The first hint of the mortgage meltdown came to me when I was teaching a supervisor in building homes. He was firing crews right and left. "No one can afford our homes. There will be a big sell-off at the end of the year." That was the end of 2006. Then a friend told me the subprime money funds had evaporated in early 2007. Soon the dominoes started to fall.
Now, almost two years later, world finance has come unglued, after several massive interventions. One person explained it well to us non-experts. The go-go banks started with $1 and borrowed $40 against it. They bought mortgage bundles with the $40 but found the bundles were worth $17 when the underlying liar-loans began to stink. Now they had lost their initial $1 and owed $40 for $17 worth of securities. Meltdown.
The Western governments are using their treasuries (our taxes) to bail out these improvident bankers. I do not have an MBA, a CPA, or a business degree, but I was shocked that all the major banks were giving mortgages to people without having their income verified. In Phoenix everyone was buying homes with liar loans and flipping them for a quick profit to other fools. Like all pyramid schemes, they ran out of fools all at once. A lot of homes were sold to illegal immigrants, using teaser rates, so the officers knew that the homes would be foreclosed in one year or two. Most Mexicans, especially illegal Mexicans, do not make enough money to afford a home. Loan officers who objected to this fraud were by-passed.
In my memory we have had the commercial property/ savings and loan meltdown, where the federal government arranged a massive bail-out, though nothing like the current one. Before that Carter froze bank accounts because of banks' greed or incompetence. We also had the bail-out on Mexican loans, where the government gave Mexico $40 billion to pay their loans, in effect giving American banks $40 billion.
The new bail-out will subsidize the entire world economy and soak up tax dollars for many years to come. Interest rates will be almost zero for some time to come. All securities have lost value. Right now people are buying US obligations that pay virtually no interest, just to be safe.
These developments will have profound effects on synodical funds and people's retirement. A number of people have told me how everyone is very cautious about spending anything.
Just before the meltdown became obvious to the average person, Wall Street gave itself $65 billion in bonus money, then began reporting huge losses (which were not even close to the truth). The excuse was - "We have to reward performers to keep them working for us." I imagine the bonus babies were the financial geniuses who ran Bear Stearns (now gone), Lehman Brothers (dead after 150 years), AIG (80% socialized by the feds), and Merrill Lynch (sold to prevent bankruptcy). Some think CitiBank will fold or combine. Washington Mutual is on the ropes already.
One professor jumped me in the teacher's lounge. He said, "I can never retire now. Have you lost anything in the market?" That was a year ago.
I said, "Not a dime. I had nothing in the market."
I plan on working as long as I can, deo volunte. Online teaching and publishing are ideal for that plan. I wonder if anyone will trust the financial institutions again. I had a bit of trouble cashing an out of state check. The credit union teller said, "Have you cashed checks from this source before?"
I said, "Don't worry. It's not an AIG check."
In 1988 I used my two favorite bank jokes, which are only good during a crisis.
One - "I stopped at my bank today and they couldn't cash a $20 bill."
Two - "I got a new account at Chase yesterday, but I had to give them a toaster."
The cashier at Sam's Club laughed out loud. Now the jokes are funny again, but people will suffer because of it, far more than ever before.
My father had an expression he used whenever the weather was bitterly cold in Moline: "It's colder than a banker's heart today."
---
PS - How much will he make this year?
Question/Comment: Last year Lehman Brothers' CEO Richard Fuld, Jr. made $71 million. Today his company collapsed. How much will he make this year?
Paul Solman: I don't know about this year. You've covered last. In 2006, according to Forbes.com, he was the 5th highest-paid CEO in America: "Total Compensation $122.67 mil; 5-Year Compensation Total $375.81 mil."
