Saturday, 26 December 2009

VIDEO: The Subprime Primer

Please note that the original "crappy" mortgages offered by the brokers to "unsophisticated" people not able to not afford home loans was facilitated by finance made available by the sophisticated big banks. The bankers, being financial "experts", should have realised how risky such home loans were and refused most of them.

The reason the banks ended up lending out such risky loans came from two beliefs - that the price of houses would continue to rise, and that the government (US taxpayer) would bail them out in a time of crisis. Plus, actual US government policy encouraged the finance industry to formulate such loans so that ANYONE could acquire a house. The environment for disaster was set.

Also, another thing to consider is that the bundled together crappy mortgages (CDOs) that were being sold to sophisticated investors- other banks, school boards, local government etc- were heavily leveraged. This system did not just take the value of the mortgages themselves, but used their value multiplied many times over. The leverage was done just as a bank loans out ten dollars for every one dollar they hold in savings. Same principle except these mortgages were not savings but unpaid debt.

The banks here simply devised another way to create money, and temporary wealth, out of thin air. It is how bubbles are formed. Now we are all paying the price for these Wall Street games.

[Posted at the SpookyWeather blog, December 26th, 2009.]

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