Reid on the current finical crisis: "No one knows what to do"

Harry Reid can say "nobody knows what to do". What HR is really thinking.. "We can't say what we know, it will hurt us politically".

What is that? Fannie Mae and Freddie Mac should never have existed.

Let's say that you inherit 10 million. You decide to use it to lend money to someone else. So, you eventually end up holding 100 mortgages. Your average is $100K.

So, you've lent out all your money. Are you bankrupt? Well, no. In fact, you're in pretty good shape.

Even if EVERY borrower defaulted, and you had to take a 20% loss by selling the properties for 20% less than you owed, you'd still be fine. You'd only have 8 million, but you'd be fine.

Now, imagine you have a rich uncle. And your uncle says "I've got 100 billion dollars to back up your lending. I'll guarantee that if your borrower defaults, you'll get paid back. All you have to do is pay me a percentage of the mortgage.

So, you go and borrow money. And lend it out at higher rates than you had to pay to borrow it. And your uncle guarantees every one of them.

With your first 10 million, every dollar of interest was profit. Now, you don't make a profit until after you've paid the interest in the money and the guarantee fee. So, what do you do? You hire some help and instead of lending 100 mortgages with your own money, you lend 10,000.

Well, with everyone in your town buying houses, the prices have shot up by 20%. And builders are building as fast as they can and selling at really amazing markups. And you're funding it all.

But you're not really making a lot money in reality. You've got huge numbers of loans out... and huge amounts of debt. And while you funded 100% of your first 100, you've lately funded nothing yourself, and instead, you're only making a small amount between what you pay out and what you've been selling the loan for.

So, you ask your uncle how to improve things. You've got a lot of offices and people to pay, and now there's 5 other guys in town doing the exact same thing you're doing. And your uncle's collecting fees and guaranteeing all of them. All you can do is become faster and more efficient at the process. None of it is your money, and your share is microscopic, of the huge amount of money that passes through your business.

So, along comes an accountant and a guy from the government. And one's telling you have HAVE to lend to risky areas, and the other's telling you how many of those risky loans there are to fill, how high of interest rate it requires, and how to fund them.

So, you go to sell a high risk loan your loan buyers and they say... Uh-uh. No way, Jose. They want a guarantee from you. But how can you? You have no more money of your own. It's all lent out.

So, you approach a broker and he says "Here, you lend the money at 11 percent. You'll have 2.5% defaults, and after accounting for that, you can still make money. So, you try that, but soon you realize that you're in debt to your eyeballs, and nobody wants to lend to you anymore.

So, you find some investors... And you sell the "risk" of these loans. They get the last 6% of the interest in return for a chunk of cash, which you then use to build your reserve fund and sell the rest of the gauranteed loan at almost no profit to someone else.

This works for a while. Then, 2008 comes along, and all hell breaks loose. Suddenly, nobody will buy the risk on the loan for cash anymore. And nobody will lend to you, because you hold a bunch of mortgages with a high default rate and you already skimmed the cash off the top months or years ago.

Now, here's where it gets sticky. Those guys buying the risk on the loan? Well, it seems they weren't as smart as they thought they were, and even a small increase the failure rate has caused their paper investments in the profit/risk of these loans to be worthless.

For years, you've been trading these bundles of weak loans, as you have or need money - and you've been doing that with the other 20 guys in town doing the same thing you're doing. You borrowed money to buy these things, and it's not been any real problem. You just trade them around with other guys doing what you're doing. When you have a bad streak, or need cash, you sell some to someone else doing what you do. And later, you buy some back from someone else who needed money. They do have a payout at the end, so they have value.

Then one day, one of your buddies hires a really bright new accountant, and he analyzes the risk of loss and recommends dumping them all. So, he puts them up for sale and a few start to buy, but then realizes that these are sold as losers. So he investigates. And he stops buying. The word gets around, a year later, none of you will buy these things and you're stuck with them. Since you can't sell them, and their "profit" is wayyy down the road, not now, they're all but worthless to you. And your buddies know that's a huge part of what you have. They know that you are basically sunk if you can't sell them when you need cash.

So, everyone stops buying and trading, and you are stuck with now worthless to you scraps of paper. Since you can't sell, you can't pay YOUR debt on time and everyone else starts demanding payment...

That's what happened to Bear Stearns, Lehman, AIG, and others.

Countrywide was the lender like you, who resorted to being a "mortgage mill" cranking as fast they could, until they had so much borrowed and lent so much that even if they could collect all their own money, they're still in debt. And to top if off, they held a bunch of subprime and now nobody wants to buy it. Unable to sell the paper they wrote against the small amount of cash on hand, they had no means of paying obligations or raising money to do so.

Freddie Mac and Fannie Mae acted like the rich uncle, and have gauranteed so many mortgages than when a slight increase in defaults showed up, they ran out of cash to pay claims.

Someone said Conservatives don't like regulation. No, they don't like excessive regulation and they don't like people interfering with normal day to day business to alter it for political purposes.

We don't like Fannie and Freddy. They existed to guarantee loans at rates that were too low for the risk involved. Failure was never actually in doubt. It was merely a matter of 'when" or how long they could just keep adding larger and larger liabilities before the wicked evil of risking too much for too low of a price.

Just a minor blip in the housing prices and both were shaken apart.

There's a reason conservatives don't like these market manipulations. They cause events like now. It is the law of unintended consequences.

The ideology says "don't entangle the government in adjusting a market". It was for a very real and practical reason, it always comes back to haunt you in the law of unintended consequences.

Freddie Mac and Fannie Mae inadvertently caused the housing bubble with almost unlimited dollars chasing real estate. And then, caused the bubble to start to pop when real life caught up with the process.

The larger the bubble, the smaller things need to be to pop it and the more is displaced when it does.

We're now reaping... Not the fault of "lack of regulation" but the unintended consequences of government creating a means of almost unlimited dollars chasing a commodity, inflating the price, and then all but automatically, popping the bubble it created.

Watcher, how many black, Hispanic, or Liberal friends have you?

On this website you are preaching either to the choir or to those who seem hopelessly hardened against the truth. I remember 1992 when I lived in Ohio, worked for the Army Reserve, and thought everybody was voting for George H. W. Bush. Clinton's victory was a sad surprise. The media is strong.

I tend to associate Republicans with strict morals and thus with better government, but many are indoctrinated to think the exact opposite. Ultimately our fate as a nation is in the hand of God....