Hello. I have previously explained the CDS crises in 200 words or less here:
http://www.dailykos.com/...
I think it's good. Take a look. Now we'll discuss the mortgage crises. It took a bit more than 200 words, and I explain how the mortgage crises and CDS crises combine. I promise I know what I'm talking about.
There are numerous websites and people who have explained it well. This is my shot at value add.
The Mortgage Crises Explained in 800 words or less
Banks began package mortgages together so that investors and pensions could purchase a bunch of them in one package. 100,000 mortgages from Rochester, Bermingham, and Tuscon. This was once done on a small scale, because packaging 100,000 mortgages correctly is hard work. Buying 100,000 mortgages without being the original lender requires that the buyer have some faith in the seller. Just like buying a car, you didn’t build it, you have faith that Ford built it correctly. If you built it, you’d know exactly what was right and wrong with it.
Over time, the sellers of mortgage packages wanted to increase the size of the business, they wanted to increase volume. The only way to do this was to relax standards. So they did. They then combined loans to credit worthy people with loans from low and no credit people, and sold them all as a package, representing that all the people in the package were credit worthy. They lied about the borrowers. This occurred on a massive scale.
Now everyone knows that many of the packages of loans have some unknown percentage of bad loans in them, but no one knows which packages or how much. So the buyers have big packages of loans that aren’t performing as advertised. Your pension may hold some. That’s problem #1.
Problem #2 is the effect this has on random homeowners. Thirty years ago, if life threw you a curveball and you lost your job, got cancer, got hurt, your child got hurt, whatever it is, if you missed a payment or two on your mortgage, your bank would work with you. It was in the bank’s interest to get smaller payments over a longer period, or to push a couple payments out, before choosing to foreclose. Foreclosing on a home was not your bank’s first choice, they usually get less money than the original loan, they have to maintain the house while no one is in it. It was done if absolutely necessary, but it was the last resort.
Now, because millions of mortgages were packaged and sold all over the world (no exaggeration), the original lender is not the current owner of the mortgage. The owner of your mortgage could be some German Bank, or Irish Pension Fund, or maybe some investment pool in Texas. All realistic possibilities. The current owner doesn’t know you, or any one of the mortgages it owns. The administrator of your loan is now a “servicer”. This company gets paid for certain things, and refinancing your mortgage is not one of them. Now interestingly it often is in the best interest of the package of loans holder to work out terms with the homeowner, except for two things. First, that’s not what they do for a living. They run pensions for a living. Second, if they write down some of the loan, or refinance your mortgage, they will have to mark that fact down on their books. They will have to admit they are accepting $80 a month instead of $100, which is better than zero, but there is the constant incentive to not write anything down. Plus, because they bought these packages at a price that one would pay if they were 100% awesome credit worthy people, any admission that not everyone in the package is awesome and credit worthy forces the owner to admit that the entire package may not be worth what they paid. No one likes to do that. So because the mortgage is one of a gigantic pool held by some third party far, far away, and that party does not have the incentive your local bank had 30 years ago, no one is getting a break on the mortgages.
There are a lot of consequences to this. People can’t move. Homes are not being sold because the banks don’t want to take a loss. The servicers are unaccountable and quite simply committing fraud and ripping people off with false fees. It’s a mess, and the end result is the housing market is either broken, or only partially functional. The normal pace of real estate transactions is no longer. This is a national problem that requires proper attention.
NOW COMBINE THE TWO!
Now check this out. Before continuing read my 200 word description of the CDS crises which I link to above.
Now, to top it off, the big banks combined credit default swaps with the mortgage packages. That is, they began betting on whether this pool of mortgages would perform, or that pool of mortgages would perform. This occurred on a large scale. A multi TRILLION dollar scale. Think about that. Think about the total size of the economy, then the size of the bets made. Makes no sense.
So when these packages of mortgages began to fail, bets began to come due. This is (an oversimplified version of) what happened to AIG. So Goldman and Citi and Morgan Stanley and all the other names on the buildings around me made TRILLIONS of dollars of bets on the packages of loans, which began to not perform as advertised. Bets began to come due, and none of these gigantic banks has enough money to pay each other. That’s it. They all owe each other so much money they don’t even know how much (this is on purpose). So they turned to the public and said “we need a trillion dollars so we can pay each other on the bets we made to each other on the packages of shitty loans we sold to others.”
That’s it. No joke, that’s about 80% of the financial crises in a nutshell. When banks fight “regulation”, they are fighting for the right to bet each other more money than any of them has, so when the bets come due, they can turn to the taxpayer and demand money or else blah blah all is lost. Seriously.
Questions? Comments? Thank you for reading.
11:13 AM PT: Also, for a longer but A+ diatribe, read this fellow, he's very good:
http://mandelman.ml-implode.com/...