Reply #59: The worst part of this ongoing financial crisis was and is the derivative, [View All]

[jtuck004]

paper such as the Credit Default Swaps, in which investors bought insurance on the CDO's. Unlike normal insurance, however, they had no insurable interest. It was just a big bet. Nomi Prins and Michael Lewis talk about these in their books. Prins estimates the notional value of those derivatives at near $140 trillion at its peak, and a lot of those "toxic assets" were taken behind the veil of the Fed, traded for treasuries.

The big problem is that people, bombarded by articles such as the above (an example is Rick Santelli's rant on tv one day, where he started going off on Fannie and Freddie), and sloppy or uninformed reporting by the MSM, leads people to think that somehow the (at its peak) $13 trillion housing market was the big problem, when it was actually the $100+ trillion of leveraged (borrowed) money from pension funds, state investments, international investors, AIG, etc, all of which "evaporated" when just a small fraction of the housing market lost it's value, because of the tremendous leverage which made the impact far greater than it would have been. That huge run up of credit that we all lived on for the past 40 years is what we are going to be paying for during the next 2, 3, or more decades. It may even cause the eventual destruction of this country.

I know it is easier for people to understand how not paying a mortgage on a home can cause a problem, and perhaps this is why the media focuses on that end. But anytime I see statements such as "the rescue of Fannie and Freddie will be the most expensive part of the government's response to the financial crisis" I have to wonder what these folks have to gain from mis-reporting. At its peak the government loaned nearly $23 trillion to investment banks, of which about $3 trillion is never coming back, a considerable amount more than the $154 billion mentioned in this article. Is it just too hard to educate people as to what is really going on, or would they rather beat up on homeowners because we have all been so thoroughly conditioned to kowtow to the financial sector?

Anyone can see the numbers, at sites like http://www.nomiprins.com/reports/, in her book "It Takes A Pillage". or in Ritholtz's book "Bailout Nation". Books like "Broke, USA" show us the path that led us into this. The movie "Inside Job" does a pretty good job of introducing people to some of the major players, especially those in the government - it's a little light on detail, but there is enough in there to make you sick, or very angry.

I just think it is important to keep reminding people what the real problem is, and who the real opponents are, because if we don't recognize the real problem, how will we ever fix it? And if we don't fix it, the financial sector, with the help of our elected officials, will continue to bleed this country dry.