"Joe Sixpack's" Guide to The Economic Crisis
Did y'all watch 60 Minutes last night? I know it's geared for the AARP set, but it's mostly just Andy Rooney that sucks (and who I won't mourn when he finally kicks it.) Anyway, they did a better job of explaining the real situation behind the scenes, and unfortunately, I'm intimately familiar with those types of business practices.
After my divorce, I got into IT during the Dot.Com explosion. I worked for a company called "First Plus," who did (surprise!) sub-prime loans. They made their money in SELLING these loans. Here's how it worked: you own a house, we'll say it's a 200K house. You've only got 50K in equity and need a loan. A NORMAL bank would start at the 50K equity, and determine how much of that you could reasonably get in a refinance situation. If you have a credit rating of 650-750 (upper end) you'd most likely get up to 45K. You wouldn't get the full 50K. Think of a teeter totter with the bank on one side and you on the other. They want to be on the ground with more money in their pockets, in case something happens to you up there. (Short: they'd rather lose 30K than 50K.)
Now, First Plus would start off at 125% of your equity. So they didn't start the process at 50K knowing it would never be that much, they started off at 62.5K. So you could feasibly get in a loan more than you had to back it up. First Plus would then take your paperwork for your exorbitant loan, and those of others, package them up as a "security" and sell them to other people. This means they weren't servicing their own loans. They were giving money to (general) you, selling the deal to another business for hopefully a slightly higher amount than they originally loaned, then leaving the whole "collecting" process to the guys that bought the package.
And let's hope people can pay off their loans, right? First Plus didn't care, because it wasn't up to them to try and collect anymore.
The company made money hand over fist. Anytime I was sent in to work on the top exec's computers, it was like entering another world. Their secretaries had private memberships to workout facilities, because they had to look a certain way. The secretaries were driving corvettes. The execs? Lotus, Ferraris, etc. The President had 8 private planes - 20 seaters, all leather, and so on. I found more coke in desk drawers... (I would write down new passwords, etc. and stick them in their drawers for privacy. Whoops. Guess they forgot their blow.) I was told once to not go into one of the VP's offices, even though we had a strict appointment. He was banging someone on his desk. Classy.
And then one day, no one wanted to buy their loans from them. No one wanted to continue servicing (collecting monthly payments) these risky loans anymore. And First Plus was stuck holding the bag. The stock price went from 72 bucks to 44 cents in 24 hours. The doors closed in two weeks, and surprisingly, no one went to jail.
This was 1999.
Guess what the Lehman Brothers and Goldman Sachs and Bears and Sterns and AIG were doing? The same thing. But, with an extra special twist! Anyone understand the futures market? It's a lot like craps, honestly. You're betting that something will or won't be a certain amount, roughly. The FL orange crop is going to be a robust market, which means a lot of product and security, buy in, because when it rolls around, money for everyone. Huge freeze in FL, dump your futures, because they don't have one, that sort of thing. (Trading Places, while crude, actually does a good job of explaining how it works, even though Eddie Murphy didn't know what the hell he was doing in the pit. I digress.)
(Side note #2: there's an insurance futures market, which is why prices rise and fall in impending bad weather, like hurricanes. Nice and disgusting, right? People MAKE MONEY off of massive destruction. Welcome to Wall Street!)
There's another element to the futures market called OPTIONS. You buy - for a percentage of a share - the option to ACTUALLY buy the future. Confusing? Yes. It's a smaller amount, essentially. If gold futures are 100 a share, a gold option would be closer to 10 bucks. And here's the important part: you don't have to BUY the actual future. You can just trade your options, because they go up and down in tandem with the actual future's price. People can make a good amount of money on options trading as you don't need as much up front to get going. Instead of buying at 100 and selling at 130, you buy and sell at 10 to 13. Smaller profit margin. Unless you buy in the hundreds of thousands, which is what serious market players do.
Now, back to the failed investment banks. They made an OPTIONS MARKET on those risky loans. I didn't know they had done that, I thought it was just the same as First Plus: making bad loans, and selling the work to collect the loans to other people. Well. They basically had the original bet of selling risky loans for a profit going, then added the side bets of options. Like rolling a Hard 8 on a craps table, no lie. If you win a hard 8, you get 10 times your bet amount. But if you lose, it's gone for good.
Also: they sold the bad loans TO EACH OTHER. Then, then,they created an options market (they called it a "swap" to avoid - here's the important part - FEDERAL REGULATION, because insurance is regulated, but swaps aren't) to make more money. They sold options to people over seas, again, to each other, and most importantly to the American People: they bundled these bad loans into a "security" and slipped them in to loads of mutual funds, one of the safest investments for the common guy in the market, which is what a lot of people's 401Ks are made up of, and a lot of people's pensions, incidentally.
So when those fail, because they will, because they gave money to people who couldn't not give it back, especially not with interest, anyone with a portfolio with a mutual fund is going to be affected. Instead of a steady 3-5% growth that the average mutual fund provides (not sexy, but it's money you didn't have, you know?) they're losing money. Like, all of them. Thanks, greedy assholes!
You know how you can hock something to a pawn shop? Let's say you hock a watch that costs 100 bucks, but the guy at the counter gives you 25 bucks. That means to get it out of hock, you have to give them back 25 bucks and a small percentage. Either way, they make money off you, right? But here's what the banks did (they're the pawn shops): They took your watch to the pawn shop down the street and sold it to them for 26 bucks (they made a dollar!) and then that pawn shop went to another pawn shop and sold that watch for 26.50. (they only made fifty cents, but they only had to hold the watch for an hour, so it's easy money.) And on and on and on.
Here you come to get your watch back, and it's not there. And they point you to another place, and they don't have it. And on and on until you give up, you don't want the damn watch, now, anyway! So that last pawn shop, that ended up taking it for 32.25 doesn't have anyone that can buy it back. No one wants those kind of Seiko watches now. So they thought they'd sell it for 35 and make money, they told the Mafia guy strong arming them that they'd sell it, sure sure, boss, and now they're screwed. Because now they have to give their own money up or lose a limb.
So, instead of 35 bucks, make that 35 TRILLION. We, the average Joes of the world, are that last pawn shop left having to foot the bill.
I'm not exaggerating when I say that these bankers make Enron's leaders look like angels. They took the philosophies of the Enron guys and built on THAT. A house of cards, indeed. It may not happen immediately, but I'll tell you this much: some of these guys are going to jail. And if not, I say revolution, people, because this is about as shifty as it comes.
And didn't anyone teach these guys about gambling? THE HOUSE ALWAYS WINS.
For a while now, I've been meaning to post about this, saying that we Americans need to shoulder a large portion of the blame with the current economic crisis. We need to accept that a lot of us thought we were getting something for nothing. A bigger house that we never thought we could afford, the hope of flipping a piece of real estate because of inflated house prices (I'm looking at you California and Arizona) or we lived on credit because why not? Yeah, you'll have to make payments for years, but who cares? You want a new plasma, a new car, new clothes all the time, etc. We got greedy. Is it any wonder that the banks did, too? Or did we get greedy because of the banks greed? I'm more inclined to go that last way, because the American public doesn't have trillions in personal debt, THE BANKS DO.
They TOLD YOU you could qualify for a 300K mortgage when you could only pay a 200K mortgage. If the banks, the money guys, are assuring you of this - and make no mistake, this is not the simplest of math - why wouldn't you believe them? For God's sake, George W. Bush told the American public that the way for each of us to show patriotism and to make our country stronger was to BUY THINGS WE DIDN'T NEED. (Incidentally, I love Suze Orman.)
So while you should have listened to that nag on your shoulder (again, general you) that told you to wait until you could afford something, let's not forget that Mom and Pop (who the current government thinks they are, and we their stupid kids) said it would be alright to go ahead and get it.
And here's an amazing factoid: Wall Street got Nobel Prize winning mathematicians (for economics) to write up complex formulas for the banks to use in packaging, breaking up, and re-selling these bad loans. It looked great on paper. Because math is awesome. Know what? PEOPLE ARE NOT MATH. We don't follow laws and proofs. Weather happens. Deaths happen. Unexpected accidents, layoffs, births, etc. happen and can't be properly predicted. Actuary math is close to precise, but the math Wall Street was using wasn't actuary math.(*cough* note the date on that article, incidentally. 1999.) It was economic math intended to fool others into investing. For shame!!
What a f*cking mess. If there's any advice I can give you: spend CASH ONLY. And build up a year's supply of things you need, no lie. At least have in your savings (or get to where you have it) two month's expenses. That means food costs, bills, mortgage/rent check, car payments, and incidentals. If that means no vacation, there you go. If that means no going out on weekends, or you cut back on clothes and restaurants and smokes and liquor and Starbucks, that's what you need to do. Putting things on the card is no longer a viable option. GET OUT OF THAT HABIT. If only because the days of low percentage rates are OVER. [ETA] swmbo linked me to an even SIMPLER explanation of our mess. It's a thing of beauty and stick figures.
In other words: I'm buckling down for the zombie 'pocalypse. The time is nigh. ;) (Ugh, and this is now too long for music, which means I'm going to spam your flists later today with a music post, but that'll all be behind a cut so you can scroll. *g*)