Stupidity Crisis

Housing crisis?
There’s no housing crisis.
There’s a greed and stupidity crisis.
Let’s see…banks that historically were staffed by green eyeshaded guys that would scrutinize the lending of every penny that left the bank suddenly forgot how to do – or how to listen to – risk analysis and underwriting rules.
They created wonderful mortgage products that provided >100% of the value of a property, never taking into account whether the value of that property would rise or fall and severely underestimating (or ignoring) the actual ability of their clients to repay the loans.
They also created nice adjustable rate mortgages with huge rate escalations, prepayment penalties and a variety of other mechanisms to ensure that borrowers could not escape from the trap of ever-rising rates. Unfortunately, they also planned their financial well being around being able to reap the benefits of ever-increased payments.
But their clients either couldn’t understand the terms of the ARMs or they ignored them; their clients also didn’t think about what falling house prices might do to their ability to sell their properties and escape the escalation of their ARMs.
Meanwhile, brilliant investment bankers, looking for new and exciting ways to create money out of thin air, bought huge numbers of these mortgages (sub-prime mortgages, by the way, are now said to comprise 20% of all mortgages currently) and packaged them into securities based on the alleged predictable flow of money coming from the homeowners (these are called “asset-backed collateralized-debt obligations”, btw, though ironically, the assets don’t exist, the collateral is worthless and thus so is the debt, and all that’s left is the obligation).
By the way, a decent number of these ARMs were taken out by speculative investors that fully expected to be able to flip their properties before any rate increases might show up.
The bankers sold these securities to unwitting investors who also ignored the house of cards upon which they were built. Apparently, they sold quite a bit of them given the $10B write downs that several of the major investment banks have taken in the last couple quarters (we’re somewhere near $100B thus far with more exposure to go).
Meanwhile, rising interest rates and Father Time started to drive up the rates on the ARMs, and guess what? Their owners couldn’t make the payments and they began to default. Uh oh, no cash coming in to support the securitized loan packages, so their value suddenly drops precipitously (see: write downs). Meanwhile, the banking credit crisis created a need for cash, and as those who provided debt funding to the investment banks decided they wanted their cash back – suddenly – the investment banks didn’t have it.
Panic! Huge losses, overseas investment, stock markets plummeting, etc. Meanwhile, foreclosed homes are gathering dust and vermin, neighborhoods are being destroyed and people are even more poor than they were before (oh yeah, the majority of those targeted with sub-prime loans in the first place were minorities and the relatively poor; see various parts of Ohio; Detroit, Michigan; etc.).
…and we’re not out of it yet. It also appears that seemingly scrupulous bond insurers (e.g., MBIA) have also been caught with their pants down or, perhaps, their underwriting rulebooks closed. These guys insured the ridiculous securitized sub-prime loans such that the investors buying them could take comfort in their high rating. However, these guys also apparently ignored the basic reasoning for having sub-prime loans in the first place – that the people taking them out are CREDIT RISKS!! (There’s definitely a Sam Kinison routine in here somewhere.)
Now, because the investment banks have largely failed, the insurance policies come into play to the tune of roughly $500B. MBIA and company simply don’t have the cash to cover that bill, and unless the government steps in to “help”, we could all be screwed.

Epilogue...I actually wrote this about a week ago. This morning, BofA and Wachovia announced horrific financial results that caused international markets to plummet even MORE than they did yesterday; at 8 am, US Index futures were down significantly, indicating a multi-hundred point loss at the opening of the market. Great...