Yesterday's real estate blog article on the $700B Government bailout of the financial markets created some good discussion. The article focused on why it was critical to the United States that we do the bailout, but it did not go into great detail as to how we ended up in this position.
There has been a great cartoon-style presentation roaming around the email system for the past year that does a humorously great job explaining how we got here. It is unsigned, so we will just give credit to "Author Unknown." Please note that if you receive this through email, most of the blog will be missing. I strongly recommend that you click-through (click on the title of this message) to the actual blog site so that you can enjoy the long, but excellent cartoon and summary.
Each of the following pictures can be enlarged by clicking on it. I will warn the reader that the language is somewhat crass, but I am sure that worse things were spoken during the real events that the cartoon depicts.
So basically, we saw an industry grow out of control and what little controls that were in place (the rating agencies) did not put much consideration into how all the new subprime loans would affect the default rates that they were using to rate the loans. These loans had less than 1/2 their expected value, so Commercial and Investment Banks saw their portfolios devalued almost "over night," which caused them to stop buying and also caused their investors to start pulling money out of their banks. When Commercial and Investment banks stopped buying loans, Mortgage Banks were then stuck with loans they planned on selling for operating capital. Now they too were out of cash and that takes us to where we are today. The final graphic shows the basic process.
So, what do you think of all of this? Do you think the entire U.S. Economy will come to a complete stop without the bailout? I'd love for you to share your thoughts in the comments section on the blog!<-->
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Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.