In the beginning, there was The House. It was a "Spec House". In other words, it wasn't built for anyone in particular. It wasn't built because someone said, "Hey! I want to buy a house and I want it to be right there on that lot where there is no house right now." Instead, it was built as speculation by a group of partners who figured they could sell it at a tidy profit. In order to maximize their profits, they used the cheapest building materials they could find, and they used mostly unducocumented workers in the house's construction. But these partners weren't stupid. They knew the house had to look nice. Once the house was built, it looked splendid! The house had a brick archway over the front door! There were exactly four real wood boards in the house, the rest being a compressed mixture of wood chips and glue. But the bricks in the archway over the front door were real bricks. It was a real house. A real estate.
So it came to pass that the house, costing the partners $61,009.58 to build was sold immediately to a nice young family for $219,000.00
Why?
It was probably the brick archway.
The nice family who bought the house financed it through a local mortgage company, who sold the loan to a regional mortgage company who sold it to a finance company which was really a bank but not the kind of bank that has tellers and toasters and a vault. They chose an adjustable rate mortgage, which are these new things that require very small down payments. This all happened very quickly and everyone was very very happy. Now the Daddy and the Mommy of the nice family could go find a job. They needed jobs because not only did they borrow the money to buy the house, they borrowed the down payment and the money for the inflated closing costs, bribing the construction and electrical inspectors and for the repair of a couple of small cracks that had already formed in the brick archway. Wait a minute, you say. They didn't already have jobs? No. But the nice mortgage agent wrote down that they did because when he asked them if they were going to get jobs, they said, "yes".
And it did then happen that the debt was packaged by the bank into a derivative. They did this by taking a picture of the house and selling the picture of the house as a representation of the financial program related activities associated with the house. Then, another bank figured out that you could actually take a picture of that picture of the house, and charge for that too. After that, there were pictures of pictures of pictures of the house, the last one not being a picture of anything but a finger, which was mistakenly in front of the lens of the cellphone camera. The next time the pictures of pictures of the house (and the finger) were packaged into a debt derivative, someone was asked where the house was, so they could get a picture of it. This was a new employee of some bank somewhere who didn't understand how these things worked. He was told to just take a picture of his finger. After that, it was all pictures of pictures of pictures of fingers. No one had a clue where the house was or that there even was a house. Fingers had become currency. Actually, finger promissory notes. And derivatives thereof.
But indeed the nice family knew there was a house. Although they did indeed find jobs, the local housing market had fallen on it's butt and they owed much more than the house was worth. In reality, they had always owed much more than the house was worth. Now, they owed more than they could possibly sell the house (which they didn't really own and no one really knew who owned) for. So the nice family said fuck it, left the keys on the kitchen counter, got a divorce and the Daddy and Mommy each started blogs wherein they called each other names.
A nice family of raccoons moved into the house. The brick archway collapsed. People who needed money for methamphetamine took all the wiring and plumbing from the house. This was okay with the raccoons as raccoons don't need money or methamphetamine or wiring or plumbing. Raccoons don't even need houses. Nevertheless, these raccoons had one.
Then it came to pass that the bottom fell right out of the finger picture derivatives swap market. It seemed no one could figure out how to properly value them. No one could imagine how they had any value. So the Government of the United States of America bought them.
It also came to pass, that a Mr. Paulson, who was not President of the United States nor God (a man named Ben Bernanke was God at that time), began to try to figure out how to assign proper value to the finger picture derivatives swaps. If the Government of the United States of America was to buy them, Mr. Paulson would have to figure out how much to pay.
This was problematic.
Because the Law of the Land of those times, while it did not prohibit charging money for packaging pictures of pictures of pictures of fingers representing pictures of pictures of houses, it seemed that there were times when these processes branched off, forming separate iterations, whole new family trees of pictures of pictures, all representing the initial house... and finger, one must suppose. This was indeed against the Law of the Land. So in arranging to buy the finger picture derivatives swaps, Mr. Paulson wrote into his proposal, that, let it be known, nobody can watch what I'm doing here or even ask what I'm doing here -- henceforth just give me the goddam money or you'll all lose your life savings and have to move into caves with the goddam raccoons (he didn't know that raccoons now live in houses). Mr. Paulson insisted upon this, because he knew for a fact that the largest banks in the world had many illegal activites on their books and that with oversight, these would be revealed.
MEET THE PRESS, NBC, SEPTEMBER 21, 2008
MR. BROKAW: Steve Pearlstein, ... Is anyone going to be help responsible for this, truly?
MR. PEARLSTEIN: Well, a lot of people have already been held responsible because they lost all that wealth. So that's one thing.
MR. BROKAW: But a number of them walked out with a lot of money as well.
MR. PEARLSTEIN: Yeah, some of them walked out with a lot of money. You know, a lot of people focus on that, Tom, that these--some executives walked away with a lot of money. The amount of money we're talking about is in the hundreds of billions and trillions of dollars. Those people walked away with millions. And we get outraged about that. But let's--we, we--at this period of time, we need to keep our eyes focused on the big thing, which is that the whole system is melting down. And you want to focus on that and not that some guy's got away with money beforehand.
MR. LIESMAN: But, Steve, couldn't, couldn't you see subpoenas and cases where bankers are called before Congress or even a jury and said, "You had this on your books, but it was really worth that," and you could see that kind of process playing out.
MR. PEARLSTEIN: You can, but, you know, to criminalize this stuff is--we got a problem to solve. Let's, let's solve the problem.
MR. BROKAW: You think we should be moving on, not looking back?
MR. PEARLSTEIN: Yeah. I mean, at some point, you know, if there was real fraud, well, let's go and get that. But someone who made the wrong decision or who, who signed the wrong value to something on his balance sheet when everyone else was going the same thing, and, you know, it might have been reasonable...
MR. LIESMAN: What did they know and when did they know it, when it comes to the actual values out there?
MS. BURNETT: Right.
MR. PEARLSTEIN: Well, I, I have to tell you, the, the thing to understand there is they fooled themselves. They didn't fool us, they fooled themselves. And they were fooling us in the process, but they were not--this is not something where there's a great conspiracy to pull the wool over our eyes.
Moral of the story: If you're going to buy pictures of pictures of pictures of fingers for taxpayers, taxpayers might give you the finger right back.
We're told that these toxic loans Paulson intends upon buying for us, might some day be of value again and we might be able to actually sell them for a profit. Seems to me if these loans are ever of value, ever again, our economy will be in just as much trouble then, as we are now. Paulson is saying we have to get right back to where people are making the same stupid mistakes, before we can get our money back. No thanks.