30 May 2008

Optimus Prime, NOT!

I am good at math, computer, history, and words, but finance is something that I don't have a strong grasp of. I work in a financial firm as a network administrator and everyday I would come across phrases like investment bank, fixed income, and primer brokerage. To me they are just network resources to have permissions set for or data to copy from point A to point B. All the talk about the subprime crisis in the news got me interested, somewhat, in finances.

I listened to This American Life podcast #355, The Giant Pool of Money, then happened to read the article Mortgages and Madness in the June 2, 2008 issue of Newsweek. I now know a little more about the whole mess. So there was this giant pool of money that is the sum of all the money the world put away and it needed a place to invest to grow. One "new" area for it to go into was the mortgage market. In the beginning, it was standard practice for the lenders to verify the borrowers' incomes and so on, then the rules got relaxed so that more people would qualify for the loans, and someone got more commissions. It did not matter that some borrowers, or actually, many, could no way be able to re-pay the loans. New home owners lost their homes, Wall Street got too many houses to unload, houses' values drop, etc.

It is amazing that the whole thing actually happened. That after all these years there are no checks and balances to prevent the mess to even start. On one side you have the borrowers who should know better not to take on debts they cannot possibly pay back. Perhaps some of these people regularly rack up large credit card bills and pay the minimum amount because the money appeared to be free at the time of the purchases. On the other side you have Wall Street not caring who got the loan as long as there was a place for the available credit to be spent on. What a mess...

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