正文
The origins of the crisis seem fairly clear. Traditionally, when bankslook at mortgages on homes, they carefully study the likelihood thatthe loan will be repaid, as well as the underlying collateral. Theirrevenue and profits come from the repayment of the loan or the abilityto realize the value of the loan through the forced sale of the house.
Twothings changed this simple model. The first started a long time ago.Encouraged by the federal government, banks that issued mortgage loansbegan selling those loans to other entities. This, then, created alarge secondary market in bundled mortgages -- huge numbers ofmortgages grouped together and sold and traded as if they were simplyfinancial instruments, which, of course, they are.
As aresult, banks began to view mortgages less as long-term investmentsthan as transactions. They made their money on closing costs, rapidlyselling the mortgages to aggregators, which in turn passed them on toothers. The banks then loaned the money again. The more mortgages banksracked up, the more money they made. The risk was transferred to others.
Inthe past few years, two new groups of players entered the scene, one oneither end of the spectrum. The first group comprised mortgagecompanies and brokers, nonbanking institutions whose business model wasbuilt primarily around the transaction. The brokers in particular hadno skin in the game. Every time they executed a mortgage, they mademoney. If they didn't execute one, they didn't make money. The role ofevaluating the borrower increasingly fell to these entities, neither ofwhich was going to hold on to the debt instrument for more than amoment.
The second group was the final buyers of bundledmortgages -- increasingly, hedge funds. Hedge funds are monies gatheredfrom various "qualified" investors -- otherwise known as rich peopleand institutions. They are private partnerships, so what they do withtheir money is between the managers and partners. No federal agency isresponsible for protecting the private placement of money by thewealthy.
In a world of relatively low interest rates,wealth-seeking investors flocked to these hedge funds. Some of theolder ones were superbly managed. The newer ones frequently were not.With a great deal of money in the system, there was a restless searchfor things to invest in -- and the secondary market in subprimemortgages appeared to be extremely attractive. Carrying relatively highrates of return, and theoretically collateralized by fairly liquidprivate homes, the risks of these deals appeared low and the returns onthe mortgages -- particularly when you looked at the contractedincreases -- seemed extremely attractive.
The fact is that noone really worried about defaults. The mortgage originators thatprepared the documentation for these riskier loans certainly didn'tcare. They just wanted the mortgages to go through. The primary lendersdidn't worry because they were going to resell them in hours or daysanyway. The mortgage aggregators didn't care because they were going toresell them, too. And the final holders didn't worry because theyassumed the system would permit easy refinancing of loans atsustainable interest rates, and that -- in a worst-case scenario --they at least owned a portfolio of houses that they could bundle andsell to real estate companies, perhaps even at a profit.
Thefinal owner of the mortgage, of course, is the loser. The assumptionthat subprimes could be refinanced if need be failed to take intoaccount that higher interest rates priced these people out of themarket. But the worst part is this: Many hedge funds leveraged theirpurchase of mortgages by using them as collateral to borrow money fromthe banks.
That was the tipping point. When the subprimedefaults started to hit, the banks that had loaned money against themortgage portfolios re-evaluated the loans. They called some, theystopped rollovers of others and they raised interest rates. Basically,the banks started reducing the valuation of the underlying assets --subprime mortgages -- and the internal financial positions of somehedge funds started to unravel. In some cases, the hedge funds couldnot repay the loans because they were unable to resell their subprimemortgages. This started causing a liquidity crisis in the globalbanking system, and the U.S. Federal Reserve and the European CentralBank began pumping money into the system.
Twothings changed this simple model. The first started a long time ago.Encouraged by the federal government, banks that issued mortgage loansbegan selling those loans to other entities. This, then, created alarge secondary market in bundled mortgages -- huge numbers ofmortgages grouped together and sold and traded as if they were simplyfinancial instruments, which, of course, they are.
As aresult, banks began to view mortgages less as long-term investmentsthan as transactions. They made their money on closing costs, rapidlyselling the mortgages to aggregators, which in turn passed them on toothers. The banks then loaned the money again. The more mortgages banksracked up, the more money they made. The risk was transferred to others.
Inthe past few years, two new groups of players entered the scene, one oneither end of the spectrum. The first group comprised mortgagecompanies and brokers, nonbanking institutions whose business model wasbuilt primarily around the transaction. The brokers in particular hadno skin in the game. Every time they executed a mortgage, they mademoney. If they didn't execute one, they didn't make money. The role ofevaluating the borrower increasingly fell to these entities, neither ofwhich was going to hold on to the debt instrument for more than amoment.
The second group was the final buyers of bundledmortgages -- increasingly, hedge funds. Hedge funds are monies gatheredfrom various "qualified" investors -- otherwise known as rich peopleand institutions. They are private partnerships, so what they do withtheir money is between the managers and partners. No federal agency isresponsible for protecting the private placement of money by thewealthy.
In a world of relatively low interest rates,wealth-seeking investors flocked to these hedge funds. Some of theolder ones were superbly managed. The newer ones frequently were not.With a great deal of money in the system, there was a restless searchfor things to invest in -- and the secondary market in subprimemortgages appeared to be extremely attractive. Carrying relatively highrates of return, and theoretically collateralized by fairly liquidprivate homes, the risks of these deals appeared low and the returns onthe mortgages -- particularly when you looked at the contractedincreases -- seemed extremely attractive.
The fact is that noone really worried about defaults. The mortgage originators thatprepared the documentation for these riskier loans certainly didn'tcare. They just wanted the mortgages to go through. The primary lendersdidn't worry because they were going to resell them in hours or daysanyway. The mortgage aggregators didn't care because they were going toresell them, too. And the final holders didn't worry because theyassumed the system would permit easy refinancing of loans atsustainable interest rates, and that -- in a worst-case scenario --they at least owned a portfolio of houses that they could bundle andsell to real estate companies, perhaps even at a profit.
Thefinal owner of the mortgage, of course, is the loser. The assumptionthat subprimes could be refinanced if need be failed to take intoaccount that higher interest rates priced these people out of themarket. But the worst part is this: Many hedge funds leveraged theirpurchase of mortgages by using them as collateral to borrow money fromthe banks.
That was the tipping point. When the subprimedefaults started to hit, the banks that had loaned money against themortgage portfolios re-evaluated the loans. They called some, theystopped rollovers of others and they raised interest rates. Basically,the banks started reducing the valuation of the underlying assets --subprime mortgages -- and the internal financial positions of somehedge funds started to unravel. In some cases, the hedge funds couldnot repay the loans because they were unable to resell their subprimemortgages. This started causing a liquidity crisis in the globalbanking system, and the U.S. Federal Reserve and the European CentralBank began pumping money into the system.
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