- US Subprime loan crisis-fully explained

A friend from abroad sent me this email with file attachment. It is in an animated video mode. Since I could not download it here, I had it written in word file. It is a ‘satire’ which plays out the entire subprime transactions from the average Joe to pension fund investors. Everyone is excited over this innovative financial investing opportunity. The conversations between the various parties are reassuringly normal until the last few conversations which seem to sum up the feelings of the affected parties. Are you one of them? Read it yourself. It’s funny.

At the Ace Mortgage Broker’s Office (with signage ‘We Make Your Dreams Come True’

Joe (the Subprime borrower): “Gee, I’d like to buy a house but I haven’t saved any money for a down-payment and I don’t think I can afford the monthly payments. Can you help me?”

Ace Mortgage Broker: “Sure, since the value of your house will always go up, we don’t need down-payments anymore! And we can give you a really low interest rate for a few years. We’ll raise it later, okay?”

Joe: “Sure no problem. Umm, there’s one other thing……my employer is a real prick and might not verify my employment, would that be a problem?”

Ace Mortgage Broker: “Nope. We can get you a special ‘Liar’s Loan’ and you can verify your own employment and income!”

Joe: “You guys are awesome! You are really willing to work with guys like me”.

Ace Mortgage Broker: “Well, we don’t actually lend you the money – a bank will do that – so we don’t really care if you repay the loan. We still get our commission”.

Joe: “Wow! Let’s get started!”

A Few Weeks Later, at the First Bank of Bankland, Inc (with signage ‘Open Your Christmas Club Account Today’)

Bank CEO: “I’d would better get rid of these crappy mortgage loans. They are starting to stink up my office. Thankfully the real smart guys in New York will buy them and perform their financial magic! I’ll call them right away!’

Let’s See What the Smart Guys Are Doing at the RSG Investment Bank of Wall Street (with signage ‘Trust the ‘Really Smart Guys’ for All Your Investment Needs’)

RSG CEO (who obtained his MBA from Harvard): “Phew!!! We’d better get rid of these shitty mortgages before they start attracting flies”.

RSG Manager (who obtained his MBA from the Harvest Anyone Can University): “But who would buy this crap Boss?”

RSG CEO: “I’ve got it! First we’ll create a new security and use these crappy mortgages as collateral. We will call it CDO (or maybe CMO). We can sell that CDO to investors and promise to pay them back as the mortgages are paid off.”

RSG Manager: “But crap is crap, isn’t it? I don’t get it.

RSG CEO: “Sure, individually these are pretty crappy loans, but if we pool them together only some of them will go bad – certainly not all of them. And since housing prices always go up, we really have very little to worry about”.

RSG Manager: “I still don’t get it”.

RSG CEO: “The new CDO will work like this. It will be made up of three pieces (or ‘tranches’) and we’ll call them ‘The Good’, ‘The Not-So-Good’ and ‘The Ugly’. If some of the mortgages fail, and surely some might, we will promise to pay investors holding the ‘Good’ tranche first. We’ll pay the ‘Not-So-Good’ investors second and the ‘Ugly’ investors last”.

RSG Manager: “I’m starting to get it. And because the ‘Good’ investors have the least risk, we’ll pay them a lower interest rate than the other guys right? The ‘Not-So-Goods’ will get a better interest rate and the ‘Ugly’ guys will get a nice fat interest rate”.

RSG CEO: “Exactly. But wait, it gets better. We will buy bond insurance for the ‘Good’ piece. If we do that, the Rating agencies will give it a really great rating, in the AAA to A range. They will likely give the ‘Not-So-Good’ piece a BBB to B rating, still pretty good. We won’t even bother asking them to rate the ‘Ugly’ piece.

RSG Manager: “So you have managed to create AAA and BBB securities out of a pile of stinky, risky mortgage loans. Boss, you are a genius”.

RSG CEO: “Yes. I know”.

RSG Manager: “Okay, now who are we going to sell the three pieces to?”

RSG CEO: “The assholes at the SEC won’t let us sell this stuff to widows and orphans, so we’ll sell it to our sophisticated institutional clients. Life insurance companies, banks, small towns in Norway, school Boards in Kansas – to anyone who is looking for high quality safe investment”.

RSG Manager: “But surely nobody will buy the ‘Ugly’ piece, would they?”

RSG CEO: “Of course not – nobody is that stupid. We will keep that piece and pay ourselves a handsome interest rate”.

RSG Manager: “This is a all great but since we are only using the smelly mortgages as collateral on an entirely new security, we haven’t really gotten rid of them. Don’t we have to show them on our balance sheet?”

RSG CEO: “No. Of course not! The guys who write the accounting rules allow us to set up a shell company in the Cayman Islands to take ownership of the mortgages. The crap goes on their balance sheet not ours. The fancy name for it is ‘Special Purpose Vehicle’ or SPV.”

RSG Manager: “That’s great, but why would they let us do that, aren’t we just moving our own crap around?”

RSG CEO: “Sure, but we have convinced them that it is vitally important to the health of the U.S. financial system that investors not know about these complex transactions and what is behind them.” …..”Let’s drop in to see the Accountants…..”

At the Office of the Czar of Accounting (with signage ‘No Nit Too Small to Pick’)

Concerned Investor: “Sir, as an investor and a concerned citizen, I demand that you force your financial institutions to show greater transparency and openness in their financial reporting!”

Czar of Accounting: “Blow me”. Gee, We Never Saw it Coming………………..

At the Norwegian Village Pension Fund Office

Norwegian Pension Fund Manager to RSG Investment Bank Manager: “Hey man, what the hell is up? We are not receiving our monthly payments!”

RSG Manager: “Yeah, I meant to call you but it’s been really crazy around here. It seems that the assholes who took out the mortgages backing your CDO aren’t able to pay them off”.

Norwegian Pension Fund Manager: “Wait a minute! We bought the AAA ‘Good’ piece of the CDO. You know? The safe one! We’re supposed to be getting paid first.”

RSG Manager: “Well, unfortunately the loans were quite a bit crappier than we originally thought and there is very little cash coming in. Frankly, I assure you that we are as disappointed as you are”.

Norwegian Pension Fund Manager: “But you told me that housing prices always go up and that your borrowers could always refinance their mortgages”.

RSG Manager: “Yeah, that was a bad assumption. We screwed up. Sorry”.

Norwegian Pension Fund Manager: “Bad assumption my frigid Norwegian ass! What about the AAA rating from the agencies?”

RSG Banker: “They screwed up too”.

Norwegian Pension Fund Manager: “But this security was insured! What about the insurers?”

RSG Manager: “Are you kidding? There’s no way they have enough money set aside to cover this mess. They screwed up.”

Norwegian Pension Fund Manager: “Well, that’s great asshole. What am I supposed to tell my villagers?”

RSG Manager: “Tell them you screwed up.”

Norwegian Pension Fund Manager: “Screw You!.”

RSG Manager: “Screw You.”

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