: what was the subprime mortgage crisis ?
In: 4
* Home loans (mortgages) represent a steady stream of income for the debt holder.
* Banks can sell mortgages – they get their big chunk of cash back now to use again, and the buyer gets a steady income stream over a couple of decades.
* Buying a single mortgage is a little risky, as any given homeowner has a risk of defaulting on the loan
* Buying a single mortgage is also more than people might want to spend all at once.
* However, if instead of buying one whole mortgage, the bank splits a thousand mortgages into a thousand strands, this fixes those two problems – the risk of any default is greatly diluted, and you can buy any thickness bundle of strands you want.
* Hooray! Everyone is happy!
* This gives the banks a *huge* incentive to give out mortgages to absolutely anyone. They sell the risk to other people, and they can make a nice little return on their loan – and they can keep doing it over and over.
* This incentive means banks bend, break and just flat-out ignore all the rules about responsible lending, and give home loans to people who are never going to be able to pay them back.
* *Millions* of them.
* Now those bundles have a *large* percentage of dead strands, of loans that are never getting repaid. Those bundles are worthless, they’re dead assets, they’re worthless as collateral.
* So the banks conveniently don’t mention that.
* The banks also cook up a whole new product – they split up the bad bundles and remix them back together into new bundles, and now it’s a fresh *new* product and the risk is defined as being diversified, so it’s considered premium quality again.
* Now millions of investors across the country have sunk all their money into worthless investments, and *used those investments as collateral on loans*.
* Eventually, the loans come due, and enough people default on their loans… and everything turns to shit.
* All the investors now have nothing.
* All the loans the investors took out using the bundles as collateral… are now unsecured
* Banks *cannot* have unsecured loans. They’re absolutely not allowed to – it constitutes fraud to loan out their customers’ money without a guaranteed way of getting it back.
* Oh fuck.
* Now everyone wants their money out of the damn banks before they go under – and this drags them under.
* fuck fuck fuck fuck fuck
You should watch *The Big Short*, if it’s still on Netflix.
It goes into the whole thing in a lot of detail.
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