Originally posted by ninthaxis
What I find very mysterious about this whole banking crisis, is how all the banks had problems at the same exact time? That is ludicrous! There is
no one that this many MAJOR organizations all HAPPEN to run out of money at the same exact time. No way, no how.
It makes sense, actually, if you think about WHY these companies are hemorrhaging money all at the same time. What do they all have in common?
Real estate. Mortgages, to be exact.
Over the past 10 years or so, property values started to skyrocket. Real estate became the thing everyone wanted, and as prices increased people
continued to want to buy, thus driving the prices further and further up. You can see a perfect example of this with the popularity of such
television shows as "Flip That House" and "Property Ladder" - people were making tens of thousands of dollars in profit by buying distressed
properties, fixing them up, and reselling them (often within the span of a month or two) at huge profit.
Everyone got greedy. The average Joe with a middle class salary, used to overspending on credit, decided that a small two bedroom ranch home wasn't
enough and he wanted a big McMansion. House flippers raked in tons of money selling McMansions. Mortgage brokers took a profit on each mortgage they
facilitated. Mortgage lenders took a profit on each mortgage they wrote. Securities firms took a profit on each
they dealt with. Securities investors took massive profits on what they
felt were "sure bets" (i.e. investing in people paying their mortgages). Insurers (*ahem*AIG*ahem*) took profit by insuring against people
defaulting on their mortgages.
Now, this profit continues to flow as long as home prices stay high and as long as homeowners make their mortgage payments. It made a lot of people
really, really rich.
People started playing dirty, wanting more profit. While there were then and are still now far too many people who feel entitled to a house they
can't afford, mortgage brokers and lenders realized they had a few tools at their disposal to sell huge mortgages to people who normally wouldn't
qualify. Remember, each mortgage sold means profit, so they started pumping out as many as they could.
, along with other "undesirable" mortgages, increased dramatically, and these mortgages went to people who are otherwise
considered too risky to make a standard mortgage loan to (bad credit, high debt to income ratio, etc) or who intended to "flip" the house
In 2006, home values began to correct from their overinflated rates of the previous ~5 years. A home one bought for, say, $300k was re-appraised to a
more true value of, say, $200k. This happened on a large scale, and many homeowners found they held a $300k mortgage on a house worth $200k. This is
known as being "upside down" on your mortgage.
Coupled with the devaluation of home prices, the crummy mortgages (subprime, ARM, balloon, interest only, etc) came to peak. A homeowner who
previously had a house payment of, say, $950 when they got the mortgage in 2003 would find their payment leaping to $1350 in 2006 when their interest
rate was adjusted. Since many of the people with the non-fixed rate mortgages are living largely paycheck to paycheck (poor credit risks, remember),
they could not afford the higher payment.
THEN you have to couple the above with what started happening in late 2005: fuel prices skyrocketing. Heating prices went way up, gas prices went up,
food prices went up...everything went up, and many people simply did not have enough money to pay for groceries, heating bills, gas for the car, and
The foreclosures started in full force in late 2006. Not only were people losing their houses, but banks were unable to resell the house for what
they had originally written the mortgage for, thus taking huge losses. A single homeowner may lose $100k in value of their house, but banks and
investors were looking at thousands and thousands of individual mortgages losing value...billions and billions and billions of dollars in total.
On top of that, those further down the pipeline started feeling the crunch. Many lenders had previously packaged up mortgages into neat packages and
resold those packages to securities firms and investors. As the foreclosures increased, the firms (Lehman, Merrill, Bear Sterns, etc) and investors
who bought the mortgages started hemorrhaging money (early 2k7 to current).
Tertiary players, including AIG, began to fall too. AIG, for example, insured investors' investments in these mortgage securities. For each default
(foreclosure), AIG was obligated to make a payout to those who had been paying insurance on their investments.
Foreclosures continue to increase, and more are to come. As the money began to drain away, stock prices began to plummet. Investment firms (i.e.
Lehman, et al) were no longer able to offer enough collateral (holdings, stock value, etc) to secure bank loans to shore up their coffers. The
companies simply ran out of money.
And here we are today, with these big companies out of money and stocks continuing to plummet. This has been building for ~2 years now, slowly at
first. But like a snowball rolling down a mountain, it picked up mass and momentum faster and faster until it turned into the avalanche we're