The Perfect Storm Again?

The former CEO of the Quebec Pension Plan Fund manager, Caisse de Depot, Henri-Paul Rousseau claims he couldn't possibly have known that the stock market was going to plunge.  It was impossible to foresee the collapse of all those financial institutions.  It was a perfect storm.  This time, it didn't claim a few Newfoundland fisherman.  It managed to sink the entire planet.

Right.  No one could see it coming, especially the experts.  They were too busy stuffing money in their pockets.  

Here's my take on the situation.

Some too-bright Wall St. guys looking for ways to make more money happened upon an idea.  Why don't we take a bunch of mortgages, package them all together, then split them up into little pieces, shares if you like, and sell them to investors.  Mortgages are really secure, we can sell them triple-A bonded.  So they went to the banks, who were happy to lend them millions to buy up these mortgages and re-sell them.  

So -

The mortgage brokers made money selling the mortgages to the Wall St. guys.

The Wall St. guys made more money selling the Triple-A bonded paper to the investors

The investor made money on these Triple-A bonded pieces of paper

And the banks made money on all of this

Until - 

The mortgage brokers ran out of legitimate home buyers

This was not good.  Nobody would make more money.

So they found a few non-legitimate home buyers.  And got people to take out new mortgages on existing homes.  And so on.  It was easy money.  The value of houses will always go up.  Guaranteed. 

The brokers were happy again.  The Wall St. guys too.  The investors.  The bankers.  No one noticed that the Triple-A bonded paper wasn't all that Triple-A anymore.  No one wanted to look under the covers.  No one wanted to stop the flow of money.  No one wanted to put an end to the party.

Then the bubble burst.  There were so many mortgage defaults, so many foreclosures that the price of homes started to fall.  Which caused more defaults, more foreclosures.  Suddenly, Triple-A became toxic.

And those that hadn't surfed out (Hey, Henri-Paul) of the way of the perfect storm got clobbered.

Of course, the banks can't be allowed to go under.  No one knows what would happen then. 

So the people who made billions keep their positions no matter what.  Great system.  Keep up the good work.

If you believe me, watch this video by Jonathan Jarvis.  And it has some cool graphics.