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Written by CB Money
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Financial crisis started in the United States with mania for home ownership where interest rates are historically low, invested tempted with an alternative investment after the dot-com crash and belief that housing is a safe and good investment.
The mentality of "Housing is a safe and good investment" became rooted in the US and this prompted the idea that housing prices will never fall. The media all that while also fueled the speculation.
With the mania for home ownership driving more people that already have a house to invest to buy another house. Some even refinance their existing house to get another house due its inflated prices. This slowly create a housing bubble.
And for those who can't afford a house, the financial institutions impose no down payment if they can't afford the down payment. But, in actual fact, some really cannot make repayments. All these are ongoing with the speculation that the housing prices will never fall. Everyone want to be in the show.
For those you cannot make the down payment will start to look for mortgage broker to get a sub-prime loan. The convenient of sub-prime loan gradually make the home ownership bubble grow.
For the sub-prime loan, most of it turned into bad loans and the banks consolidate the bad
loans and rename them as Collateralized Debt Obligation. The banker slice and dice those bad sub-prime loan into more CDO's. This loan rating are then manipulated by the bankers using the so-called financial wizardly and overcapitalization. Banks who are in trouble due to bad loan started to sell these new safe "investments" to other banks, cities and town, insurance companies, pension funds and everyone else.
Meanwhile,
The mania over home ownership resulted in the overbuilding of homes. And when this happened, supply exceed demand and this push down the housing prices. When housing prices fall, mortgages worth more than homes themselves. Gradually homeowners can't pay mortgage and their housing loan became default. This vicious circle turned until the money flow to the bank started to dry.
When banks do not get paid, they fail. When bank fails it pull down more entities. Lehman Brothers goes bankrupt and Washington Mutual seized and assets sold to JP Morgan. Those banks that still survived had the government to rescue them. Government has to rescue Fannie Mae, Freddie Mac and AIG. Merill Lynch bought by Bank of America and Wachovia bought by Wells Fargo.
In addition, when banks do not get paid, banks will stop lending money. CDO investors do not get paid. And these started the Crisis of confidence. Stock prices from US to South East Asia
free fall.
The last resort is the government bailout.
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