A simple morons understanding of the financial crisis
I am a self proclaimed moron when it comes to high finances. This financial stuff give me a headache but it seems important so I tried to figure it out and what prompted that was this email that has been going around It starts something like this
“I'm against the $85,000,000,000.00 bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000
bonafide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman
and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billon that equals $425,000.00.”
It kind of made me mad because it it is just wrong. Here is my take on all this:
The math is bad $85,000,000,000 / $200,000,000 = $425.00
The big problem here is liquidity. The banks and financial institutions are not lending money to each other because no one know the exact value of how much has been lost with these crappy mortgages. So these 1B - 30B SIVs (There are many forms of these things but I'm going to call them all SIVs for simplicity), that have had sub prime loans (Or just pieces of them) sneaked into them, have no concrete value and no one wants to lend money against them. They shouldn’t have been in there anyway and this is what leaks back to guys like Dod and Frank because they are in charge of watching over these types of things. Some shit loans ended up with AAA ratings because they were packaged with good loans and securities in the form of these SIVs. Compounding this is the fact that value of the SIVs, like most things on Wall Street, are kind of inflated so the $250,000 sub prime loan sitting in the SIV may be arbitrarily valued at $2,000,000 (These numbers are being pulled out of the air to show you that they are being counted as worth more then they actually are in the financial world) which companies are trying to use as collateral. So when this 250K loan defaults it could equal a loss of equity on a financial statement of 2M.
The banks have to find out how much the SIVs are worth and start lending money against them, no one seems to know how to do that. The 700,000,000,000 is just a band aid so money will start flowing again. When money flows the banks loosen lending. Not the requirements but the amount of cash they will lend out. The more cash that is out there the more we spend.
So someone, somewhere (this isn’t a single person) decided to hide all this Utopian crap money in with the building blocks that make up the foundation of the house that is our complex financial system. Well no one knows how shitty the foundation is (even though to the average schmuck like me it should be simple math) so we all stand around staring at the house wondering if or when it will fall. Well the governments idea is to prop up the house with 700,000,000,000 worth of lumber and let the bankers and financial wizards go in and figure out what is exactly wrong with the foundation. Hopefully it isn’t as screwed up as they think it is. The other issue is that in truly valuing the SIVs they are most likely going to worth much less then what banks were valuing them at for loan collateral so no matter what the news will not be good.
Unfortunately, as stated before I am a moron when it comes to high finance. The information I have found comes from conversation with smarter people than I and rudimentary research, like most big mouth A-Holes I can only point at the problem and have no clue on how to solve it. Also don't correct my grammar or spelling, as stated before I'm one of those guys who didn't go to college (I also almost flunked HS English). If I’m wrong about this please let me know. I just decided to float it as I’m sure there are millions like me who don’t really get it but want to know.
Vu
0 Comments:
Post a Comment
<< Home