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 ZT: Explanation of Credit Crsis |
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strawhat2tiny2tiny
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头衔: 海归准将
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加入时间: 2008/09/13
文章: 2158
海归分: 144415
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作者：strawhat2tiny2tiny 在 谈股论金 发贴, 来自【海归网】 http://www.haiguinet.com
It really began in 1998, when large numbers of people decided that real estate, which still hadn't recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend. The new competition brought down mortgage fees and spurred innovation, much of which was undeniably good. Why, after all, should someone who knows that they're going to move after just a few years have no choice but to take out a 30-year, fixed-rate mortgage?
As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia's boom or from rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages.
Because these loans go to people stretching to afford a house, they come with higher interest rates for the borrowers - even if they're disguised by low initial rates - and thus higher returns for the lenders. These mortgages were then sliced into pieces and bundled into collateralized debt obligations, or CDOs. Once bundled, different types of mortgages could be sold to different groups of investors.
Investors then goosed their returns further through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would end up doubling their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody's Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.
All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people - by "people," I'm referring here to Greenspan, Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners - decided that the usual rules didn't apply based on the idea that home prices nationwide always rise. And they did rise ever higher, so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.
And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn't spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.
Many of these bets were not huge. But they were often so highly leveraged that any losses became magnified. If that same $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That's why a hedge fund associated with the prestigious Carlyle Group collapsed last week.
"If anything goes awry, these dominos fall very fast," said Charles Morris, a former banker who tells the story of the crisis in a new book, "The Trillion Dollar Meltdown."
This toxic combination - the ubiquity of the bad investments and their potential to mushroom - has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm rests in large part on the confidence of other firms that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.
The conservatism has gone so far that it's affecting many solid, would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Street's fears. A recession could cause automobile loans, credit card loans and commercial mortgages to start going bad, as well.
作者：strawhat2tiny2tiny 在 谈股论金 发贴, 来自【海归网】 http://www.haiguinet.com
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 ZT: Explanation of Credit Crsis -- strawhat2tiny2tiny - (4674 Byte) 2008-9-18 周四, 18:43 (800 reads)
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