Unmoored Part I

We took a road trip recently with some friends I’d met on the bus on the way to DC in 2010. Good people. Aunt and uncle of Chris Loesch, it turns out. It was a pleasure trip to go see a concert 450 miles away, so there was plenty of time for talking about other things, and we did talk books.

The big “Bush’s Fault” 2008 crash came up, and he asked if I’d read “The Big Short” or “Boomerang”. They were about what was going on inside Wall Street and the second — around a few other countries in the Western World … in the early 2000’s up to 2008.

Now people ask me to read and watch all sorts of crazy things that I won’t. Anything that starts out telling me about how Jews are controlling the world from a bunker in London, 9/11 truther crap … not buying it.

My interest piqued when he told me it was the same author that wrote “Moneyball” … which I had recently watched (good movie) and “The Blind Side” … another good movie that I think did rather well in the theaters. I think Sandra Bullock was in it. So I thought hey, even if he turn’s out to be a crackpot he’s not your average anonymous crackpot, and I liked the material and treatment in those two movies so the odds were against.

Thanks to the evil corporations of Barnes and Noble and Amazon, and Intel and AMD and all the corps involved in running the internet … I had a copy on my nook tablet within 10 minutes of checking into the motel.

I read “Boomerang” and am most of the way through “The Big Short”.

I’m titling this series “Unmoored”. Hopefully you’ll see why.

I frankly knew few of the actual inside details of the crash. I knew AIG was involved big, as well as Goldman Sach’s. I knew it had to do with banks making loans to people who couldn’t afford to pay them back (I would like to point out the flip side of this — people who couldn’t afford to pay them back were TAKING loans from banks). And it was mostly these big banks. The quasi-government alinstitutions Freddie Mac and Fannie Mae were connected to it. Government anti-red-lining policies contributed. I knew it was triggered by overextensions (I thought of banks) and defaults by real estate loan holders. All true, but far from the whole story.

I’d heard the terms “CDO” and “Default Credit Swap” tossed around, but really didn’t know what they were exactly. I basically knew what it was to “short” a sale, but I couldn’t wrap my head around how it pertained to home loans.

So here’s my general understanding of it now:

In the real-estate loan market, there are good risks and bad risks. People with higher credit ratings are good risks and get the best interest rates, and people with poor credit ratings are bad risks and get higher interest rates to cover the risk. Yes, it seems “unfair” to charge people with less money more money — but it’s a loan, not charity, and the lender needs to cover the cost of the people who won’t pay theirs back to make it worthwhile. All basic stuff we already knew. Those last loans are called “subprime”. The borrowers don’t meet normal credit rating standards for a prime rate.

The Community Reinvestment Act of 1977 opened this market up quite a bit and probably contributed to the problem … but I’m finding out it really was a (relatively small core group of) bankers and people some big investment houses that spun this whole thing out of control. It’s very hard to wrap your head around the mechanisms, not so much because they were THAT complicated — it’s just — you can’t make any sense of what relation to actual economic reality they bore. In other words, “who even dreamed this stuff up????” Most of the management at the banks didn’t even understand them – and they didn’t care – as long as their portfolios looked better every year. This was as much of the problem as the core group’s wild schemes.

This core group, actually, weren’t a “group” in the sense that they got together and colluded. They would just as soon have stabbed each other in the back, I think. But there were a few people doing the same kinds of things, studying and copying each other and extending the ideas to more and more absurd mechanisms further and further unmoored from economic reality.

[to be continued.  I’m making this a series both to make it easier to read and easier to write.  I am going somewhere with this.  I think.  It’s a little fuzzy right now, but I’m going somewhere as long as I keep the word “unmoored” in mind.]

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3 thoughts on “Unmoored Part I

  1. Pingback: Unmoored Part II | Rotten Chestnuts

  2. Pingback: Unmoored Part III | Rotten Chestnuts

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