Isthmus
Android Expert
Don't be so damn ignorant or racist please. The financial crisis began, not two years ago, but during the recession of the early 2000s. Anyone's ethnicity had nothing to do with it, so don't be such a troll. After the collapse of the .com bubble, big money had to find a new asset class that would continue to yield sustainable large returns. The recession of the early 2000's caused the fed to lower rates to unheard of levels. This had the effect of driving the lending market. All of a sudden people could benefit from the low rates and afford more house for the with the same income and make the same payments. This also cause seller to gradually adjust to the new market of cheap money and begin to raise their prices artificially. Nothing made home prices rise other than financial speculation caused by ready access to cash.
On the bank side of things, bank invest staggering sums of money, both on their accounts and those of investors. they need to generate steady returns and look for different ways of doing it. one of those ways is to pursue whatever market is generating the biggest returns at the time. Banks were hemed in by what they could charge (those pesky low rates), so instead they cut expenses and dramatically raised their lending volume. They did this largely through CMBS lending Pools. such pools work by pooling a massive amount of loans, securitizing it based on a waterfall of fees and returns, and selling different rated bonds to other investors based on the level of security for each bond's relative risk rating. Basically the more risk you take on, the higher your return can be. Banks made relatively small spreads on these things (we are talking percentage points), so in order to make a return on the investment worth while the pools needed to be huge. Because of their size, underwritting on the loans didn't need to be as tight, because common wisdom said that even if some (even many) of the loans defaulted, the credit pieces of the loan would survive.
You with me thus far? no minorities yet ok?
As more banks got into the game, spreads tightened and caps dropped, so the pools had to get even bigger. Banks began to realize their possible exposure and took advantage of a nice little feature of residential mortgages - they could be sold to fannie and freddy. sure enough banks began to make it a point to keep the loans on their books for as as little as possible, before securitizing them and selling them off. at it's height banks like wachovia and credit suisse (the two biggest cmbs lenders) used to boast about the size of their pools and how little time they held them (I think it was down to about a month by the time it all crashed). the respnse by retail banks was to feed the machine and get the money out the door. to do this they had to engage in a race to the bottom with every other retail bank out there, so they all lowered their underwritting, began lending with less collateral (remember they were selling the loans and with them the risk of ending up with a bad investment), and in a great many cases began ignoring basic credit rules and engaging in fraudulent arrangements just to get the money out (eg, selling ARMS as if they were Fixed rate mortgages and missinforming borrowers about what they were doing).
Low rates, made money cheap, cheap money meant bigger loans, bigger loans made people be willing to pay more, willing to pay more made sellers ask for more, and the banks, having no other major asset class that could yield as much fueled the machine, transferred the risk and took a haircut for their troubles. It was only a matter of time before something gave.
I remember being in a meeting with representatives from most of the major banks as well as the major rating agencies. the thing was basically a giant group hug were all these guys were congratulating themselves on being the masters of the universe, that they could do no wrong and basking in the fact that the gravy train would never stop. The sole voice of dissent was the woman that ran the business unit for S&P that rated these types of transaction. they were having very serious doubts about the sustainability of the business model and the ratings being assigned to some of these pools. they were also under intense pressure not to be deal killers and maybe gave favorable ratings at times that they shouldn't have. She expressed her concern ad was basically laughed at and told to not be a killjoy. Less than two months later the market imploded. She actually ended getting a promotion BTW, while most of the bankers... Well, not so much.
That happened back in the summer of 2007 and we've been picking up the pieces ever since, waiting for the swell of defaults to pass (the last bulk of it is supposed to come due this year and next).
the entire country was involved in this, as were homeowners (both new and existing) of every income level and ethnic background. Liberal politicians or the current administration didn't set the events in motion either. Butthey did step in to keep the rest of the economy from collapsing when credit dried up. Sure people bitch about the cost of doing that, but trust e when I say that the effect of doing nothing would have been FAR greater and we would not be talking of any sort of recovery any time soon (not like what we've had is a true recovery).
BTW, no new asset class has risen to take over for real estate, and that market is once again starting up. If it hasn't happened already the first CMBS deals since 2007 are scheduled to happen this year. CMBS as a whole is a sound system and guarantee's teh ability to lend money at very low prices. the problem is greed and the looseinig of underwritting standards in order to get those pools moving and the fact that issuers had little to no skin in the game. restrict those two things a bit and there might be better behavior next time. This has not yet happened.
There you go, that's the story in a nutshell from someone who lived through it working in the system that caused it and still working in it. now you have no excuse for more ignorant racist remarks.
