Sunday, September 28, 2008
It's All My Fault!
This financial bust thing? Maybe its not all my fault but I played a role in it.
Back when I was a grown up, I worked for prestigious financial news company. The first project I was on involved creating a database that allowed large commercial investment banks to track and package mortgage backed securities. The package was sold to Bear Stearns and Lehman Bros. when I was there.
Did you catch that phrase, “mortgage backed securities” Good, I knew you would. The short version of how they work is that an investment bank would bundle a group of mortgages together, divide the pool into strips (for example: year 1 and so on) and then sell the strips to institutional investors (like CALPERS). Strips for more recent years were considered lower risk while ones out at the 25+ year mark were thought to be higher risk (people pay off the mortgage early or sell the house and move). The database I helped develop allowed the investment banks to track and bundle all sorts of mortgages (residential and commercial).
The government placed regulations on banking institutions during the Great Depression because of the numerous bank failures. Congress passed the Glass-Steagall Act that created the FDIC (the people that insure your bank deposits up to 100K) and created strict divisions on what different types of banks can do. The big change happened long after I left said company. In 1999, the bank restrictions were largely removed and one of the areas dramatically affected was that of the mortgage backed security industry. Commercial banks could now underwrite and trade debt obligation securities (like mortgages). That meant a whole lot more players in the mortgage backed securities pool.
Money flowed into the housing industry. Because mortgage brokers and smaller banks were no longer on the hook for 30 years, people who never could get a mortgage before were signing on the dotted line for no documentation, interest only mortgages. A real estate agent friend of mine had someone buy a $500K listing with $40K income! What bank thought the buyer had a hope in hell of paying it back? What did the bank care? The mortgage was going to get bundled with others and sold anyway. Commercial banks clamored for more mortgages and local banks provided.
Kaboom! It couldn’t last. With the rising costs of food and fuel combined with ARM’s coming due, people couldn’t pay. It didn't help that there are other debt oriented securities...but peoples lives don't fall apart the same way when they lose a car as opposed to their hosue.
Deregulation caused this, people! And my little database helped it along…..Next post: Why 700 billion really isn’t that much and how the US taxpayer may end up ahead.
Back when I was a grown up, I worked for prestigious financial news company. The first project I was on involved creating a database that allowed large commercial investment banks to track and package mortgage backed securities. The package was sold to Bear Stearns and Lehman Bros. when I was there.
Did you catch that phrase, “mortgage backed securities” Good, I knew you would. The short version of how they work is that an investment bank would bundle a group of mortgages together, divide the pool into strips (for example: year 1 and so on) and then sell the strips to institutional investors (like CALPERS). Strips for more recent years were considered lower risk while ones out at the 25+ year mark were thought to be higher risk (people pay off the mortgage early or sell the house and move). The database I helped develop allowed the investment banks to track and bundle all sorts of mortgages (residential and commercial).
The government placed regulations on banking institutions during the Great Depression because of the numerous bank failures. Congress passed the Glass-Steagall Act that created the FDIC (the people that insure your bank deposits up to 100K) and created strict divisions on what different types of banks can do. The big change happened long after I left said company. In 1999, the bank restrictions were largely removed and one of the areas dramatically affected was that of the mortgage backed security industry. Commercial banks could now underwrite and trade debt obligation securities (like mortgages). That meant a whole lot more players in the mortgage backed securities pool.
Money flowed into the housing industry. Because mortgage brokers and smaller banks were no longer on the hook for 30 years, people who never could get a mortgage before were signing on the dotted line for no documentation, interest only mortgages. A real estate agent friend of mine had someone buy a $500K listing with $40K income! What bank thought the buyer had a hope in hell of paying it back? What did the bank care? The mortgage was going to get bundled with others and sold anyway. Commercial banks clamored for more mortgages and local banks provided.
Kaboom! It couldn’t last. With the rising costs of food and fuel combined with ARM’s coming due, people couldn’t pay. It didn't help that there are other debt oriented securities...but peoples lives don't fall apart the same way when they lose a car as opposed to their hosue.
Deregulation caused this, people! And my little database helped it along…..Next post: Why 700 billion really isn’t that much and how the US taxpayer may end up ahead.
