| Doubts about The Crisis of Credit |
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KenA
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| Doubts about The Crisis of Credit |
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Hi. After watching this video The Crisis of Credit Visualized on YouTube , which explains what happened with Prime and Subprime Mortgages leading to the Credit Crisis, I actually didn't understand a few parts and definitions that maybe someone could clarify them to me.
As I understood, independently of being a Prime or Subprime Mortgage , after the mortgage is made available to the house buyer, the finance bank who sold the mortgage, uses the same mortgage and 'wraps' it as another product named CDO ( which is now viewed as a 'toxic' product ) and re-sells it by injecting it into the market which was primarily the Stock Market.
If what I said above is correct, How can the investment bank sell a mortgage which is linked to a person (eg. John Doe ) and sell it to others?
My guess: through a complex operation(s) they manage to hide the mortgage as CDO, right?
Since the CDO is now sold on the Stock Market ... traders operating buying and selling stocks don't actually see a document, just the stock code and its price and just buy/sell it. ( it's a virtual operation ) (they don't know it's John Doe's mortgage) ... traders from all over the world specially ( US, Europe, Japan ) bought those stocks. The result: the toxic product CDO was already disseminated through the whole world .
If I remember it well, the bank BNG Paribas in Paris was the 1st to notice that all those stocks where pure trash ... that was when everything started to go down.
Am I right in my assumptions? Thanks in advance. Ken A.
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Wed Sep 12, 2012 12:24 pm |
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Wino
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I am by no means an expert on this, but to my knowledge, a few of your facts aren't quite on target. They bundled mortgages and called them "collateralized debt obligations" or CDO's. Basically, the banks put a bunch of mortgages together and allowed people to trade them, but not on the stock market. Those tasked with determining the investment-worthiness of the packages reported they were AAA rated, top-of-the-line debts, and safe investments.
What could go wrong? I mean, you're buying a debt that is backed with real property - houses and land.
What went wrong is that the properties were having money loaned that far exceeded its value, and the borrowers had no method of repaying the money they borrowed, except by selling the property for at least as much as they paid for it - minus broker fees, closing costs, document fees, etc. This pyramid scheme, mostly set up by Bill Clinton and perpetuated by George Bush, all with Congress' collusion, was doomed to collapse, as soon as anyone took the time to see if the borrowers could repay the loans, or if the property could be sold for what was borrowed to buy it.
Well, 2008 shows that once the lights were turned on, everyone knew the jig was up.
But in the meantime, every banker, real estate agent, and house flipper who didn't get TOO greedy had already made their money. Those at the bottom of the pyramid - those that joined too late - were left with large debts on properties they could never afford to pay for. They bought, expecting the skyrocketing rates to never stop skyrocketing.
Everyone now "upside down" on their property by a large amount is where they are because they were greedy. "Hey, if I buy now, in 6 months, it will be worth 20% more," so they bought and paid too much. Others looked at the book value (estimated or appraised value) of their property and borrowed against this value. And they all bought crap - cars, big screen TVs, or even more over-priced property - with their gains.
So, the money is all spent. Those at the bottom of the pyramid lost everything. Those at the top are living in mansions. That's how all pyramid schemes work. This one, though, was world wide, and those perpetrating it are those still in office, and those who are contributing millions to keep them in office. What do you think happened to the "TARP" money? It went back to those who "contributed" to the campaigns of those who determined who got the TARP money.
And you're paying for it. The corruption in the US has reached an all-time high. And with the two candidates running for president, and the certainty that 90%+ of Congressmen running will keep their seats, you won't see any change anytime soon. I have never been this pessimistic concerning the future of the US in my entire life. Maybe it's just that I have started to actually see the workings and the results of the criminality that now infests our "government."
I've said enough. There's a lot more to say, though I don't feel like writing any more. Suffice it to say that things are going to get a heck of a lot worse before they're going to get better. Assuming things will get better, anyway.
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Wed Sep 12, 2012 6:24 pm |
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littleroc02us
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And what I still don't get is for the borrower who does a budget each month and knows their incoming and outgoing, when they signed on the dotted line promising to pay back the money, how is it that when they saw how much their monthly mortgage payment would be each month on a fixed rate they couldn't do 1st grade math to conclude whether or not they could afford it??? Is it greed/stupidity of the consumer in addition to stupidity by the lender? I bought a home in 2006 and refied last year, but I always knew my gross salary and what I could afford to buy. Yes, I blame the idiots in Washington as much as I blame the consumer, too bad we live in a country where when you make a mistake or are greedy the Gov't will always be there to bail you out. I'll never understand I guess. 
Risk comes from not knowing what you're doing. (Warren Buffet)
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Wed Sep 12, 2012 8:01 pm |
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KenA
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Hey thanks all for the comments ( very appreciated ) ... I live in Brazil and the reason I'm very curious about what happened in the US is because in some ways I see similar behavior here too ... probably in a lower scale and with different methods to wrap the toxic products, but from the last 2 ~ 3 years until the present day an incredible amount of people from the lower mid-class to actually lower-class had easy access to things like new car, expensive electronics and credit to buy houses / apartments with absurd prices ... well, let's see what happens here ... not that I want those people to loose anything, but IMHO something is not smelling good here too ... thanks again and let's hope for the best 
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Wed Sep 12, 2012 9:24 pm |
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Wino
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quote:
Originally posted by littleroc02us
Is it greed/stupidity of the consumer in addition to stupidity by the lender?
Yes, both sides got greedy. Those on the power side got rich. Many of those on the consumer side got shafted. Of course, if you sold in 2006 or early 2007, you made money, too. But that's because you weren't greedy: You didn't pay too much because you didn't see the value. Of course, you would have had to save the profits, not use them to "multiply" their value or to buy crap.
This situation is why I am cautious of oldguy's method of leveraging new properties with existing properties. I'm more than happy to buy as I go, and accept guaranteed income from my assets. His way multiplies value. My way adds value. His way has large risk. My way has little risk.
Both methods, though, fail if you spend the profits foolishly and don't have any fall-back position (cash) in case of problems.
Con men only get to pull their cons by playing on the marks' greed. The consumers were seeing new ATV's and other toys, and didn't bother to do the math. Why should they? Real Estate will never go down in value!
Except it can.
And it did.
I don't know Brazil's situation, but I suggest the OP look at the actual value of the property. What was it (or something in the same area and about the same size, etc) selling for 10 years ago? Don't pay more than twice that amount. If the property is now 3 times more, it's over-valued and the bubble will eventually burst.
And don't get a loan you cannot pay for if things do go south.
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Thu Sep 13, 2012 3:31 am |
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littleroc02us
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Thanks, my comments were mostly Sarcastic, I already knew the answers.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Thu Sep 13, 2012 2:45 pm |
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KenA
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quote:
@Wino
I don't know Brazil's situation, ...
Very scary, 'cause prices are way higher than 10 year ago!
quote:
@coaster
... People forget.
Well noted: People Forget! Including myself ... actually we see many argentines doing street jobs here in Brazil
Truth is the whole world is in a very delicate situation now.
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Thu Sep 13, 2012 4:09 pm |
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