Examing The Sub-Prime Mortgage Bust

The BBC has a very good documentary on the financial events leading up to the current credit crunch and banking crisis. This video is UK centric but is relevant to the United States credit crisis as much of the lending to sub prime borrowers originated here.

10 hedge fund managers pulled in 500 million dollars last year with a lucky few pulling nearly 1 Billion dollars

The video explains discrepancy in risk-adjusted returns for these financial brokers. They made obscene amounts of money without taking on any risk. Assets are no longer a function of value but a function of liquidity.

US tax payers may have to bail out the large investment banks like Bear Stearns.

In England there are currently 30,000 people earning over half a million pounds a year, and over 50 Billionaires. All of them work in finance related industries like hedge funds and private equity firms.

The video starts off a bit slow, but there are some very good financial analysis and explanation after about 10 minutes.

Basically the problem is that brokers, not actual banks, created the mortgages for the past 6 years. The brokers had no connection to any lending institution, and sold their originated mortgages instantly, often times to overseas investors. Unfortunately the fee structure incentive for brokers was to create inflated home valuations and provide financing to any individual regardless of the personal credit. The more loans a mortgage broker created, the more money they made and they had absolutely no responsibility after the loan was created.

These sub prime loans were sold to investors as AAA rated investments. Normally a mortgage is a good investment, however the value of the home loans inflated too rapidly and these borrowers were not able to maintain payments on the inflated loan amount. Unlucky investors who believed they had purchased AAA securities are left holding the bag. If 1 million homes go into foreclosure because of these bad lending practices, and the median home purchase price was $250,000 this leaves $250,000,000,000 in bad debt. This is a lot for any bank to reconcile.

ND and WB have more about the details of the underlying factors of our current recession caused by unsafe lending practices.


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5 Responses

  1. In a nut shell, at least in America, it breaks down to two things.
    1. Theft (by the loaning agencies)
    2. Stupidity (by the loanees)
    Enough said.

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