Let me get this straight.
First you con people who can’t afford to buy a home that they can get one with no deposit down at a great rate, which will shoot up next year but never mind, don’t worry — your house will be worth so much more then, you’ll be able to borrow more money against it to pay off your mortgage.
Then you take these mortgages, bundle them with other mortgages in various packages called credit derivatives, and you sell these debts to another company and take your commission on the sale. Then that company resells the debt to another company, who sells it to another company, on and on, each company repackaging it, and each taking a commission, till nobody knows who holds what or what it is they hold anymore. Some time along the line, insurers watch all these commissions being made, and they say, hey, for a commission, we’ll insure your debt (in things called credit default swaps).
Now the funny thing is, these debts are being bought by debt. Yes, the people buying the debt have borrowed tons of money from other people to buy the debt with. In fact, for every dollar in real money they have, they’ve borrowed $30 with which they’ve bought more debt.
People figure all this debt in the world amounts to around $45 trillion plus. To give you an idea how much this is, people say the Iraq War will cost us around $1 trillion. So we’re talking 45 Iraq Wars of debt here.
This is not money printed by the government. This is money made up out of nothing but bad deals by Wall Street institutions, i.e. investment banks like Bear Stearns, Lehman Brothers, Morgan Stanley, and Goldman Sachs, and insurers like AIG, and mortgage holders like Freddie Mac and Fanny Mae, in some new kind of Ponzi scheme.
Why do they do it? Listen, every time they sell the debt, they make a commission, and all the busy sellers get million-dollar Christmas bonuses — the 2006 Wall Street bonus payout was $62 billion. They call this raising capital, but it’s actually just going into more debt.
Sooner or later, the poor saps who were suckered into the American dream of owning their own homes find they can’t keep up with the mortgage when the rate shoots up the second year. Plus, instead of going up, home prices start to drop, because what goes up often comes down. The Ponzi scheme starts to unravel. Pop goes the bubble.
So what happens?
The guys who’ve been borrowing money to buy debt find that nobody wants to buy the debt they peddle or own anymore, and the insurance they took out is not there anymore, so they’re holding worthless debt, and their stock price is tanking, so what do they do?