Comment from IDKNM on previous post:

on 10 Oct 2008 at 12:36 pm # edit thisidonotknowme

And all the people who took out no principal, 100% mortgages on properties they never even walked into because they were going to “flip that house”. All the people who can’t pay their mortgages should be foreclosed upon and all the banks who get stuck with a bunch of properties because they made stupid loans should go out of business. Let people suffer the consequences of their choices.

If it were only that simple. Brokers sold to banks, banks sold to regional holding companies, and the smaller holding companies sold to the big boys, AIG et al. Using faulty formulas based on old data, these mortgages were sliced up and reconsolidated into CDO’s, which were rated at AAA, which is as good as cash. As Wall Street got more and more greedy, banks were encouraged to give more and more loans with fewer restrictions to keep the flow of money going. Eventually, they started giving No Income, No Asset (NINA) loans, which meant you could take out as large of a loan as you wanted, as long as you SAID you COULD make a certain amount of money. No W2’s or bank statements required. As it became easier and easier to get a home, prices went up and up as demand increased. Eventually, people started defaulting on the loans because, oops, they couldn’t afford them. All of a sudden, the supply of homes went up, demand decreased, and home values actually started depreciating, something that has never happened on a scale so large in the US. The “good as cash” CDO’s now started to lose value, which the brain trusts (for reasons beyond me) never accounted for when they started buying up all these mortgages. If the companies had borrowed 2:1 like the rest of us can do, this wouldn’t have been so bad. Unfortunately, they were leveraged at 20:1, 30:1, even 50:1. High leverage is great when you’re winning, because if you’re leveraged 30:1 and the value of your investment goes up 1%, you make 30% on your money. If it DROPS 2%, you’re pretty much closing up shop and selling the office furniture to the highest bidder. This is what happened to AIG, Fannie Mae, Freddie Mac, Bear Stearns, etc. If these companies are allowed to collapse, it could be catastrophic to the global supply of money and possibly create a worldwide depression, which we’ll be lucky to avoid anyway.

Now, do I agree with the bailout? It’s not such an easy question to answer. I don’t believe in the government bailing out businesses that make bad decisions. I don’t believe in the federal government getting involved in a lot of things, but they do anyway. Now that I have read a bit about what’s happening with the lending market, and the astronomical amounts of money that will basically disappear if something isn’t done, it’s really hard for me to say that nothing should be done. I am an idealist, but I am not a myopian.