View From Table 9

September 20, 2008

How We Got to the Second Great Depression…

Filed under: Uncategorized — table9 @ 12:06 pm
Tags: , , , , , , , ,

I actually don’t think that people overextending themselves in debt is the core issue. The core issue is that the debt itself became a financial instrument that was traded for profit. Here’s how it went:

First, came the concept of a Home Equity Loan, back in the early 80s – a way to ‘tap into’ the ‘equity’ (i.e. paper profit) in a home. Hey, what a great way for Seniors and others on a fixed income to profit from their house without selling it! We can make some money on the interest too. Hey a new concept!  A house as an investment vehicle, not a place to live.  Not bad, in fact it’s kind of nice….

Better yet, what about the debt itself as an investment vehicle?   After all, people always pay their mortgage, and their second mortgage.  Hey, we’ve got this debt here, paying steady returns, let’s treat that like a stock or a bond (but without all those pain-in-the-butt regulations surrounding stocks and bonds) and trade it.

Wow. We can make money on this. Better yet, we can ‘bundle’ mortgages and trade them as a group. We can also sell insurance policies so if the mortgages don’t perform like they were supposed to (i.e. people don’t pay their mortgages on time) we’re protected still!

We’re making more money! Let’s make more mortgages that we can trade. Uhhhh….well, we’ve got to loosen some standards here, but that’s OK because we’ll make more money selling the debt, so make that loan! We’re not going to get stuck with it, and really if only a few in the bundle go bad it won’t matter.

Wow! Housing prices have gone insane now that we’ve loosened our standards! That means more debt to sell! Hooray! More money! Let’s loosen our standards even more so we can make more debt to sell and get really rich! We’ll just mix up more of these ‘loose’ loans into the ‘good’ loans. It’ll be fine.

Uh oh. Housing market is beginning to stall. I think we’ve reached our limits. And, uh, some of those not-so-good loans (“subprime”) are failing. And, uh, we may have not been completely honest about some of the mortgages we were bundling together. So people might be a little upset to find out the ‘good’ debt they bought wasn’t as ‘good’ as they thought it was. Errr…That’s OK, housing will stabilize, and we’ll be fine.

Uh…more housing falling…people are starting to walk away from their houses….uh-oh. And, er, more loans are going bad, even ones that were supposed to be OK. People don’t seem to like paying more for their house than it’s actually worth in a down market. Those who thought they could ‘flip their house’ (like on TV!) for a profit, well, they can’t. Oh, yeah, and they’re not making as much money as they thought they’d be since real wages aren’t growing.

Oh, man, housing is NOT coming back. Jobs are starting to disappear as the engine that was fueling them (housing) is shutting down. More and more people are walking away, becoming renters, and we’re stuck with these bad notes and houses we’ve got to maintain. Heck, we don’t even know in some cases who owns the dang house so we can try to sell it and get some of our money back because we’ve sold the loan so many times.

Oh, geez…. Now we’ve got a crisis of confidence – if we lied about this debt, what about other debt we trade? How could auction rate securities fail? We only lied a little bit, why should others be worried?

Bear Stearns got saved! Maybe Paulson didn’t mean it when he said once in a lifetime though…that was nice of Bush to Save! His! Friends! so they can go back to their yachts in the Hamptons and stick it to the taxpayers while still looking good to the little guys we don’t care about. We’re going to be OK. Never mind.

Oh BOY – FNMA “Fannie Mae” and FRMA “Freddie Mac” are in trouble! Why? Got caught up in the loosey-goosey find some money game as well. Seems they’re supposed to guarantee that a loan is good, and, well, they didn’t do their homework as well as they should have. Made a lot of money servicing all those loans, and they felt their guarantee from the Feds would protect them. And now Paulson’s got a spine, making their shareholders eat the deficit and not making the taxpayers. Yikes! Rich people are losing money and poor people aren’t? What’s wrong here?!

What? They’re not saving LEHMAN? Hmm…must have meant it! Or the guys at Lehman pissed off Bush at the Country Club. Oh, man, Merrill sold themselves. EEEEEE….

Oh, geez, now it’s hitting even non-investment banks. AIG is flailing because of those insurance policies they sold (and made tons on) to guarantee those mortgage debt packages are now having to pay out because more packages failed than they thought. And why are the taxpayers loaning them money to bail them out when the other financial institutions wouldn’t? Lucky them!

Oh, well, let’s hit up our buddies in the Fed and Congress and let them fix it all by creating a new place for taxpayers to buy the bad debt we made fortune off of AND we get to keep the fortune. Yay! We love Republicans!

Don’t get me wrong here. I think if you overextend yourself to the point that you’re in bankruptcy and/or you lose your house, you should in fact lose your house and all your stuff and have to pay it back. Anyone dumb enough to take on that much debt should have to feel pain to learn that you don’t take on more debt than you can handle. You’re grown up, you should know your limits. Yet so many times we hear “But the bank wouldn’t give us the money if they didn’t think we could pay it back.” That USED to be true.

At the core there was some misplaced trust, or rather an abuse of trust here on the part of the financial system. Remember, it used to be that your bank (or anyone else who wasn’t the mob) wouldn’t lend you money unless they really thought you could pay it back. And that was true. Then banks and other lending entities decided that your ability wasn’t so important because they weren’t going to make money on the loan interest you’d pay them. No, they were going to make far more money selling your loan to someone else than they ever would holding your note and just receiving a po-dunkey 5% or 6% return. So they breached their fiduciary responsibility to their shareholders and the public in making that loan, and that is far more serious to me than the actions of the person receiving the loan. Then, on top of it, when they bundled and resold these loans, they lied about the likelihood of loan repayment, making the loans seem more stable than they really were.

And that’s what we should really be pissed off at. Not the people getting the loans, whose credit is now ruined and are not becoming renters again. The people who breached their responsibility and made the loans they should not have, and then lied about the quality of the debt they were selling to make money. And those that let them.

Oh, and I think those CEOs, CFOs, COOs, all the Executive Leadership of the companies getting help (Bear, AIG, Lehman, others) should have to give the Government (i.e. the taxpayers) ALL THEIR BONUSES and SALARIES beyond, say $500,000 – what a CEO SHOULD MAKE – to pay for the mess they led their company in to. They should be made to give back their past earnings plus a % of future earnings.

Lastly, if you think McCain (who was part of the administration that LET THIS MESS HAPPEN) and Palin (who got her own town of Wasilla in a mess building a sports arena in the middle of nowhere on land they might not own) can fix this, then you’re a fool.



  1. Nice writing style. Looking forward to reading more from you.

    Chris Moran

    Comment by Chris Moran — September 20, 2008 @ 12:14 pm | Reply

  2. Very Good and Usefull Article, With Some Good Tips and Pointers !
    I Am Going To Use The Info.

    Thanks !

    Comment by Troy DeVille — September 21, 2008 @ 8:55 am | Reply

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