I was told people would only be interested in a post about the current financial crisis if I included a photo of Corey Haim scrounging chicken bones from a dumpster; only then would the dire repercussions of the financial meltdown be made real to our readers. I'm sorry, but I couldn't find that photo-- Corey has successfully avoided the paparazzi on his evening jaunts to the alleyways behind McTucky Fried's. Instead I found this picture of Winona Ryder scavenging leftover triple-cheese nachos, Super Slurps and buttered popcorn kernals outside Groman's Chinese Theatre. That's why there's Chinese writing behind her, okay?
I find this financial crap fascinating but can't bring myself to read about it in the papers. Back in the 90's, when people talked about the S & L (Savings and Loan) scandals, I thought they meant "SNL scandals" --like, Eddie Murphy getting caught with a tranny prostitute? So you can see why I have no idea what's going on. But it sounds BIG.
So here's what happened-- It's well known that after the Stock Market crash in 1929, many investors, their entire life savings wiped out, were so devastated by their financial ruin, they jumped from their lofty office windows high above the streets of the financial district. What is less known is that some of them survived. My father was such a man.
No, wait, that's another story.
So, after the crash in 1929, the government put protections in place so that the same thing wouldn't happen again. The government made sure that savings banks and investing banks were separated, meaning the money in savings banks-- where most people keep their money-- could not be used to gamble on the stock market, so that people's savings would be safe if the stock market crashed again.
In the 80's, two things happened-- the savings banks complained they couldn't make any interest on people's money, so they got the government to get rid of the regulations, thinking, well, this isn’t the 1920s anymore, and our business community is more ethical now, and won’t get involved in any sketchy investments. Uh-oh, I smell trouble.
Then, to make playing the stock market more feasible for everyday people, ie, those without the money to hire personal investors or financial advisers, mutual funds were introduced, packages of stocks with a wide portfolio, meaning a little of this and a little of that, so that if one failed, another would rise, and the general trend was up. But with so many investors, there was less wealth to share and less payouts.
Banks started trading in dividends called “Derivatives” – which was not investing in concrete things like gold, or oil, or wood, but in things like mortgages. This is where it gets hard. A bank would give someone a mortgage for a house, then the bank would sell the mortgage to another investment company, so the interest collected on the mortgage became part of the mutual funds of that company.
This wasn’t a big deal when mortgage rates were 5 percent, but when mortgage rules were deregulated under the Bush administration, banks were allowed to give mortgages to people with really bad credit, and because the buyers were such high risk, would give them crazy “fine print” deals, where their interest rates for the first 5 years were really low, then would jump to like 30 percent after ten years. Since these mortgages had higher yields, they were increasingly the mortgages being bought up.
The problem—when the buyer defaulted on the mortgage (usually when their payments suddenly jumped to 6 times the former amount), the bank at least had the collateral of the house, which it could sell, if even at a loss. But the companies that bought the mortgages had nothing, meaning—what they had traded in was worthless.
Jesus Christ, I think I'm about to defenestrate. That's enough for today.
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