Re: Please help me understand 'sub-prime crisis'
OK this is a soft ball that came my way that maybe I can help a bit with.
Here goes.
The modern world is driven by debt issuance n' monetary tweekin' here n' there. This is one of those things the whole world has done as lead by the good ol' USA.
In the USA, (which has the largest economy [n' debts et al]), this corncept actually started in the 1930s when FDR's Administration invented the Federally subsidized 30 year FHA loan fer single family homes.
That single corncept werked very well ta encourage home ownership and has been copied all over the world.
In the early 1990s or late 1980s Wall Street, (where I werked, [here in Seattle], not New York), the major WS Firms started "securitizing" non Federally backed mortgages on real property and packagin' them n' sellin' them to smaller investers. They were called "CMOs" in those early days. I was a fixed income expert n' those things REALLY REALLY scared me, as they would break a 30 mortgage into "tranches" and sell the junk or trash tranches to the least sophisticated investors. Never bought the stuff unless me client refused ta listen' to me advice, (which does happen from time ta time).
We had a "bear market" in bonds in the early 1990s, (Mrs. Jones notes that means: rates went up), and small investors, (not my clients if I could help it), predictably got crushed.
Then WS, (real short memories when it comes ta makin' money on WS), started packagin' all sorts of debt into "CDOs" collateralized debt, (instead of only mortgage obligations). That was the ol' turbo button, (as Mrs. Jones likes ta say)!
In the late 1990s the Federal reserve rescued a number of players in "hedge funds", that should have been allowed ta fail, (hind sight bein' 20/20 n' all), and those types of unregulated players who use so much leverage, (borrowed money), they could threaten the entire world monetary systems with their speculations.
One of those BIG players, (who single handedly), crushed the Pound Sterling some years back, n' some Asian currencies in the late 1990s now totally owns one of the major political parties in the USA. Sooooo don't look fer any regulation of this type of very harmful activity anytime soon, (Mrs Jones correctly observes).
The issuance and reissuance of questionable debt and many of the world's banks (and investments in bond mutual funds fer smaller investors), now has a lot of this trash in their portfolios and they do not know how much will blow up or where it is.
Bill Gross (PIMCO), who runs more debt then any other person on this particular planet, was whinin' like a Socialist last summer, (n' he is a Capitalist). That was very tellin' how bad this deal is. I think I posted parts of his letter last summer here on iboats.
Banks in the US started issuin' loans, (called liar loans), that lacked the basic documentation previously required on large loans. These were the "sub prime", loans or even some that were in conformity with cornventional loans, n' they were repackaged by WS n' sold to everyone on this planet.
Bottom line. Way too much money was printed from the mid 1990s to today by the whole world's central banks. That caused fairly good economic times in most of the world. The price of housing went up in the USA but it went up even more in the rest of the world. Now we need ta let the terlet flush. Those who borrowed money they should not have borrowed need ta get hammered, n' those who bought the paper need ta get spanked too, (happenin' right now). Some of the banks who packaged the stuff need ta go away, n' one of the WS firms who was NET SHORT AS THEY CRAMMED THIS CARP DOWN THE THROATS OF THEIR BEST CLIENTS needs ta get a big spankin'.
Hopefully this will have a happy ending and the system withstands all the troublin' stuff I jus' spewed about. If not then it will not be sooooo good. I'm optomistic by me nature so lets hope fer the best, (but people should batton down those hatches fer a bit of a blow).
Hope this makes some sense to readers. If ya need some clarification I will try to reply to non specific questions, (as I can't give any specfic advice).
Respectfully, JR
