Financial Crash, Part II
Mar. 17th, 2009 12:49 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
forsythOkay, so earlier I said greed and short-sighted thinking crashed the world economy. Which is true, so now I'll go into a little more detail.
The short-term thinking was the idea that housing prices would always go up, because they'd been going up. Obviously, something doesn't have to continue just because it's been happening. But the bursting housing bubble was just what set things off.
Because you see, the real problem was these "derivatives" and "CDOs" and all sorts of other fancy names. Derivatives started as insurance for large, somewhat risky investments. In things like shaky automakers, or that kind of thing. They existed for years.
But over the last 20 years, especially over the last ten or so, they stopped being that. In many ways, they basically became bets. Those guys at AIG that just got big retention bonuses that everybody's so pissed about? They helped do this. They wrote derivatives for everything. More derivatives than their entire company was worth. And what did many of these derivatives have as collateral? Those "CDOs" which stand for "Collateralized Debt Obligation." And "bundles" of mortgages. The derivatives let companies and investors bet more money than they had. That's what leverage is, banks usally loan out more money than they have in the vault, because not everybody's going to come get all of their money at once. The mortgage companies and banks took a bunch of risky mortgages, put a part of each mortgage in a bundle, and then got ratings agencies to say these risky mortgages were AAA investments, on the theory that not all the mortgages in that bundle would lose money at once. And on the fact the ratings agencies are paid by the companies that were making these "investments".
And so then, those bundles of mortgages were used to back derivative bets, and had derivative "insurance" taken out against the possibility of those bundles going bad.
So when the "impossible" happened, and housing prices nationwide went down? Then the people who bet on those "AAA" mortgage bundles lost their money, and called in the derivatives. And so the banks that issued the derivatives called in their collateral, which meant the mortgage companies called in their derivatives that were supposed to protect them from loss on the bundles. So at least three or more different people were expecting to get paid off from money based on the mortgages, which weren't worth face value any more, because those McMansions really weren't worth what the real estate agents said they were, and the "easy" mortgage terms suddenly ballooned and people owed more on their houses than the house was worth.
And meanwhile, the folks who set up and ran this racket racked in millions of dollars in salaries and fees over those years. It wasn't just the housing market going bad, it was the fact that these industries had sprung up to base a huge financial sector on just those mortgages, not on actually creating anything. And to put it in perspective? At its height, this derivative trading was around to $600,000,000,000,000 ($600 trillion) a year.
The total value of all publicly traded stocks last year? $36,600,000,000,000 ($36.6 trillion). The Gross Domestic Product of the whole world? 54,584,918,000,000 ($54.6 trillion)
Yes, they literally bet TEN TIMES as much as all the assets that exist in the entire world. And they're all so bound together if any of the banks fall, they could take the whole economic system with them. Which is what those assholes at AIG are basically thereatening to ensure they get their retention bonus.
Here's a Village Voice article with more explanation of derivatives.
The short-term thinking was the idea that housing prices would always go up, because they'd been going up. Obviously, something doesn't have to continue just because it's been happening. But the bursting housing bubble was just what set things off.
Because you see, the real problem was these "derivatives" and "CDOs" and all sorts of other fancy names. Derivatives started as insurance for large, somewhat risky investments. In things like shaky automakers, or that kind of thing. They existed for years.
But over the last 20 years, especially over the last ten or so, they stopped being that. In many ways, they basically became bets. Those guys at AIG that just got big retention bonuses that everybody's so pissed about? They helped do this. They wrote derivatives for everything. More derivatives than their entire company was worth. And what did many of these derivatives have as collateral? Those "CDOs" which stand for "Collateralized Debt Obligation." And "bundles" of mortgages. The derivatives let companies and investors bet more money than they had. That's what leverage is, banks usally loan out more money than they have in the vault, because not everybody's going to come get all of their money at once. The mortgage companies and banks took a bunch of risky mortgages, put a part of each mortgage in a bundle, and then got ratings agencies to say these risky mortgages were AAA investments, on the theory that not all the mortgages in that bundle would lose money at once. And on the fact the ratings agencies are paid by the companies that were making these "investments".
And so then, those bundles of mortgages were used to back derivative bets, and had derivative "insurance" taken out against the possibility of those bundles going bad.
So when the "impossible" happened, and housing prices nationwide went down? Then the people who bet on those "AAA" mortgage bundles lost their money, and called in the derivatives. And so the banks that issued the derivatives called in their collateral, which meant the mortgage companies called in their derivatives that were supposed to protect them from loss on the bundles. So at least three or more different people were expecting to get paid off from money based on the mortgages, which weren't worth face value any more, because those McMansions really weren't worth what the real estate agents said they were, and the "easy" mortgage terms suddenly ballooned and people owed more on their houses than the house was worth.
And meanwhile, the folks who set up and ran this racket racked in millions of dollars in salaries and fees over those years. It wasn't just the housing market going bad, it was the fact that these industries had sprung up to base a huge financial sector on just those mortgages, not on actually creating anything. And to put it in perspective? At its height, this derivative trading was around to $600,000,000,000,000 ($600 trillion) a year.
The total value of all publicly traded stocks last year? $36,600,000,000,000 ($36.6 trillion). The Gross Domestic Product of the whole world? 54,584,918,000,000 ($54.6 trillion)
Yes, they literally bet TEN TIMES as much as all the assets that exist in the entire world. And they're all so bound together if any of the banks fall, they could take the whole economic system with them. Which is what those assholes at AIG are basically thereatening to ensure they get their retention bonus.
Here's a Village Voice article with more explanation of derivatives.
