group to get certain Republicans to vote down Mccains proposal. So my sister, while most financial advisers choose not to speak out, your brother does every chance he gets. If you find me dead, ask Mr. _ where he was at the time-lol
Comments(1)