This is my post on Pete Dominick's website.
http://standupwithpetedominick.com/...
Here are the seperate links from my research. There are 3 total.
First link
Second link
Third link
Basically this collapse was not caused by sub-prime mortgages and the poor people who bought them.
The sub-prime market was only worth 600 billion dollars, I say only because past economic downturns the dot-com bubble, the Savings & Loan scandal, and the fall of Enron and WorldBank have all had impacts on the same scale as the subprime mortgage problem.
The fault for the Great Recession lies strictly on Wall Street, with a completely unregulated, off-the-books financial instrument invented more than a decade ago.
Wall Street found a way to create a financial tools called collateralized debt obligation, or CDO. Basically, he scrounged together about a thousand subprime mortgages, wrote a financial instrument that said, You buy this instrument, and provided that these mortgages aren’t defaulted on, we pay you dividends every year. So far, so good: you buy a widget, and as long as a bunch of people around the country pay their mortgage bills every month, you make money.
But every year, a few people stop paying on their mortgages, so people who purchased CDOs were going to take hits on their income. No one wants an investment that’s sure to do ‘middlingly-well’. So, in order to make the CDOs more attractive, the financial genius invented what’s called tranching. Basically, he split the instrument into three piles: the large, safe pile; the middle pile; and the small, risky pile
Investment rating people rated each individual tranche of CDO, and they gave the big, safe tranches a AAA rating — the best the market had to offer. That made the large, safe tranches look like something that everyone wanted a piece of: as safe as a government bond, but with a higher rate of return. No self-respecting conservative investor could turn it down — and almost none did.
Then came the housing bubble. Clinton and Bush might not have agreed on much, but they agreed that getting Americans into houses was good for the country. They both pushed for laws and policies that made it easy to get a mortgage even if you didn’t have the best of credit.
Subprime mortgages became more common, and with them, more CDOs were made — but the demand for CDOs went up even faster, because as the housing market accelerated, CDOs started making startling amounts of money.
This whole time, because CDOs were both profitable and confusing, the financial industry managed to convince the government to leave the CDO market completely unregulated
Enter financial instrument number two: the synthetic CDO. A synthetic CDO is like a real CDO, but it doesn’t actually have to have any mortgages attached to it. It’s completely fake in every way except that people actually just write up contracts betting on how many homeowners will pay their mortgage every month. Synthetic CDOs are literally just a form of gambling, and the financial market gambled BIG.
With no regulation, and a housing market that seemed to be on an unstoppable skyrocket, the market for synthetic CDOs exploded over the course of a couple of short years until it was worth almost two trillion dollars — more than three times the value of the real market it was based on.
Moreover, these synthetic CDOs were tranched up into various slices, sold, resold, and gambled upon by every single major financial entity in the country — and most across the world. If any one entity suddenly went belly-up and defaulted on all of the debts it owed to all of the companies that held various tranches of its CDOs, those other companies could easily go broke as well. In many cases the value of the CDOs held by a particular bank added up to more money than the bank actually owned.
That is where the idea of "too big to fail" came from — because if CitiGroup had gone under, the incredibly interwoven nature of CDO debt would have caused most, if not every, other major bank in the world to become bankrupt in a massive domino effect. Keep in mind that, while the banks would have failed, the geniuses that invented and sold CDOs and synthetic CDOs had long since pocketed hundreds of millions of dollars in ‘fees’ and would walk away scot-free.
Long story short: the invention of the CDO and the synthetic CDO created a hyper-leveraged market based almost solely on mortgages. The completely unregulated nature of the market meant that the housing bubble’s bubble-ness was multiplied a thousandfold. No one was around to warn people about what would happen when the bubble burst — and the financiers selling the CDOs certainly weren’t about to do it themselves!
The poor people who got lured into easy subprime-mortgage homes aren’t at fault. The credit rating organizations may have a little bit of fault. Realistically, however, the fault lies solely on two groups: the government overseers who decided to allow the CDO market to go unsupervised, and the wealthy financiers who created and sold CDOs to anyone who would buy
UPDATE: Please Rec so more people can be informed of the root. This is a great discussion. I am proud of Kos readers being so informative!!!