Opposition to Paulson's bailout plan is sheer idiocy and if the Republicans don't support it, then a pox on thier house. $700 billion is pocket change compared to what we'll lose if we go into a deep recession or even a depression. I can not overstate the danger we are in. Millions could lose everything. I have come to the end of my rope with the corrupt and super-political Republican party... approve the deal or be responsible for an economic disaster that you will never be able to disown.
So whats up with this whole credit crisis thingy? Why do we need a $700 billion bailout? What the fuck happened? Why is Elmo a retard?
I bet you've been asking the very same questions.
Being the Wile E. Coyote-esque genius that I am, allow me to drop some knowledge on yo' ignint asses. Its time you all know exactly what the subprime crisis is and how we got to this point without all of the economic jargon and big-assed words...
Y'all pay tention now, ya heah?
The year is 2004. Jeb is a 28 year old man from Atlanta, Georgia. Jeb wants to buy a $450,000 McMansion in the brand new Prawnville suburban development on the outskirts of Atlanta, but he doesn't have enough money to do so. Jeb has been making $45,000 per year at an I.T. company where he has worked for the past six months and his decision making abilies have always been questionable (Jeb is voting for Obama this year).
When he was 22, Jeb leased a BMW on his credit card even though he worked as a pizza delivery boy. It made him look like 'a baller', though, so Jeb didn't think twice about the cost. Needless to say, in two months' time Jeb wasn't able to pay his credit card bill and the BMW was repoed. Since that point, Jeb's credit has been in the shitter. Jeb's credit score is 10 & 1/2.
Regardless, Jeb believes that he is entitled to live in a big, fancy McMansion so he decides to go down to his local mortgage broker to try to get a mortgage. Jeb has saved up about $1700 in his bank account, which he believes is a sufficient down payment for a $450,000 house.
Jimmy is Jeb's mortgage broker. Jeb plops $1700 in cash on Jimmy's table and says "Git me er mortgage, pleeze". Jimmy advises Jeb that while he can't get him a 30 year fixed rate mortgage due to his credit sdcore of 10 & 1/2, there's this "loan product that's perfect" for him called an Adjustable Rate Mortgage (ARM). Jimmy says that an ARM is "awesome" because the interest rate is currently only 3%, whereas a 30 year fixed rate is at 5.7%. "Fixed rate mortgages" says Jimmy "are for old timers and suckers because ARM rates are soooo low. Besides, if the interest rates go up you can just give me a call and we'll refinance. Piece 'o cake. And the best thing of all- no down payment is required!"
"Awesome!!!" says Jeb. "Where do I sign?". Being impulsive and fiscally irresponsible by nature, Jeb never really stops to think about what would happen if the interest rates go up and he suddenly has to pay 6% or 7% interest. Jimmy, on the other hand, doesn't give a fuck. He's not lending out his own money, he's only a mortgage broker. Besides, Jimmy gets a hefty commission each time he gets another ARM signed up.
After Jeb leaves Jimmy's office, Jimmy calls his pal Bill the banker. Bill works at the mortgage department of the 1st Regional Bank of Georgia. "Bill," Jimmy says, "I've got another one for you. The loan is for $450,000- adjustable rate. Our guy has no work history, his credit is terrible, he has no major assets, and put down no down payment. Is that okay?"
"Another subprime? Sure!" exclaims Bill. You see, a 'subprime mortagage' is a mortgage given out to people who are a high credit risk, like Jeb. "Sign him right up, Jimmy, I'll have the money to you by closing."
So is Bill totally nuts or just plain stupid? Actually, he's neither. You see, Bill has no intention of collecting a single mortgage payment from Jeb. In fact, as soon a Jeb goes to closing, Jeb's mortage is placed into a vast pool along with thousands of other subprime mortgages given out by the 1st Regional Bank of Georgia. This vast pool is then divided up into shares. Each one of these shares is called a 'mortgage backed security' that can be bought and sold like stocks or bonds.
Now that Bill has thrown Jeb's mortgage into a pool that has been divided into thousands of shares, he has to find buyers for these shares... but he doesn't have to wait long. The phone rings- its Ira the investment banker from Lehman Brothers in New York City!
"Bill, Its Ira. Do you have any mortgage shares for me to buy? We just can't get enough of them! We love mortgage shares because real estate is such a safe investment. I mean, even if the home buyers default on their mortgages, the home itself is great collateral. Real estate never goes down in value, so how can we lose?? It's a win-win!"
"Well Ira," says Bill "I do happen to have mortgage shares for you, but they're subprime shares. They're riskier than other types of shares. But don't fear- we called our friends over at AIG this morning and for a small percentage they've agreed to insure the shares against loss! Isn't that great?"
"Wow!" exclaims Ira, "That's awesome! I'll buy all of the mortgage shares you have. Then, I'll re-sell some of the mortgage shares to investors around the world, and I'll hold on to the subprime shares myself because they pay such a high interest rate. What a cash cow! Bill- its great doing business with you, my friend. The next time I talk to you I hope you have even more mortgage shares for me to buy".
"I sure will, Ira" says Bill. "I'll lend money to anything that breathes and shits so long as you keep buying the loans from me!"
Fast forward to 2007. Back in suburban Atlanta, the developments of Pwntown and WestFAIL have sprung up next to Prawnville, chock full of McMansions. So many McManisons, in fact, that there aren't enough people to buy all of them.
Things for Jeb aren't so wonderful. His ARM rates have risen modestly, and since Jeb only makes $48,000 per year (he got a raise) and just leased another BMW, any little adjustment in his mortage rates put him in danger of running out of money. In a pinch, Jeb calls Jimmy the mortgage broker.
"Jimmy, I wanna re-fin-ance to er fixed rate mortgage" says Jeb.
"Um, yeeeah" says Jimmy "Ya see, the thing is you're a bad credit risk so I can't re-finance ya right now, mmmkay?"
"But what 'bout mah house" says Jeb, "Can't yer use that as co-lateral?"
"Yeah, about that house" responds Jimmy, "ya see its kinda not worth what you paid for it because they've built so many other McMansions around here. We can't even sell the ones we have on the market now. I just can't get a bank to refinance someone like you with depreciating assets and bad credit, mmmkay"
"But... wuh 'bout mah house? Mah Bee Em Dubyah?!?! You said I could re-finance as soon as the rates went up!!"
"Well I'm sorry, guy. I just can't help you out, But who ever said life was fair? Have a good day."
Jeb is now stuck. He doesn't have enough money to pay his mortgage and no one will refinance him because his credit sucks and his house is worth nearly $100,000 less than what he paid for it.
Jeb is not alone, either. In 2006 and 2007, a large percentage of subprime loans begin to default. All of a sudden, Ira and his buddies in New York are holding millions of morgage shares that are worth a whole lot less than what was paid for them. Some, in fact, are worthless. And on top of this, the collateral behind the shares has decreased greatly in value. To make matters worse, forclosure is not even a viable option due the costs that would have to be incurred by forclosing on thousands of people like Jeb and taking possession of and maintaining their houses.
In any case, between snorting lines of coke and getting handjobs at massage parlors, Ira gets a phone call from Harry in the Hamptons, who is a big-time investor in the Lehman Brothers' hedge fund.
"WHAT THE FUCK, IRA? I'M GONNA RING YOUR FUCKING PENCIL NECK!" screams an irate Harry.
"Oh, hi Harry. H-how can I help you?" meekly replies Ira, trying to calm his client.
"OH HI???? I GOT MY STATEMENT TODAY- HOW THE FUCK DID I LOSE $135 MILLION THIS QUARTER!?!?!"
"Well, you see, we invested a bunch of money in mortgage shares and they're not doing so well right now..... but the market goes up and down....and they'll come back I'm sure..."
"YOU'RE SURE??? WHAT THE FUCK?!? YOU TOLD ME THEY WERE SAFE INVESTMENTS!! YOU TOLD ME THEY HAD THE BEST INVESTMENT RATING AND THEY WERE INSURED!"
"Y-yeah, don't worry. I'm gonna call AIG right after I get off the blackberry with you and ask for the insurance money".
"YOU FUCKING BETTER! IN THE MEAN TIME, I'M PULLING WHATS LEFT OF MY MONEY FROM LEHMAN. YOU GUYS SUCK BALLS!".
As people like Harry in the Hamptons pull their money from Lehman, investor confidence crashes and small investors begin to sell their shares of Lehman Brothers. The further down the stock goes, the more people sell in a panic. All of a sudden, everyone is selling and Lehman is running out of cash.
Desperate, Ira calls AIG.
"Hello, is this AIG? I'd like my insurance money for my subprime mortgage shares."
"Hi, this is AIG. Look guy, we have a little issue here. Check it- you're like the millionth person that called today asking for an insurance payout n' shit. Some jerk from Goldman Sachs just asked me for cash like 2 minutes ago over this subprime stuff. Thing is, I just don't know if we can pay you all, cause we never anticpated all of you asking for insurance payouts at the same time."
"What the fuck? I'm screwed! If I can't calm down the investors in Lehman, we're gonna go bankrupt! What can I do?"
"Dunno, brah. You're pretty fucked but so are we. I heard the government is gonna take us over because we've run out of money. Why don't you call another bank like Citibank and ask for a loan?"
Despondent, Ira calls Citibank and asks for a loan.
"Hello, Citibank? This is Ira from Lehman. We need some cash because everyone is bailing on us! Give me a couple of billion, please."
"Hey there, Ira" says Carl from Citibank, "We'd love to help you but we just can't do it. I mean, my bosses have told me not to lend money to anyone since we lost all that money on mortgage shares not to mention the money we lent to other investment banks that we ended up losing when they went under. Besides, since your share prices have dropped and you've lost all your money, your credit rating has been downgraded to junk bond status. In other words, You have a terrible credit rating and collateral that is depreciating in value. I'm afraid we cant give you a loan, you're just too much of a risk. Sorry, guy."
The next day, Lehman Brothers goes bankrupt and Ira retires to San Tropez. Ira had sold his stock in Lehman a few months ago and ended up quite rich. He's currently enjoying his new life on the Cote D'Azure. Jeb, meanwhile, is enjoying his new life at his momma's house eating spoonfulls of cheeze wiz.
After Lehman's bankruptcy, panicked investors begin to sell more and more shares in all the other financial companies. As the selling gathers momentum, it becomes indiscriminate. Suddenly, the federal government realizes that if it doesn't step in to calm the markets, the entire banking system faces total collapse. With no more loans and no more credit, the entire U.S. and World economy face not just recession but full-blown depression.
So to make a long story short, the government requested $700 billion to buy all of those subprime mortgage shares from the banks and other shareholders, so that investors can regain confidence in the banking system to prevent a collapse. The money is not definately a total loss because the houses which are the collateral behind the subprime shares do have some value to them. Once the real estate market turns around, its quite plausible the government could even make money. Right now, however, things look pretty grim and the cost to the U.S. taxpayer colud reach $1 trillion.
So who's to blame?
Well if my parable has taught you anything, its just not that simple. The blame is so large that it encompasses everyone, not just greedy Wall Street 'fat cats' like Ira. The Greenspan Fed is to blame for keeping interest rates unnaturally low, thus enticing people who don't belong buying houses into buying houses. The public (Jeb) is to blame for buying above their means, planning poorly for the future, and spending money wastefully. The mortgage industry (Jimmy and Bill) are to blame for lending money irresponsibly to people they knew were terrible credit risks. Wall Street (Ira) was to blame for buying mortage backed securities under the idiotic premise that they would never lose value, thus enticing the mortgage industry to lend without standards. Insurers like AIG are to blame for underwriting mortgage backed securities that they knew they couldn't pay for, and Credit agencies are at fault for not investigating the viability to the mortgage backed security shares before issuing them high credit ratings. Finally, government is to blame for failing to properly monitor lending standards.
This post is by no means a complete account of what happened, just a condensed and simplified version for public consumption. I hope that with a little understanding of the issue, you can now identify the spin as it comes from both the Republicans and Democrats, and make a more informed decision as a voter in November.
Labels: credit crisis, economics, economy