- Photo by Kevin Lamarque, Reuters
(U.S. Treasury Secretary Henry Paulson (left) and Federal Reserve Chairman Ben Bernanke (right) testify Wednesday before members of Congress)
Everyone wants you to think that the issues involved in the current financial debacle are too complicated to understand. That includes Arianna Huffington and other figures on the left.
But it’s not complicated at all. Much of the value of financial companies was based on their holdings in “derivatives.” These were merely financial instruments whose worth was based on, or derived from, “mortgage-backed securities.”
A security is a stock. So, these mortgage-backed securities were stocks that were bundles of various mortgages put together, an instrument that promised the presumed cash stream of tons of monthly mortgage payments.
Almost all of the mortgages in question were “sub-prime,” which can best be translated as “shaky.” Under incredibly relaxed lending laws–and because of the insane belief that absolutely nothing should be regulated–lenders were allowed to grant mortgages to all sorts of people who had no business having one.
Under the current lending laws, I can give a mortgage to just about anybody, with almost no proof of income or savings on the part of the person taking out the loan, with no down payment, and no real payments for a ridiculously long grace period.
Why would I do such a thing? Isn’t that risky? Sure, but then I put these all together and sell them off as a stock and let someone else assume the risk.
Then that buyer. in turn, puts them together with some other such instruments and turns around and sells the new “product” at a markup. If that sounds like a Ponzi scheme, that’s because it is one. A Ponzi scheme where no one expects to be left holding the bag.
Unless, of course, house prices stop skyrocketing and homeowners can no longer pull ever greater amounts of cash out of their house to pay their mortgage installments and everyone starts getting foreclosed and all at the same time. Oops.
Now no one wants to buy these derivatives, and voila’—they’re worthless. Suddenly, Lehman and Goldman and others who were buying and selling this worthless paper are forced to write off billions of dollars.
It should be noted that Treasury Secretary Paulsen made a personal mint as CEO of Goldman Sachs before becoming Treasury Secretary. Of course he thinks we all need to give our money to his friends at Goldman Sachs. No kidding.
These companies are the same ones who have been so insistent on the total deregulation of our financial system. So, since they have lived by deregulation, let them die by deregulation.
You are being told that for the economy to be sound, Goldman Sachs has to be sound. No, it doesn’t. When they go down, a company with a better, smarter model will fill the void and give a better, sounder product. Beauty of the free market.
For another article on this, go to Poynter Online. David Cay Jonston says the bailout is being packaged as urgent, no time to debate, pass it now. It is not urgent at all.
(posted by j.h.)