AP3MIKEY

off topic: cthree do you have a bigger pic of your avi

cthree

That one?

AP3MIKEY

Yes, thanks i love that shot.

GPMike

I have Wamu as my bank. Had them going all the way back when I was a Dime customer, who Key then bought, and then Wamu. Sad to see this bank go down. This will be my excuse to change to Commerce Bank.

philbert

i have checking accounts with wamu and like their non-pretentious branches and online features.

i still have trouble understanding how they, and most others, got themselves into a huge portion of this mess... negative amortization adjustable rate mortgages with low teaser rates, a full 83% of them underwritten without full disclosure of borrowers' incomes according to Fitch. who the f#@k was in charge of risk at these places?

whitemistress2k

OUCH!!!!!

On a side note, I'd only deposit low $90k into any FDIC backed institution anywhere... Not that I have anywhere close to that amount to play with, but I've read it's unwise to go to the full $100k limit.

Chris S

I'd rather not keep anywhere near six figures total in bank accounts unless I had a near-term defined need (such as closing on a house w/ a big down payment). Otherwise, I'll put my excess cash to work in the markets where I at least have a fighting chance to beat inflation.

sahtt

The solutions are getting capital. They are in the same boat, they need it and they can't get it.

cthree

The answer is surprisingly simple. Let me offer a stab at it.

Mortgages as Money

The banks decided, with the help of the rating agencies, that a mortgage makes for good collateral that you can borrow money against. The rating agencies, Moodies, Fitch, S&P got paid big money to put their seal of approval on assets they didn't understand; AAA. Those AAA assets were then taken by the banks and offered as collateral on loans to other banks. The money from those loans was in turn loaned out to more customers for mortgages, home equity loans etc, all AAA rated regardless of their quality, which were in turn used as collateral on even more loans.

2 mortgages got you 4 which got you 8. By the time 2005 rolled around the banks were flipping so many mortgages that they were offering them to just about anyone who would take them. The bond raters didn't care because they were suckling from this massive mortgage teat.

The banks loved it. They were showing hundreds of billions and in some cases trillions of dollars of AAA assets on their books (all the money they were owed for the mortgages they wrote) and it didn't matter that they were actually paying people to take these loans. They had so many of these things that they bundled them into loan bundles and sold them to the investment banks who couldn't wait to get in on the game, the Bear Stearns, the Lehman Bros, the Merrill Lynches. Everybody was fat and happy.

Really bad loans started going sour. The whole bushel started becoming toxic and banks said whoa! I can't take those mortgages as collateral anymore, some are toxic and we can't establish a value for them. Not only that, all of the banks were in the same boat. They were all bloated with these leveraged mortgage products. A Mexican stand-off ensued when no bank would loan any other bank money with the collateral they had. This was the "crunch" of July 2007.

The problem was the banks had leveraged these mortgages 20, 30 and 40 times over and those loans were coming due. The banks only loan eachother money for a very short time so these loans have to be recycled. In the past banks would pay one loan by taking out another. No they can't take out those loans anymore so they are having to pay them in hard currency. The banks start to liquidate their assets with the help of the Fed who loosens their standards for what they will take as collateral. Loan limits are raised at Fannie Mae and Freddie Mac and qualifying mortgages get sent off to them. On and on it goes with the banks lifting all the cushions to find cash to service their loans to other banks who are doing the same.

Banks look for investors to inject capital. Sovereign funds, wealthy arabs, whatever it takes. At the same time they have to start to write down their over inflated balance sheets. $500B in funny money gone. The bank with $100B in assets now has $90B, $80B, $60B and counting. Their assets shrink but their debts do not. The bond raters now step in and cut their bond ratings and their credit ratings making it even harder to raise capital.

Bear Stearns can't hang on anymore and gets eaten by a bigger fish. More write downs, more struggles, more small banks and loan originators fall. The insurers of the debt of these small banks, like AIG, are getting crushed with the payouts.

Lehman Bros is the next to fall. It can't raise enough capital and unlike Bear Stearns can't find anyone willing to swallow them up. They go bankrupt and at the same time Merrill Lynch gets swallowed by BofA.

AIG starts to scrounge money from its subsidiaries to cover these bond defaults. They are starting to run out of cash. More banks are perched on the ledge. S&P, Moodies and Fitch start chopping the credit ratings of them and their access to capital dries up. They declare bankruptcy which tips AIG into bankruptcy a few weeks later, unable to make good on their insurance obligations.

The remaining wall street firms, Goldman Sachs gets their credit rating cut and finally comes clean about their hazardous soup. Huge profits from trading have until now allowed them to avoid disclosing their dirty laundry. Morgan Stanly has the same problem.

Unable to obtain bond insurance at any price Key Bank, Wachovia, Citigroup and about 1000 other banks with toxic balance sheets all declare bankruptcy and seek protection. Like the house of cards they created the whole thing comes tumbling down in a Tsunami of funny money.

And that is the story of how a mortgage became money.

Fin

cthree

Epilogue

It's called a Ponzi scheme which, like gambling, is illegal for all but a privileged few.