Originally posted by -Pr-
I'm so glad I watched The Big Short, otherwise that shit would have made no sense to me.
Dude, I spent a long-ass time explaining the House Crash a few years back:
Originally posted by dadudemon
Okay, quick overview in not-so-layman's terms:
Those home loans, owned by the banks, were purchased by investment banks. They packaged up those home loans (from really good to sub prime loans) and created bonds for investment. Those investments were then invested in in the form of Collateralized Debt Obligations (CDOs). Those CDOs were packaged up and the poorest performing loans in the bonds (the crappy "tranches"
were ignored or obfuscated, on purpose. These newly packaged CDOs were then invested in and those are known as Synthetic CDOs. Then they added another layer (and perhaps another layer on top of that).
The subprime loans were never the problem that led to the housing market crash. It was the packaging up of those home loans into investment opportunities (CDOs) and with reserve requirements being only 10%, investment organizations (calling them "firms" doesn't seem to be encapsulating enough) could theoretically create up to 10x the amount of money they invested (huge return of investment). But they would package up these investments into higher tiers of investments (Synthetic CDOs). And then those new packages (which were packages of packages) were invested in (synthetic CDOs of synthetic CDOs?). And it didn't stop there...they added another layer of this and invested in that new layer, too (synthetic CDOs of Synthetic CDOs of CDOs?). And they tried to cover their asses with Credit Default Swaps if their bonds/CDOs failed.
And when the sub prime loans started to go into default, it had a catastrophic cascading effect as each of those lattices of investments would collapse from the bottom up, horrendously destroying each layer of investments. Since each layer represented a huge increase in investment value, each layer represented an exponential loss. And since retirement funds and all sorts of goodies were rolled up into these investment bundles, they collapsed, too. The actual cash available from these investments were percentages of percentages of percentages.
Subprime loans did not cause the housing market crash. It was the investment strategies that the rules permitted that caused the crash. If they were not allowed to balloon their investments up to 10x the amount (because cash reserves only had to be 10%, remember?), then the sub prime loans that defaulted would have a direct value to loss impact on investment rather than the ridiculously ballooned exponential impact that those defaults caused.
Oh, and, also, the AAA rating for the investments that had a significant percentage of sub prime mortgage loans in them greatly created a false sense of security for people investing in those programs. So not everyone on walstreet is to blame for this (but that's where almost 100% of the blame should be placed, not on the actual subprime loans).
Cut out the 2 major factors that led to this crisis:
1. Rules that allowed cash reserves to only be 10% of the investments.
2. Cascading investments with packaged up home loans.
If those two variables were not present (in other words, no-nonsense regulations were in place), then the housing bubble could never have happened. We wouldn't have ever gotten silly overpriced homes because there was no way for it to balloon like that with absurd regulatory requirements of only 10% cash reserves and the ability to package up investments that are already packaged up investments which were comprised of packaged up investments. I mean...how greedy do you have to get to do something like that knowing full well that even a fraction of the underlying investment, if it fails, will cause an exponentially bad impact on the highest levels of those packaged investments?
Hedge funds betting against portfolios failing?
Man, I feel like I still don't understand all of this stuff.
But, yeah, it was never poor people that caused this problem. It was stupid regulations and rich people who got greedy. Making home loans available to people with weaker credit is not going to cause the housing market to crash. Not even close. That's not what happened that caused the housing market to crash to begin with.
That article was written by an idiot who is trying to spread partisan fear-mongering while, at the same time, covering the tracks of the Wall Street crooks and banks who actually caused the problems. It is a political agenda against Democrats, not actually anything legit. Let's also be clear that the Democrats also contributed to the policies and housing market crash. Just not in the way that the article describes Obama's recent decisions.