THE EAT ME PILL -PART TWO
THE ALICE IN WONDERLAND WORLD THAT IS THE FINANCIAL CRISIS
So Mr Hanky Banky has told Mr President , that the banks will do all they can to lend to small businesses to avoid the recession becoming a depression.
Then he speaks to Mr Ben Bernanke, head of the US Federal Reserve "The Fed", and he promises Mr Bernanke that his bank will only lend to top quality firms with little risk that the borrower will default. So this rules out many, if not most smaller firms.
Finally Mr Hanky Banky makes his most dangerous visit of the day - he attends the shareholders' meeting of his own bank, The Bank of Dispepsia. How could this meeting be dangerous when it takes place in the opulent surroundings of the Waldorf Astoria Hotel in New York? It is the answer to THIS question that explains the start of the greatest financial crisis since 1929.
The shareholders are angry; furious actually. And why wouldn't they be? They bought shares in his bank at a price of $36.50 just two years ago, and now the share price of the very symbol of American Capitalism, The Bank of Dispepsia, has slumped to 36 cents. Before I explain how this happened I have to assure you , that everything in the explanation that follows, ACTUALLY happened on many occasions. Gradually, you will begin to understand the mess that we are in right now.
SIX MONTHS PREVIOUSLY ....
It starts in the city of Detroit - Motor City. In the horrendous slums of Downtown, men in $1,000 suits are knocking on doors. Their Target - "NINJAS". People with NO Income, NO Job, and NO Assets.
"Mr Winston, Sir, would you like to move to a brand new house in the suburbs?"
"Man, I'd like to spank J Lo's beeehind but that just aint gonna happen"
"No Sir, I am going to give you a brand new house with a 130% mortgage, and you just have to promise me that you will use the extra 30% to pay the mortgage loan payments. Come with me and I'll show you your new house...
One hour later Mr Winston returns from his new home having passed a Maserati showroom on the way back.
He calls to his wife,
"Mama, we're gonna move to a brand new house tomorrow, and you should just SEE my noo auto..."
"Leroy, I TOLD you come off that weed..."
But Leroy hasn't gone back on the weed, and his family and many others, move into lovely new homes in the suburbs, until....
With no incomes and no jobs, they cannot pay the mortgage. In the middle of the night, one by one, they leave their homes, put the keys through the front doors, and disappear into the night.
BACK EAST
While all these poor people, are leaving their homes, on the 57th Floor of The Head office of the Bank of Dispepsia, on Wall Street NY NY ,The Chairman, George Madison III, brings his Board Meeting to order. Around the huge Rosewood Table, 27 Vice Presidents of the Bank are hearing a very optimistic Annual report, and one particular area of their accounts is showing extraordinary growth: everywhere the word is CDO's (Collateral Debt Obligations). Now, sad to say, not one person in that room really understands what a CDO is, but one thing they do most certainly understand is this: their $1.5 million bonus which now resides comfortably in their UBS managed Portfolio, has resulted from the massive profits being generated by these CDOs. This certainly must be good news!
Actually its the worst news the capitalist system has ever heard, and some years later it threatens to bring down each and every major bank in the world.
So what is a CDO, and how was it that these bankers had received such large half year bonuses on the back of them? CDO's are packages of hundreds of loans, just like those given to Mr Winston, bundled up and sold on to other financial institutions as AAA Debt.
AAA Debt is the description given to loans that are so solid that there is simply no realistic chance that the borrower will miss a single payment, let alone default completely. So if Barclays lends money to Bank of America, over night, that might be called a AAA Debt. If the UK Government borrows money from UK Pension funds - those are AAA debts. But Banks all over the US were bundling up the most risky debts in the history of lending, hiding their true nature and selling them on from one bank to another.
The most immediate result, was the second major failure of a US bank - the fall of Lehmann Brothers in 2008 and the difference between THIS collapse,and the earlier one (Barings), was that it was about to bring the whole world down with it. -Forever after, these loans became known as the NINJA loans and they continued to be disguised as CDOs.
SIX MONTHS LATER
So now you can understand why Mr Hanky Banky, is not looking forward to his Annual Shareholder's meeting in Mid Manhatten.
Next time I'll explain the link between Detroit City in 2008, and the European Debt crisis which is still buffeting our shores like a Hurricane.
POLIT BLOX
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