The Financial Crisis for Dummies

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Turn on any radio or TV station and you’ll be told that the current financial crisis will not clear itself until the housing crisis abates. Then, of course, there’s a cut to some damned, dumb story of some damned, dumb, high-profile starlet who lets her boyfriend beat her up every three days, and if you’ve had some coffee, you might think, “Wait, what was that first story again?” Forget it.

Here’s what happened:

A) Housing prices skyrocketed earlier in this decade, irrationally. My own modest row house in Philadelphia went for “selling purposes” from about $95,000 to a quarter of a million dollars. My wife, I, and even our young daughter knew this was preposterous. Nice to think about…but essentially nonsense. Way weird.

B) The MBA bright boys decided this was an opportunity, and began “bundling” mortgages of our house, our neighbor’s house, the local crack dealer’s house, and some several knuckleheads’ houses in Memphis, Fargo, and/or Boise into “leverage vehicles,” or “securitized derivatives,” which they then sold to The Dumbest Man on Earth, often a banker trying to make his books look good. See, here’s the basic notion:  A house (a building) has a two values – the first is what its price is according to the market; the second is its lifetime mortgage value, which is obviously very much higher, much to the delight of bankers. The notion of leverage is, as the saying goes, baked into the very idea of a mortgage. The value of the paper your mortgage is written down on is much higher than the value of the actual building you sleep in. (A thirty year mortgage at 5% on $100,000 nets the mortgage “owner” – the bank – $432,194.24, much of it interest.) But an essential truth is that the second value is potentially illusory (it obviously depends on the entire mortgage being paid). There were problems with the deals said DME above cut:

C) No one ever thought to actually look at the houses reflected in the bargain-priced derivatives the bankers happily snapped up in order to decide what common sense said they were worth…

D) …let alone think about the knuckeheads who were buying (read, mortgaging) houses – or, ha! second/investment houses they couldn’t afford except for the assumption that housing prices would go up forever. 

Then, you had E):  The generation of business geniuses that I went to school with decided that it was all worth the risk to sell/buy the above referenced, ironically entitled “securitized derivatives,” after they’d been sliced and diced so thoroughly that no one could understand the products being sold, to the entirely foolish brothers of the bankers referenced above.  After the slicing and dicing, no one knew what was in the product – a piece of this mortgage, a piece of that one, a piece of one in Anchorage, and so forth. Or, as I explained to a friend who has spent his life writing poetry, translating poetry, and actually doing honest work of various types in an e-mail, “[I]f if you leverage – businessese for ‘lie about’ – the value of a pile of mortgages, changing the value from ‘1’ to ‘2’ by selling it to somebody for twice its value because housing is appreciating, that’s one thing – that’s ordinary analysis and speculation, here on the part of the buyer at ‘2,’ principally; however, if you keep repeating this action, re-selling and re-selling leveraged paper until that ‘1’ becomes ’40,’ well, that’s “a pretty big sin,” as the priest told Loretta in Moonstruck, and that’s where the house of cards collapses because housing can’t always go up. Of course, it takes a real boob to buy a pile of mortgages on, say, 100 rowhouses in my neighborhood for $1,000,000,000, which would make the ratio of the common sense value of one such house (its selling price) to its paper value 1:40, or – 100 x (40 x the peak value of this house a couple of years ago; it’s certainly not “worth” $250,000 now). Here’s the crux of the problem: There actually were supposedly savvy businesspeople out there – lots of them – too stupid to say, “I don’t understand your contract,” or too stupid to say that 100 x Dr_NaCl’s house will never = ONE BILLION DOLLARS.” Seriously, that’s what this is all about, and it ain’t over.

Obama’s new, semi-helpful plan may get to the floaters – think people in the Atlantic when the Titanic went down. What do you call those flimsy round things you throw to floundering swimmers? But here we’re talking about those who will drown if their elevator mortgages actually activate (read, kick the monthly payments from $900 to $2200); Obama’s plan doesn’t get to those who are already “underwater” (their houses are already worth, say, $75,000 less than the principal of their mortgages).

Sorry, we may still be looking at The Second Great Depression…the banks aren’t lending enough yet, and probably haven’t even actually fired all the retarded (sorry, “mentally challenged”), and thus, about 600,000 people are losing their jobs every month.

Hope I’m missing something. If I’m not, you’d all better consider ultrashort ETFs, and buy some TUMS.

And maybe a gun.

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