I was asked by 3 separate, unrelated people, "Did you watch that piece of 60-Minutes on how Wall Street collapsed?". When I came home, another person said that I had to seek out the same segment. All told me that it described in simple terms, how the entire house of cards came down, ultimately causing the global market to become paralyzed. I watched this piece and was shocked. It could have all been averted - if only there were simple rules in place.
Please take a moment to educate yourself with this very enlightening 60-Minutes segment entitled "Wall Street's Shadow Market". It's 12:03 minutes in length, and worth watching every bit of it. No - this is not an attack on any party. Just the facts on what brought down the global financial markets.
Get informed - and then vote for a change.
There are a lot of people out there that haven't a clue on what caused our financial system to completely melt down, requiring the government to bail out Wall Street to the tune of $700 billion - and raising the already historic national debt from $482 trillion to $1.182 trillion.
How was this possible you ask?
Over regulation maybe? Far from it. It was the lack of regulation and the effects of de-regulation. Said another way. No rules. NONE.
What do you get when you mix GREED and NO RULES?
Well, you have people making lots and lots of money, followed by people making promises they can't make, quickly followed by millions of people loosing their shirts, as well as millions of investors and pensioners.
But how you ask?
Banks lent out money for homes and properties that were already overpriced to start with, with interest-only loans, with no money down, and where the rate paid are very low to start and the principal actually increases instead of decreases over time. Risky loans? Well, once the bubble began to burst, these very loans became underwater risky loans. Not good. Not good at all.
Sound risky you say? Well - not really. Well - at least that's not what the investment banks said. They were lending out investor's money - and in turn, they said that their investments were insured - well - kind of. It sure did sound good.
So how were these risky debts insured?
Well, normally, a bank would secure these loans with an insurance policy. Should a particular loan go bad, the insurance policy would back the bad debt. Simple... Well not so fast. The problem was that backing loans with insured policies was too expensive - and more importantly, REGULATED by law. Insured policies have to have funds available and on hand to protect the very policy they have insured. In other words, there are rules and laws that must be obeyed.
"There's got to be an easier way," say the bankers !!!
So how do you insure these risky investments without following the rules, while at the same time, keeping your costs down? You change the name of the insurance policy to "Credit Default Swap" - which are nothing more than undisclosed insurance contracts - which ARE NOT REGULATED, nor is there capital reserves to back those so-called insured policies. Better yet, you tell your investors that they are secure. So - the investor believes that his investment will return high profits while still being a safe bet. PERFECT.
The bottom line is that these banks made a boatload of money while times were good, but the moment that the sub-prime loans started going belly up, and the banks started calling for their bad loans to be secured. The problem was that these so-called secured loans started failing at record numbers. Worse, there was not money to back these bad loans. The money didn't come from reserves, but rather, funds that would have normally be used for lending. When that money ran low, the banks themselves became insolvent overnight. Banks weren't lending to other banks, banks weren't making loans, and the overnight, the banking industry came to a grinding halt. In comes the $700 billion bailout and the panic spreads around the globe.
So - there you go. Is having no rules in banking a good thing?
