Dominoes

I once had a professor who would tell us that while free markets were fickle, things were [almost] never as bad as they seemed nor as good as they seemed to be. We are experiencing that rare case where things may actually be as bad as we think.

That said, lets look at the causes, and realize that socialism is NOT the answer. We should never privatize gains and socialize losses. How may of us made $70,000,000 last year? Lloyd C. Blankfein, the CEO of Goldman Sachs did.

How it all began
In the mid 1990s, when the US economy was booming, the idea of home ownership and small business start-ups became all the rage. At the same times banks were running out of qualified people to loan money to. Since banks make money by charging interest on loans (including mortgages) they began to ease credit restrictions.
By the late 1990s and early 2000s the increase in demand for homes drove up the price of homes.

From 2003-2005 the economy began to take a real turn for the worse, and unemployment began to rise. Since more homeowners had seen the value in their homes rise due to increase demand, many began to borrow against their homes; using the equity to help pay off other debt that has accrued.
Around the same times, there was still this massive push to get new homeowners into the market. Vultures began to come in and convince some that they were ready for home ownership, when in reality they were not. That caused subprime lending to soar. All bad loans were not subprime.

Some very smart investment bankers began to realize that these loans were going to be problems, however they had an out and it was CMOs. Banks began to sell loans to other banks. Then the loans would be packaged together with other loans and given an insurance wrap. These bundles now had mortgages as the underlying collateral. Once these loans began to default at a higher rate these CMOs became harder to sell.

In 2007 fear form the subprime market began to spread to the mortgage market in general. In turn banks, especially those who were exposed on the home lending side began to see their stock price drop; fewer home buyers meant that the price of homes was dropping fast as well.

In the fall and winter of 2007 were when things really hit the fan: executives at Citigroup and Merrill Lynch were forced from their post, as those firms began to realize steep losses in both asset base and profitability. This caused banks to sell off senior debt to raise money: Citigroup raised $7.5 billion from Abu Dhabi; National City picked up $7 billion; and Washington Mutual raised 5 billion.

Then came the New Year, and the nation's largest mortgage lender, Countrywide was on the verge of going belly up when Bank of America stepped in and bailed them out. The in March Bear Sterns ccrumble under its own weight of decreasing losses and write downs. Next in July the second largest home lender in CA IndyMac was taken over by federal regulators. The next two dominoes were Freddie and Fannie. Then came Lehamn Bros.

Now we have consolidation and Goldman will become a bank. What's next? Maybe things are as bad as they seem.