Wednesday, October 8, 2008

What's Going On?

Every time i write an article to post on Peacedrops it's because there's something strange going on in the world that i don't completely understand. In fact i think that media explain us things in the way we regularly don't understand a fuck, it's their job at the end. That's why i took my own informations in a view to try and explain the matter in the easiest possible way.
All right, to better comprehend the reason of the deep crisis involving the world's financial markets we need to know what is an ARM. It means adjustable rate mortgage, that simply represent that kind of mortgage loans where the interest rate that the client is supposed to pay to the bank is periodically adjusted based on a variety of index (i.e. Cost of founds, London Interbank Offered Rate and many others...). The mechanism basing the economic model is very well projected and make the possibility to own an house -or more- very easy. That's why i don't intend the concept founding this economic system as totally wrong, i think that to let people make their dream come true, like owning the house where to live, it's honorable by the way. The system, the concept, the theory, is honorable. Not the men supposed to handle with it.
Let's see in which way this model permitted many people in United States and in many other countries to buy their own house: i wanna buy an house so i go to the bank that after checking my stability give me the money i need. I decide to chose an adjustable rate mortgage because I'm sure the interest rates will drop and I'm also sure the price of the house I'm buying will rise. After three, four years i notice that I'm a lucky guy, and things are going exactly like i planned. If my house's price rise and the interests rate i pay drop, it's exactly the same thing than affirming that i payed more than i effectively payed, the whole economy payed for me part or better everything of my mortgage. Good, in this case i have different options, maybe the gap between rising of houses' price and dropping of rates is that big that it payed my loan in half time, I'm done, I've my house and my money. More frequently people make other plans. For example the bank can tell you that you can renegotiate your mortgage, in the way that for the same amount of the monthly payment you already faced with no particular problem -or, at least, putting a couple of hundreds dollars more-, you can buy a second house. Exactly because the price of the first home you bought rose up and the rates you pay dropped down the bank is offering you to renegotiate. You buy a second house because the free market took charge of most part of the amount you monthly were supposed to pay, that means that with the same amount of money you already planned to pay now you have the chance to have two houses instead of one. Three instead of two. Four instead of three.
At the same time, as you can figure, when houses' price drop and interests rates rise it starts to become more difficult renegotiate a mortgage. If this happen people is not able anymore to face the rising monthly payment and banks don't receive cash anymore. But banks, as you know, are very smart, so i guess it's impossible they couldn't know in advance that something big and really bad was coming soon. That's why I'm sure they invented something called "Securitization". It is an almost new practice with which banks transfer or sell a right to a person, in this case an investor. To make it more understandable the bank transforms the right to receive from a debtor his monthly payments in a certificate that sell to an investor. The investor buy this bank certificate and the interests rate connected. If you know a little bit of economics you surely know that the interest rate of any investment is almost totally related to the risk of the same. In this case, the risk that the bank smartly transfer to the investor (better if small) is called "Credit Risk" and represent the risk that the mortgage holder would not be able to face the payments anymore. And sorry, THE BANKS ARE SUPPOSED TO TAKE IT. These certificates or securities are called mortgages backed securities (MBS) and collateralized debt obligations (CDO), and there is many people that bought this shit to make a good investment, maybe to pay someones grandson university education.
This is the background of the story, of course this caused the domino effect that's under everyone's eye. Firstly banks don't have that much money to finance new enterprises and new investments, people that lost big money with MBS and CDO live in not very good conditions, generally you can attend a crisis of consumption and other stuff like that. NO LIQUIDS.
So i thought: have been changed something in my life after i started and read every single day that Dow Jones got another -6% or that another bank went bankrupt? No. But will anything change? I honestly hope not, but i mean, every day you see on the news that this index lost 3, 4, 5 points, that means that there is more shared sold that bought that day in that market. So the price of them dropped. But this is the risk of investing in a stock market or not? People who decided to allocate their founds on stock market already knew that beside a nice rate of earnings should find an extremely high level of risk...and than, in a few word, people that put money in a stock exchange has many more money somewhere else, so, who the fuck cares? The stock exchange is like the second car or the second house, you can lose it, i care to the people who's losing their only house, or people that invent everyday a way to let their kids eat. I'm actually very happy if some of that mother fucker speculators lose some money. So, the stock exchange doesn't make me worried too much, but, i know, behind the shares they exchange everyday all around the world's markets, there are enterprises and people losing job. Maybe there were enterprises.
Right now the share represent the enterprise, i mean, there was a time when the solidity of a company or the ability and honesty of a management was the base of the share prices, now it's exactly the contrary, empty, bubble companies that base their importance on the daily quotation of their share. If i was working for an empty fake bubble company i think I would notice it right away and right away i would start to look for another job cos i don't think should be that difficult to understand that under the high quotations there's nothing else than speculation when you are inside it. But no body talked. My life didn't change at all, is this a crisis that maybe just involved banks, stock exchanges, house prices (so house owners) and mother fuckers in general without touching all that normal people that handle with normal problems and pay regularly normal rents? I'm going ahead and paying the same rent even if the houses prices dropped.
I'm thinking about that every time i read anywhere articles or big titles about this crisis, everyday i spend without this crisis involve my life and the life of all the normal people i know i face these articles with an always more pronounced smile.
I'll be back on the matter with the funny solutions that the ridiculous world's genial Governors are inventing day by day with a focus on subprime mortgages, the evil invention of banks and i hope to tell you other nice and above all encouraging news, thank you for your time and attention.

1 comment:

kk said...

Lovely. And if you would like to expand the nightmare, add Auction Rate Securities held by Qualified Intermediaries to the mix.

Auction Rate Security:

Qualified Intermediary: