Financial Crisis?

Posted by polamex at 06:20 PM in lies . | 0 Comments

I spent awhile last night trying to figure out what's going on with the current financial crisis. Why did a few huge, well established banks fail? Why is this all of the sudden a big deal? Well here's how I understand it.

Apparently it all comes down to the credit crunch we've been hearing about for the last year. The diagram below explained a lot to me. The housing market was soaring sky-high. So high that they developed a higher risk & debt tolerance. Then they started offering riskier loans to us homeowners (e.g. Teaser Rates, ARM loans). The thinking was as long as the houses they were selling kept increasing in value over time, homeowners could refinance just a little bit later under more favorable/realistic terms. But what happened? The prices of homes stopped going up, and all this money lent out there couldn't be paid back. Unfortunately the banks that backed these loans were considered investment-grade stocks, along with the insurance companies that backed them. Then they fell like dominos. Fannie, Freddie, Lehman, Merrill Lynch, Bear Sterns and AIG. Then we all noticed. :)