08 May 2009

the big aha moment!

i knew one of these days, after reading article after article, and wiki-ing things like 'credit default swaps', 'mortgage-backed securitization', and immersing myself in the business section of the ny times, it would just suddenly make sense to me.

i mean, i got the basics and i understood in a very superficial level what had happened, but now. now i think it's clicked, and i've found some satisfaction that my understanding of our economic shitstorm is on a deeper level.

okay, so when i talk about they i'm referring to wall street greedy fucks. they made up money by setting unsustainable values on land, and then offering mortgages (and all those fees) to the individuals and institutions willing to pay a too hefty price on land (because the buyers could then turn around and sell or rent at exorbitant prices).

let's use an example. let's say they offered a selling price of $10,000,000 (that's ten million (i think)) on a fancy high-rise lofts in, um, downtown los angeles (dtla). dtla owners were stoked to sell their building for that price. so they found buyers and gave the buyers the loan (even if the buyer didn't really have enough for a down payment). they took that ginormous mortgage, cut it into chunks, and sold off the pieces to other banks, hedge funds, and pension funds. and so long as buyers were able to sell or rent their units, they could make its payments. and those other banks, hedge funds, and pension funds earned a pretty penny in interest on those payments. and then the banks, hedge funds, and pension funds could use that interest income to justify making more loans on down. on down to the little man who would turn around and buy one of those overpriced units from buyer.

and so long as land values skyrocketed, the system rewarded egregious risk, and a culture of coersive, if not predatory, lending was born. and well, we all know what happened. when homeowners started to default, when it became abundantly clear that they couldn't afford the overvalued land after all (i mean, when it's the mortgage or that medical emergency, what're you going to do?) and stopped making payments, everything imploded. because the whole system depended entirely on everyone making payments on time. always.

so back to they. let's say that they made a huge investment in that loft building in dtla, just as things were beginning to crash in little man mortgage land, thinking that folks would be looking to the rental market when they lost their house to foreclosure. nice (what does this tell you about they's mindset?). but they forgot to take into consideration that their very existence depended on the steady and consistent payment of those little man mortgages on those overpriced units in that overvalued loft building in dtla. oops.

and when little man couldn't pay his bank, his bank couldn't pay its bank, and that bank couldn't pay they. and they would go belly up because the only asset they possessed was debt, debt that wasn't being paid. imagine what would happen if they went bankrupt. It might put the entire rest of the flimsily held economy into a tailspin toward catastrophic meltdown. or wait a second...
they sucks. and while i am sure they didn't mean to destroy the world, they were so focused on making more money, they were so blinded by their greed and the thrill of the dollar sign rush, they almost did destroy the world.

that's why we need regulation. industries motivated by greed need checks, balances, and very watchful eyes. by people _way_ smarter than me. i mean, how long did it take me to satisfactorily wrap my arms around this...


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