what caused this Financial Crisis was it?

Okay I keep hearing the blame game on what caused financial crisis, some say it was President Bush, and Iraq, blaming it on our 10 trillion Debt. On the other side there is the Real estate bubble that says this crisis is upon us due to Banks being forced to give out bad loans by lawyers such as Obama.

What I am hoping is some one can Explain in what is causing this and who is to blame, and if we don't know perhaps we should put aside the party differences and find out because if we some how manage to squeak by another 4 years we need to know who needs to go and who needs to stay.

I am less inclined to blame the bush administration because, now that they are gone Bad decisions continue to be made, not that I am giving them a pass either they are to blame for a lot of things!

So what is causing this crisis?

George Bushes Spending on Iraq
Clinton's Fair Housing act and lawyers including Obama suing banks?
Both?
one more then the other ?
Or some other reason?

www.abovetopsecret.com...

Originally posted by Verd_Vhett
Clinton's Fair Housing act and lawyers including Obama suing banks?
Both?

The problem ultimately stems from the way that western governments ( almost all of them) do business. Everyone robs Peter to pay Paul. Everyone is borrowing money from everyone else, even though no one actually has any money. They're all running deficits. Everyone talks about the US deficit being so large. Here's a fact, folks. The Eurozone has a collective debt of 7.5 Trillion Euros. That's LARGER than even the US national debt when converted to dollars. The way we're all paying for this is to print new money and dump it into the banking system, where, because of the reserve rules in place, every new dollar magically becomes ten.

Long story made short: its a gigantic money bubble. Because of the way our governments operate, in tandem with the banking system, the financial system of the western world is, put simply, based in bull****.

Its been going on for decades but its just now catching up to us. Why is it catching up? That I can't say for certain, but I suspect that its because two major players have emerged that aren't playing the game the same way: India and China.

reply to post by Verd_Vhett


There are a number of components of this current problem that in aggregate this situation.

1. Back in the 70's under Jimmy Carter, the Community Reinvestment Act was created. This forced banks to provide loans in all neighborhoods that that bank did busines in. The percentage was initially @45% of loans. If banks failed to meet that goal they were "red-lined" essentially putting them out of business. Banks dealt with that by hiring a bunch of community bank officers who sought lower income folks who had a good chance of being able to pay their loans. During the Clinton administration the percentage of loans that had to be given to low income folks was raised to over 50% of loans. Banks were unable to find enough folks in the poorer neighborhoods to qualify for a traditional loan. To not get redlined, the sub-prime mortage was created which provided a vehicle (no money down, interest only, ARMs, no income verification, etc) which would enable them to satisfy the government criteria. With housing prices consistently rising, this was not that big of a problem since folks' equity in their homes was rising and if they were getting sideways on paying their loans, they could either refinance and get into another sub-prime loan or pull equity out of their house.

2. Banks then sold these loans to investment bankers. The bankers securitized these loans, bundling loans together to create securities. They would package safe loans, moderately risky loans and risky loans into a security and sell them to mostly institutional investors, hedge funds, etc. By a loophole in the methodology used by the rating agencys, only the two safest tiers of loans were rated, giving these securities AAA or AA ratings. Therefore when folks were buying these securities, they felt they were buying quality debt when in fact they were buying crap.

3. The investment banks knew there was risk in these loans, so they bought insurance against them, a lot of it from AIG. AIG created collaterilized debt obligations(CDO) to insure the debt securities. The banks bought $billions of CDOs to insure against the risk debt.

4. The housing market began to correct. The bubble broke. This created a model where folks who were constantly refinancing their loans against the increased equity in their homes could no longer do so. Folk began to default on their loans.

5. The defaults increased and began to undermine the quality of the investment in the bundled debt securities. That was OK, because the investment banks had bought the CDOs as insurance against the risky debt.

6. As the default rates accelerated, the investment banks were losing a ton of money and AIG and other folks who held CDO's were overwhelmed with what is essentially a redemption (sale) of those instruments and began to heavily leverage counter-partys to handle these redemptions. Wall Street is a model that is based on healthy counter-party relationships. Since no bank has enough cash on hand to handle all of the risk on their books (think about everyone selling every dollar of Fidelity mutual funds in one day. FIDO could never satisfy those redemptions with cash on hand. They need to borrow it from other banks). A major counterparty failed (Bear Sterns). This created a shock in the chain of counterpartys. Next came Lehman. Now banks stopped lending to one another because they thought they might not get paid back. This created the credit crisis, because money was not flowing through the system.

7. Folks began to belt tighten, further extracting money from the economy

Thats the best I can do. Lousey and risky investment products backed up with synthethic instruments to insure them and then a break in the chain in counterpartys, so the banks fail. Now we're pumping money into the system to get money moving.

In short banks figured out a way to collateralise debts to get paid by insurers to take debts off the bank's books.

The idea was to insure bad lending by selling securities for loans to insurers like Freddie Mac and Fannie Mae. FM and FM purchased these debts and paid the banks cash for them.

The banks took this cash raised against bad debts and used those funds as if they were depositor's funds. They wrote more credit against bad debts so that all the credit slushing around in recent years was not backed on real security.