They Knew...

Yet another post about the ongoing global financial meltdown. Sorry, but this stuff is really fascinating to me. But then, I would find an asteroid striking the Earth really fascinating too.

It's the popular consensus that the main (or at least initial) cause of this financial mess was the collapse of the housing bubble. Blame for the bubble and subsequent bust is being placed everywhere: Clinton, Bush, liberals, conservatives, greedy mortgage lenders, under qualified home buyers, crazy types of loans, government regulators asleep at the wheel. All of which are factors, but this misses the Much Bigger Question, which is:

We've had housing boom/bust cycles before. Never before did they threaten to take down the entire global financial system like this. What's so different this time?

What's so different is what was done with the mortgages after they were sold. Wall Street investment companies (Bear Sterns, Lehman Brothers, etc) were buying up as many mortgages as they could from banks and mortgage companies so they could repackage the loans into exotic instruments sold all over the world as AAA rated "safe" investments. Banks and mortgage companies were more than happy to quickly unload these increasingly risky mortgages onto someone else. Every step along the way, big commissions were being made. Unfortunately each step took the underlying risk and magnified it, while at the same time making the increasing risk less and less visible.

The result? The entire global financial system became an extremely leveraged house of cards, with risky mortgages forming the foundation.

To shift metaphors a bit, when the first domino fell (foreclosures and the drop in housing prices), Wall Street investment companies were the next domino in line. And there are a whole lot more dominoes starting to fall that were set in place by greed and lack of regulatory oversight. Insurance companies, pensions, entire countries, and much much more. We haven't seen the end of this.

Speaking of the end of this, here's an excellent (but lengthy) personal account of what was going on in Wall Street over the past decade. Titled "The End", it is authored by Michael Lewis, who worked for a while in Wall Street, and earlier wrote the book "Liars Poker".

When Bear Sterns and Lehman collapsed, putting thousands of investment analysts out of work, the photos I saw of them leaving their workplace for the last time seemed rather odd. They were mostly all smiling or at least not looking worried. Strange, for having suddenly just lost a very high paying job. But it turns out that a lot of them saw this coming a long time ago, and some even placed (and collected!) multi-million-dollar bets that the risky financial instruments they had created from mortgages would eventually take down the very companies they worked for. Not to mention, most of the global economy.

They knew. They knew...

(another really fascinating global meltdown scenario)