Foreclosures are on the rise and we paid $700 Billion to make that stop. It didn't stop. Banks robbed people! TWICE!
Brainiacs and financial gurus are cautiously telling me what's gone wrong in banking, investment banking and insurance companies. They never fail to begin with "It's very complicated". When they explain it to you they do so in low voices as if you shouldn't be hearing this. They say it as slowly as possible as if this allows "idiot non financial types" their best chance for comprehending what they view as the seriously difficult subject of "Financial Markets" They expect you to react with the proper amount of awe due any discussion of "Financial Markets" and "Financial Instruments:" Then, you are to respond and the only proper response, the only response that will satisfy your "financial friend" is the "Lawn Mower Man" response. In a hushed but awakened voice, a tone that indicates that you've just absorbed all the knowledge in the world, you must say "I never knew it would be so complex". So I did.
But then I thought about it. If it's too complex to explain chances are its astronomy or bullshit. The financial world is full of absurd rules, products with unintelligible names "Credit Default Swaps" "Derivatives" "Synthetic Assets" and penalties. But in the end it's just a game played by institutions (like casinos) and people with money (investors) instead of muscle. It's like football without a helmet. There are tons of obscure rules, strategies and explanations for what went wrong after the game. Crowds and fans are equally invested in the outcome of either game.
When I first took an interest in football I asked "How is the game played?" A very serious football devotee told me "It's too complicated to explain". HA! A girlfriend of mine elbowed him aside and said "You get four chances to go ten yards. If you do, you get four more chances". Now, I love watching football but obviously I don't play! Now I watch the financial markets, but I don't play.
But I digress. The Financial Markets, "It's so complex". NOT!
Here's what happened to us. Your mortgage was torn into little pieces. These little shreds of paper where placed in baskets, with a bit of paper in this basket, a bit in that basket and yet another few bits in a few other baskets. Those baskets were taken to market and sold separately. Each basket had a piece of your mortgage in it. Those baskets were "securitized". Fancy! It means these baskets were labeled and sold as "securities" or financial products. Their value was set by your mortgage and your promise to pay it. Got it?
Then they changed the rules.
"Mortgage backed securities" have been sold all over the world. Mortgage Backed Securities used to refer to one of the most reliable, safe products you could buy, because people always pay their mortgages and homes always go up in value. But Mortgage Backed Securities USED TO be backed by ONE WHOLE mortgage packaged with other WHOLE mortgages.
But these Mortgage Backed Securities weren't backed by groups of WHOLE mortgages. They were backed by lots of tiny slices of mortgages cut up and scattered into various baskets. And since these "securities" were only backed by tiny slices of your mortgage and mixed in with tiny slices of sub prime and teaser rate mortgages, some slices went bad. The baskets were all tainted with pieces of rot.
No one knows which shred goes with which because they are scattered in a million different baskets.
Mortgages were packaged this way because banks and investment banks knew that the loans were bad. They thought they could hide the rot in the basket if they just put a lot of little pieces in each basket. And they knew that all the baskets had rot in them. Now you've got rot in the basket but you don't know which shred is part of a good mortgage and which shred is part of a bad mortgage. No one wants to buy the baskets. They ruined their product!
So Bush decided that YOU should buy the baskets. That's what the bailout was supposed to be for. Buying baskets of rotten securities.
The big problem seemed to be how does the Government "value" each basket so we could buy them.
Some said set up a Resolution Trust Corporation to "unpack" the baskets piece by piece and put the mortgages back together like a giant puzzle. Then assign a value to each whole mortgage. Some say just give the banks the money and let them sort it out. I say something else.
There is only one common connection to each slice of mortgage in the basket. YOU! There is only one person attached to each slice of mortgage. It's still your WHOLE mortgage. In fact, the ONLY thing that connects to each piece of your mortgage in each basket is you.
So what? Well, if I give YOU (and every one else with a slice in the basket) the ability to pay your mortgage, then the basket isn't worthless anymore. All I have to do is identify every homeowner whose slice is going bad and help them pay their mortgage. Then my basket (still full of slices of various mortgages) is worth close to what I paid for it.
So how do I help you pay your mortgage? In exchange for taxpayers money banks must lower the interest rate and/or the amount of time you have to pay off your mortgage so you can afford to pay it. Then the baskets we all bought are worth close to what they were expected to be worth. The bank has to eat the rest because they sliced up your mortgage and tried to pull a fast one!
Will it work? Well, if I give you an extra 10 or 20 years to pay your mortgage, and I extend to you the lower interest rates that I am now receiving from the Federal Reserve (the price I pay to borrow money) then there is a good chance you can afford to pay your mortgage. If you default the US Government could guarantee that mortgage instead of being stuck with all of them.
TAKE CARE OF THE FORECLOSURES and YOU SOLVE THE FORECLOSURE CRISIS.
Unfortunately the $700 billion has not purchased one basket. Not one. Instead the money went to banks and insurance company AIG with no strings attached. No conditions that the banks work with you.
The banks got the money, the baskets are spread out all over the world rotting and you are still unable to pay your mortgage. Banks robbed people. TWICE.