Breaking Down the Market
Wall Street Hits Main Street...but how about Regis Blvd.?
Aaron Mejia '08, Contributing Writer
Issue date: 9/29/08 Section: Perspectives
Breaking Down the Market: Wall Street is a mess and big banks are collapsing.
Bear Stearns, AIG, Leymann Brothers, Sallie Mae and Freddie Mac. As losses exceed $600 billion, analysts estimate a total loss of $1.3 trillion. Calling it "Economic Pearl Harbor," billionaire investor Warren Buffet supports the U.S. Treasury's $700 billion bank rescue plan.
How did this happen?
Barry Ritholtz, author of the influential financial weblog, "The Big Picture," puts it in layman's terms, describing the fall of global investment bank Bear Stearns:
Bear Stearns is the little pyro -- the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.
When did it start?
In 2002, people were able to afford houses they normally couldn't. There was little fear of buying a house with nothing down, because housing prices, we were assured, only go up. If the borrowers couldn't pay, lenders anticipated "housing-price appreciation" that would have covered the amount of the bad load.
No one imagined what would happen if housing prices dropped.
Big banks bought these loans, chopped them up, added some new spices, and resold them with new names, as "CDOs"(collateralized debt obligations). With a new face and name, the toxic loans made their way around the world as banks, hedge funds, and mutual funds also purchased them up.
Seeing how successful these new securities were, big banks bought some themselves.
They bought a whole bunch actually, and, and expected, made a lot of money.
But, now: housing prices have decreased and all these securities have devalued to the point of worthlessness. So the government had get involved to re-assure our foreign community.
The odd part is nobody can feel the effects yet. Why is that so?
Bear Stearns, AIG, Leymann Brothers, Sallie Mae and Freddie Mac. As losses exceed $600 billion, analysts estimate a total loss of $1.3 trillion. Calling it "Economic Pearl Harbor," billionaire investor Warren Buffet supports the U.S. Treasury's $700 billion bank rescue plan.
How did this happen?
Barry Ritholtz, author of the influential financial weblog, "The Big Picture," puts it in layman's terms, describing the fall of global investment bank Bear Stearns:
Bear Stearns is the little pyro -- the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.
When did it start?
In 2002, people were able to afford houses they normally couldn't. There was little fear of buying a house with nothing down, because housing prices, we were assured, only go up. If the borrowers couldn't pay, lenders anticipated "housing-price appreciation" that would have covered the amount of the bad load.
No one imagined what would happen if housing prices dropped.
Big banks bought these loans, chopped them up, added some new spices, and resold them with new names, as "CDOs"(collateralized debt obligations). With a new face and name, the toxic loans made their way around the world as banks, hedge funds, and mutual funds also purchased them up.
Seeing how successful these new securities were, big banks bought some themselves.
They bought a whole bunch actually, and, and expected, made a lot of money.
But, now: housing prices have decreased and all these securities have devalued to the point of worthlessness. So the government had get involved to re-assure our foreign community.
The odd part is nobody can feel the effects yet. Why is that so?
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