Greed and the Unraveling of America

We can sit back and bitch and moan with what is happening in our country today and we can point fingers all over the place, but that will not help. What we are seeing is an unraveling of our financial institutions on a grand scale. This unraveling is not the fault of any one group or person but the fault of all who participated. Democrats and Republicans are both at fault as is the large corporations and the individual who bought the products from them. We all got caught up in the glare of financial freedom and became greedy.

So how do we fix the mess? Do we bail out Wall Street, the individual home owners who are trapped in the middle, or just let everything go. Before we can answer these very tough questions we must look to the past and see how we arrived at this time in history.

Sub-primes who are they and what are they?

I am not going to bore the reader with an exhaustive report on sub-primes but will attempt to give a short synopsis of what they are. Sub-primes are loans given to people with sketchy credit histories. That's it in a nutshell.

The sub-prime market did not appear overnight. There history can be traced back to the Clinton administration (or further if you want to get technical). In 1995 Clinton, Al Gore and Henry Cisnero gave support to Fannie and Freddie to include up to fifty percent of their portfolio's to the sub-prime market. So we get to a state today where Fannie and Freddies portfolio's are filled up with low quality loans. Hence the start of the meltdown because when people start to default on these loans, because they have no jobs or their pay is cut, you now have a problem.

Let's take a look at how Fannie and Freddie work to see how all this is put into action. Some people think that these two institutions actually give loans, but they don't. They act as a clearing house for the banks and actually work in the secondary market. The bank sells you the loan and then bundles your loan with others and sells them to the secondary market. Fannie and Freddie buy up these loans, which accounts for fifty percent of todays market, and then sells them to investors as bonds.

Greed

Through the nineties we saw fortunes made in stocks and real estate. Now much of this wealth was created on paper and only existed as long as everything was running smoothly and real estate and stock prices were rising. People were buying houses and watching their equity grow at amazing rates. People were buying stocks of companies that had exponential growth of their stock prices.

I had a friend at this time that had done fairly well at flipping houses and he once told me, “ Equity means nothing until you sell it!”

I had another friend in 1999 come to me to brag that he was retiring at 40. He had made a fortune buying stocks of companies that had stock prices of 100+. Even those these companies had never made a dime of profit. Today he is back in the workforce after losing everything.

Point being when the market dries up and prices start falling backwards you are left with nothing but the opportunity of holding some really bad debt. Because of the availability of cheap credit with no real accounting of whether you could afford that debt people saw dollar signs and a way of becoming millionairs.

I knew a person who took all the equity out of his home and bought four rental properties financed with interest only loans expecting to make a fortune because his Real Estate agent told him that home values would escalate from 15 to 20% annually for the next 20 years. This was in 2004, today he is facing bankrupcy and the very real possibility that he will lose everything.

When I mentioned to him that a rate of return of that nature is not possible or at the least extremely risky he choose to ignore the possibility of his failure. Greed had clouded his better judgement.

Was it only his greed that drove the market? I don't think so! We had a lot of people involved here. The Mortgage officer that gave him the loans even though he was not qualified, the Real Estate agent who promised a return that was not in line with reality, the Politician who was asleep at the wheel, and the news agency that did not do anything to expose the trouble that lay ahead. All was rosey in the United States of America.



What They Aren't Talking About
(coming soon)