--- In FairfieldLife@yahoogroups.com, Robert <[EMAIL PROTECTED]> wrote: <snip> > If all of these mortgage companies, who made bad loans, why > can't they just lose money like the rest of us would.
Because the mortgage lenders sold the loans to investment folks, who packaged thousands of the loans and then sold the packages to investors, who sliced them up and sold them to still other investors. Any given single mortgage loan may have been chopped into many pieces, each one of which is now owned by a different investor after having been sold and resold many times over. And the investors own packages of these pieces. The problem now is that a lot of the loans have gone bad--the borrowers have been unable to make payments--but there's no clear trail from what was borrowed to who owns it now, because the loan has been resold and chopped in pieces over and over. So nobody knows what these investments are worth, which means investment companies don't know the value of their assets, which shuts down their ability to make trades or to make loans to or borrow from others. The investment market's ability to do business is based on confidence in the value of assets. When that's lost, the market seizes up. Investment banks hold onto their cash, so there's no liquidity. Interest rates go way up because nobody knows what the risks are. Commercial short-term loans that regular businesses depend on to operate become very hard to obtain, and they have to lay off workers. Banks become insolvent. Credit-card rates soar and people can't make those payments either. Bottom line, it's a massive domino effect, and it's global. What the bailout is primarily designed to do is to establish a value for all these toxic loan products by purchasing them, a process called "price determination." Once the investment companies have gotten rid of the toxic loan products, they have a much clearer idea what their assets are, and confidence is presumably restored in the markets. Actually it's far, far more complicated than I've described, but that's the basic idea. The mortgage lenders were off the hook once they sold their loans to investors, so it isn't a matter of letting them go out of business. If anybody's interested, the Chicago NPR station did an excellent radio program on all this back in May. There's a transcript here: http://www.thisamericanlife.org/extras/radio/355_transcript.pdf And here's what's called a "tick-tock" from the Wall Street Journal that describes what happened a week ago Wednesday when it first became evident that a real financial catastrophe was about to take place: http://tinyurl.com/5yfhlm
