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. 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. 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 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 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.the guys who tried to deny Rajini the 3000Cr in ‘
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 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.building a skyscrapper on a basement made of Chinese bamboo. Now jackie Chan will tell you that
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….
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, and I apologize if it fails to make sense. Been busy these days you see.. Head here for something more serious
(Image courtesy: BusinessWeek)