Birgit is a banker, so I asked her to explain the U.S. sub-prime mortgage scandal to me.
"Well, some US banks gave mortgages to poor people who couldn't really afford them. Think of a black man in a string vest sitting on the porch of his shack in Alabama, or someone in Flint, Michigan who lost their job at the steelworks. At the start of the mortgage they were paying maybe 2% amortization of capital and maybe 2% interest (a sub-prime rate), totalling 4% of their capital per year. Say $660 per month on a $200,000 home. When the fixed-rate period expired, they were charged maybe 6% interest, totalling 8%, thus doubling their due payments. So they couldn't afford that, maybe not even the 6% needed to just pay the interest without any amortisation.
"This left the original bank sitting on a potentially bad debt. Foreclosing the loan
would mean they owned the house, but would only be able to sell it in a depressed area at a much lower price. And of course the newly homeless poor would still be billed for the difference" :-(
"So the original banks preferred to sell off packages of bad debt at a discounted rate to
investment banks who sold some of them on to other (greedier) banks who didn't realise
how many of the debts in the package were bad (like nearly ALL of them!). "
The investment banks and the greedy banks (like Northern Rock in the UK) were caught with their pants down, and investment bankers worldwide ended up exposing their naked backsides, so to say but at least some of those bankers were honest enough to name their bank after their predicament." she said wryly.
"What?" I said "There's no bank called 'Naked Backsides'!"
"Nooooooooooo", she grinned, "but there is one called . . .
"This left the original bank sitting on a potentially bad debt. Foreclosing the loan
would mean they owned the house, but would only be able to sell it in a depressed area at a much lower price. And of course the newly homeless poor would still be billed for the difference" :-(
"So the original banks preferred to sell off packages of bad debt at a discounted rate to
investment banks who sold some of them on to other (greedier) banks who didn't realise
how many of the debts in the package were bad (like nearly ALL of them!). "
The investment banks and the greedy banks (like Northern Rock in the UK) were caught with their pants down, and investment bankers worldwide ended up exposing their naked backsides, so to say but at least some of those bankers were honest enough to name their bank after their predicament." she said wryly.
"What?" I said "There's no bank called 'Naked Backsides'!"
"Nooooooooooo", she grinned, "but there is one called . . .
"Bare Sterns"
GROOOOOOOOOOAAAAANNNNNNNNN!!!!
Happy Blogging!!!!!!!
Kay
I'm groanin'!
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