Why did the credit crisis happen
The big institutions like Bear Stearns and Lehman brothers (and others) starting buying up all the risky loans made during the housing boom and packaged everything up into mortgage backed securities. These were sold on the open market with high return (and high risk). In order to hedge the risk and make the securities more palatable to the buyers an insurance policy was sold along with it called a credit-default swap. There was only one catch, it was called a “swap” and not an “insurance policy” for one for important reason…regulation. A swap is not regulated and insurance is. Insurance is not only regulated but requires ample and provable capital reserve in place to cover the default, no matter how great or how many. So this loop hole was exploited with a finacial instrument called swaps and unfortunately had inadequate reserves to cover defaults in large numbers.
Again, you still ask the question how did this happen? People who are smarter than the rest of us…crazy formulas and algorithms from the brightest minds in the world came up with formulas to predict a certain amount of defaults and balance risk and reward. The one catastrophic flaw was you can NEVER model human behavior. As a result here we all are, wallowing in a bowl of our own financial piss. Capitalism that attempted to be to capitalistic. I remember asking myself about 7 years ago when I jumped head first in real estate development and eventually into brokerage “how real estate prices continue to escalate at these prices when salaries are not keeping pace?, something is eventually gonna give.” While I was fortunate to be part of the biggest real estate run in history I am now witnessing the monumental blow-out.
I do have strong faith is this country, I’m an entrepreneur, I’m a proud citizen and as always I think we small business owners and innovators will be the phoenix from the ashes of a conglomerate corporate America that got too fat and too greedy. Rome fell in 800 plus years, I hope America can make it more than 250 years. Serious changes need to take place in this country in terms of credit, spending, debt and energy independence.
I’m not trying to come off as a know it all or a Monday morning Quarterback, hindsight has 20/20 vision or any other platitude you can think of. However, I am trying to insert my voice of short-term reason to a long-term problem.
