Kyunki Lehman bhi kabhi Goldman tha
Jeez what that booming sound? I heard they shut of that stupid LHC so this couldn’t have been that so-called Bing Bang. Turns out that our Vaigyanik Daanav was meeker than our very own Mamata Bannerjee.Β If it wasn’t the shelved experiment then what could have caused the commotion? Closer inspection reveals that it was just another bank that came crashing. I’ve crashed parties and weddings before but that was when we were pretending to study at night and overcome by hunger. Crashing banks seems to be a rave and is catching on like wild fire.Β Oil rates are at an all time high, the job market is horrible in the states, real estate paints a sorry figure and interest rates are at a lowly three percent. I barely managed to pass Managerial Economics during my undergrad and the only thing I remember from back then is the phrase ‘break even point’ that I now-a-days use with utmost liberty. Seeking some answers, I turned to our resident economist Baba Bangali for some answers.
Baba, So what did the Lehman brothers do wrong? Did they invest in the ICL?
Bhakta, you bring an interesting analogy but then the ex-aussie cricketer and current Hyderabad coach isn’t related to the banker brothers. They have nothing to do with cricket though even investing in the ICL would not have brought their downfall. It all has to do with the housing market while the falling dollar and oil prices acted as catalysts in this down-the-drain excercise. You’ve been working for a year now, haven’t you heard people talking about mortgages? Everyone in the media is talking about subprime lending, does that ring a bell my child?
Subprime? Is it another variety or prime rib they offer at Subway?
You are worse than I thought you are, it’s subrprime and not prime rib, what is a veggie like you doing thinking about meat? I guess I need to break it down to you in the language you understand. Do you remember the scene in ‘Annamalai‘ where the bank
officer
grants Rajini
his loan without
any collateralthe bank officer grants Rajini his loan without any collateral. The bruised and battered Rajini has nothing to show as security as his land is demolished and seized. Well the same thing happen in reality as well when someone with a pathetic credit history goes to a bank seeking a loan to finance his/her dream house. The banks not only loan him/her the down payment but also the whole amount for the house. Then and there no questions asked no matter how bad your credit history is. The only catch being that he will have to pay an exorbitant interest rate and in the process the bank will make a killing at the end of the mortgage period. The guy is just happy to get his house and keep making payments for the next 20 years.
Now enter two people called phani-ki-ma(Fanie Mae) and free-dimag(Fredie Mac). They buyout these loans from the banks and claiming around 3/4ths of the profit that the bank would have made at the end of the mortgage period. The best example for this would be how the villain buys out the hero’s brother-in-law after the marriage and gets to molest the heroes sister. The groom is happy with a large wad of money while the villain chases his wife across the room. Banks lose out on a huge share of the profit but then they get their money back and can now close out another deal, so even the meager profit satiates them.
What do phani-ki-ma and free-dimag get out of it? Isn’t their money frozen?
I know by now you must think they are idiots like the guys who tried to deny Rajini the 3000Crthe guys who tried to deny Rajini the 3000Cr in ‘Arunachalam‘ by buying out everything right from his film to jockeys and even the election. Well they were definitely stupid but then not that bad. The sold these mortgages as securities in the stock exchange to investors who then owned a stake in the mortgage. They ate a major portion of the profit and then gave the rest back to the investors as dividends. Much like how Bheema split food between him and his brothers in the Mahabharata and not our tamizh gay film. Even your rusted brain can deduce that higher the housing interest rate, higher the mortgage profit. Higher the profit implies higher a share for our idiots and a richer dividends to investors. With ‘Aakashvaani’ type predictions that the housing market is booming and will continue to do so, this mess kept getting deeper. The prices of these securities began rocketing and there was heavy betting as everybody wanted a piece of it. There were other banks and players who were also into the subprime market and all of them came tumbling down one after the other.
Well this is the good part, so where did shit happen? Seems hunky dory so far..
Bhakta, Do you realize that people were betting on mortgages that were based on the profits they would make on after an awful lot of time on interest paid by a guy with no credit history! It’s like building a skyscrapper on a basement made of Chinese bamboobuilding a skyscrapper on a basement made of Chinese bamboo. Now jackie Chan will tell you that it is very strong but then we all know the truth don’t we? Now with the huge financial dister we call as war, coupled with the debt if the US, falling dollar prices, rising oil prices and eventual loss of jobs, this was bound to happen. People no longer had funds to pay these interests and that meant that the profits would not be coming. This inturn meant that the securities weren’t that valuable as they were assumed to be and that meant the investors would lose big time. So while these zero-credit history people declared bankruptcy and were evicted from their houses, no one came forward to buy these houses for no one had the funds! Mortgage-owners had assets that no one wanted to buy and hence their prices fell like wickets on the third day of the Kanpur test. So Fanie Mae and Freddie Mac owned mortgages that were not even worth the cost of paper they were printed on, while guys like Lehman Brothers, Washington Mutual and others who dealt in subprime lending went bust. So now somebody gauging this confusion spread the rumor that ICICI had subprime holdings in the US and was all set to close out as well. This spread like wildfire and that explains your tweet as people raided the ATMs on Tuesday night. The RBI had to step in and issue a statement for normalcy to return.
Well I buy all of it but then why did insurance companies flop, did they insure ‘Love Story 2050’?
You have a bad habit of fast forwarding but then as Bhakta Sharukh says ‘Picture abhi baaki hain mere dost‘. Banks while lending out mortgages insured them as a fallback. Insurance companies kept selling products against these mortgages going by the assumption that the market is booming and defaulters can sell their houses to any one for a much higher price. House owners had to pay interest to banks as well as insurance companies but then they always knew that they could sell it to a higher buyer if shit happened. Just like in every movie the villain dreams to get away with all his wrong doings until the climax where he is outwitted and either dies or is handed over to the cops. Insurance companies thought that the housing bubble will never burst but when it burst they didn’t have the funds to support the claims.
You are not the only smart one on the planet and even I can google myself through the internet. I’ve d found this video which is slightly old but makes perfect sense. It’s an hour long but then worth watching. Do stream the full video while you have time, it genuinely worth the time spent. I need to get back to meditating in the Himalayas now so scoot….
[googlevideo]http://video.google.com/videoplay?docid=4343898391323537541[/googlevideo]
PS: The title of this post was the outcome of a comment I left on NarenJi’s post.
PPS: This post has been in the editing phase for a week now, andΒ I apologize if it fails to make sense. Been busy these days you see.. Head here for something more serious
(Image courtesy: BusinessWeek)
Excellent post. Love the Rajni movie analogies. Must admit, I’ve spent the last few weeks not caring about the news, lost in my own thoughts, and this was a quick way to catch up. It’s ok to feel like a journalist now π
Also, I think the guy in the video is mostly right, but his conspiracy theories re: Iraq are a bit out there. I’ve been saying for some time that an export focused economy can not sustain itself in the long run as we will someday lose our price advantage to someone else or have geopolitical factors that may alter that demand significantly. I too believe that internal consumption must increase and we must invest our exports into growing local demand and a build a sustainable local economy starting with the slumbering giant that is our rural population. Clearly, with the right investment, a billion Indians can power an economy a lot better and a lot more sustainably than 300 million Americans can.
—
me: I’m glad you liked it. Yes the guy slightly comes of as a hardliner but a majority of the points he makes are valid. But then you are aiming at contributing to the rural economy in your own way, I’m proud of you brotha
yup…the imporant characters of this movie would be …sequence rather…
The Bank > The Investment Bank > Investors> Insurance Companies
i like the way you tried comparing the financial situation to that rajini movie and ofcourse mahabharath.Despite the fact that i dont know much of either rajini or mahabharath.
your comparison made sense..
Well written !! i like the title of ur post…
—
me: nandri hai ji. I’ll try explaining the analogies sometime…
Very interesting and nicely written. Loved the analogies with Rajinikanth movies! BTW, the oil prices are falling due to lower demand. You see by the time you started writing it in drafts it fell π
—
me: Kya kare ji. I didn’t have the patience to give it a reading and correct any inaccuracies.
Hehe, I hope your post doesn’t find its way to everyone’s inbox as email forward titled “Sub-prime Crisis for Dummies”.
—
me: I’ll be more than honored if that happens! Can you plz do my boni?
very well explained what with the analogies and all!
funny references…
i like
—
me: thank you sirjee, howz wrk I say!
work? $^&*##*(^%$^!!!..
you know u r popular when people start requesting posts off you.
can i also get a dummies guided to us elections pliss?
the thanks in the anticipations,
the humble readers the π
Oh! I am in tears now….
wogay ma, comin soon…
Very well explained. Finally I understood who the middlemen are. Sad thing is everything is connected, so no respite for anyone who’s involved, or for that matter, not involved!
—
me: valid point you make. It affects everybody either directly or indirectly in a different magnitude.
Excellent analysis, and I should know, considering I’m in finance and an eco nerd! π
You should make this a series. Financial Analysis for Science group pasangos.
—
me: see! told ya! But i suck at finance stuff, so you gotta ghost write those posts..
Banana peeling and feeding in mouth explanation of india… very good, I say!
—
me: lol! thnx a lot. I’m glad u liked it…
Kabali appreciates Baba bangali! lol at the comparison of chinese bamboo π
—
me: Baba bangali acknowledges the honor!
This is the third post I’m reading this week about the crisis. All of them were by Science group pasangos. With varying levels of calling them for “dummies”. And Tam cinema analogies.
—
me: well I don’t call it a dummies manual, but then i’ve tried to break it down to bare essentials. I’m not smart enough to understand hi-fi jargon you see. Please post the other two links as well…
Related to this, I also loved the following cartoon so thought I’d pass it on you. When emailing this, use as companion pair.
DK, those pull quotes you have in your post template are great but they are pooping all over your RSS feed. Just thought you might want to know and muddle through Feedburner a bit.
aspiji, thank you for padhaaring here. I subscribed to my feed and they looked ok in Google reader also when I opened the feed in IE. What aggregator you using? Lemme know and I’ll check!
Actually I just tested it using Google Reader in IE and it looks fine. But Google Reader in Chrome is a different story. They’ll probably fix it – its nothing at your end.
—
me: ah thnx for the update sir! I’m relieved now…
Is there a Baba Bangali Ashram in Tallahassee? I need to meet with this wise man!
With institutions like Lehman Bros., Merrill Lynch, AIG, Wachovia going under, and Congress rejecting the 700 billion dollar bail-out, I’m sure many more are doomed, what with the falling credit ratings. Insurance firms are on their guard! Treasury securities and gold seem to be the only saving options worth having! Lowers the risk on losing out to such disasters!
Also, Goldman Sachs and Morgan Stanley have lost ground in the investment banking sector and recently received federal approval to function as traditional banking institutions. That’s how short of cash reserves these banks are! Promising credits and loans to everyone and then losing their own credibility in turn! Finally, it’s the tax-payer’s money that’s going to clear the debts of these corporate devils! How sad indeed!
Hi,
I am Richa from SiliconIndia. I am also an avid blogger for a while now and participating actively in Indian blogosphere. I read your blog posting and found them very interesting and informative. We would love to see a copy of your blogs posted here, whenever you are posting it on blogger.com. Here are some of the benefits of posting your blogs here:
We have a strong community of 1 Million professionals
Best blogs of 2008 to be published in a book “SiliconIndia bLoG PrinT”
Best blog to be printed in SliconIndia & SmartTechie magazines each month
Chance to be featured on homepage everyday
There are 10,000 active bloggers who participate in active blogging
We appreciate your community initiative here and in helping build a more powerful India! Also, if you have any ideas or want to volunteer to help for SiliconIndia, we would be more than excited to get your help. Pls mail me back at richa@siliconindia.com with your suggestions and feedback.
Richa
Blog Editor β SiliconIndia
http://blogs.siliconindia.com/
Lovely post max…really well explained. And the video is also really good, made things more clear!
—
me: thnak u ji…
Babaji.. Pranaam.. Nicely explained! One day I would like to see a debate between you and Maami’s Owl – it might be more interesting than the presidential and vice-presidential debates these days.
—
me: vanakkam! the owl? well we just need a nice topic then! thnx btw.
ROTFL…LOL. I think this should be a post for dummies about the current market situation π
Lekhni and you make such a contrast!
—
me: ha ha thnx! Lekhni and me have no comparison ya…