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The Financial Mess in the U.S. In A Nutshell

Posted September 21st, 2008 at 01:11 AM by SuperflyTNT
Updated September 21st, 2008 at 01:28 AM by SuperflyTNT (Added info.)
Hey there loyal Heroscapers! I know there's been a lot of news about why the country's financial markets have gone to crap, and here's a short summary for those of you who want to know WHY...

Let's start with how FUTURES trading works....

You may have heard of 'speculators' in 'oil futures' and wonder what that means. What this is dates back 400 years to the old corn farmers.

Back in the old days when you wanted to buy corn, you had to go to a farmer's market to do it. Whatever corn sold for that day, that's what you paid. Then someone got the great idea to go to the farmer directly, and buy the corn BEFORE IT WAS HARVESTED at that day's price, expecting that the price would go up when the corn was actually harvested, thereby getting the corn for a lower price the day it was delivered than he would've paid for it if he bought it the same day from a Farmer's Market. That's how buying and selling futures worked. Now what happens is that people buy futures on LEVERAGE, meaning that they have no intention of ever actually taking delivery of the product when it's produced - they instead buy the CONTRACT for the oil, sit on it for a few months hoping the price will rise, and just before the product is out of the ground they sell the CONTRACT to someone else at a higher price and then they pocket the difference.

Let's fast forward to today: Let's say that a barrel of oil is 100$ this morning, so I invest ten thousand dollars and buy a CONTRACT from a oil producer, thus owning the rights to 100 barrels of oil. Well, then I go to my investor buddies and bad mouth oil, telling them that I heard supplies are low, refineries are having mechanical problems and that a war's going to start in Iran. People get scared that there'll be a shortage, and so since the supply isn't finite, people will pay more. The price of a barrel of Oil surges, and now it sells for 110$ a barrel. I go ahead and sell my CONTRACT to someone for that price and the guy cuts me a check for ELEVEN THOUSAND. I just made a thousand dollars in a day. Wow! What a deal! The problem is that when everyone starts badmouthing refineries and oil companies the price continues to rise. Sure, I make money, but the market is being artificially manipulated by the powerbrokers and rumormongers and the price at the pump for average Joes goes up!

In a nutshell, that's why Oil prices have risen so much even though supply and demand have remained constant (basically).

Now, let's move on to the Mortgage Crisis:

Mortgage brokers get paid a commission on every loan they sell. The more loans, the more money they make. Let's say that some guy comes in and has crap credit, and no money down, but has worked at the same place for 5 years, lived at the same place 4 years, and has a pretty stable history of paying bills, although he had a car repo a couple of years back. These are TARGET customers. The mortgage lender goes ahead and gives him an interest only loan where the payment is really low but he's not really paying off the loan, just going ahead and paying the interest as it's accrued. That same lender gets 100 people like that, and another 100 people with GREAT credit too. Then, his investment bankers put all 200 loans into one big package and call it a "Mortgage Backed Security", which is really just like a stock certificate that owns all 200 mortgages. He then goes to investment banks like AIG and Bear Stearns and sells them the mortgages, washing his hands of the whole deal and making a bunch of money. The big investment bank has 5000 of these types of securities, all over the country, and then THEY break them all up into FUNDS. They wash the numbers up and make it look like a reasonably safe investment and then sell that investment to people to go in their IRAs, 401Ks and other instruments, and you and I end up with them in our mutual funds as 'moderate risk investments'. Fast forward to today. Of the 5000 original mortgages, 2500 of them are defaulted on because the interest rates have gone up, and the people that own the homes are out on the street. Because the investment bank had to take a loss on the mortgage and pay for it themselves, the stock becomes worthless and everyone's money goes down the tubes while the big investment bank portfolio manager makes a killing on commissions for buying and selling it.

In essence, they never should have given the loans to the people, then they should've never bundled bad loans with good loans to make the investments look more stable, and the investment banks NEVER should've given those mortgage backed securities the good ratings to entice investors to buy them!!!

Furthermore, the SEC (Securites and Exchange Commission) who is SUPPOSED to oversee all of this and make sure there's no manipulation should've JUMPED IN AND SEEN IT AS THE MANIPULATION IT IS!!!!

Finally, let's get to the Financial Market Crisis that's causing all the banks to fail....

Have you ever heard of SHORT SELLING a stock? What this means is this: I go out to an investor buddy of mine and ask him to legally transfer some of his investments to me, in essence BORROWING the shares of a stock for a set period of time, let's say 2 weeks. Then I sell the stock to someone at today's price, let's say 100 dollars a share. I am HOPING that the price goes down so I can then buy them back at a lower price to give back to my broker buddy. In the example above I borrowed 10 shares at 100$ today, then sold them for $1000 dollars total. Tomorrow the stock is only worth 90$, so I buy them back for $900 dollars and then return the shares to my buddy, all the while pocketing $100, a 10% return on my investment....but wait....I NEVER INVESTED ANYTHING! I borrowed the shares from a buddy, who BORROWED THEM from someone like you and I out of our IRA or 401K! So in the end, YOU AND I own the stock which is managed by our broker, and he loaned the shares to a buddy so that HE could make money off short selling, who in turn kicks me 10% of his profits. That's short selling in a nutshell.

Here's the problem with short selling....the brokers are all in the same boat, and what happens is that these big guys call their press buddies and issue a release that Bear Stearns is in financial trouble because of buying bad loans. Their stocks go down, allowing the short traders to make a boatload of money, but the people that invest their money with Bear Stearns (like you and I in our IRAs) get screwed because our shares decrease in price, losing OUR money!

A short history of 'short selling': Short selling has been looked upon historically as a morally corrupt thing to do because you're betting that a company will do poorly. In fact, England banned it outright in the 1800s due to it's crippling effect on the Dutch economy (see Tulips). Shorting stocks were pretty much SOLELY RESPONSIBLE FOR THE GREAT DEPRESSION OF 1929. In fact, the US GOVERNMENT banned short selling in downturns until our wise and omnipotent president BILL CLINTON signed it into law in 1997. In the 60s, a guy found a loophole - he started mutual funds (which at the time were unregulated) that were based upon short selling, and the HEDGE FUND was born.

Hedge Funds are the lowest form of life in my opinion. They live to watch companies burn so they can rake in profits, and they are particularly well known for rumor mongering to effect markets and destroy companies so that they can short-position themselves and make millions. That's a story for another day - Wiki search SHORT SELLING and HEDGE FUNDS to see how they operate, but bring a barf-bag...it will sicken you.

Let's complicate the problem even more...Bear Stearns has all of our money invested in common stocks like Hasbro and Walmart which is fine, but they ALSO lend money to other investment banks. When those banks fail the loans go into default (the don't get paid back). The word gets out that Bear Stearns is in deep financial trouble (even if it isn't) and then everyone sells off their shares with Bear Stearns. Then the crap hits the fan....Bear Stearns doesn't have the money to pay back to people and not only do THEY go out of business, anyone who owned their shares loses all of their money!

Wait, it gets better! Instead of them just going out of business, the US government drops 800 BILLION dollars, bails them out so that your stocks aren't worthless, and guess what....they do it with YOUR TAX MONEY! So, in short, you paid for the stocks the first time with your post-tax dollars when you invested, and now you get to PAY AGAIN for the SAME STOCK in the form of TAX DOLLARS that should've gone to repairing roads, paying teachers more, lowering the cost of healthcare and all the other things that TAXES SHOULD DO!

In the end, it all comes down to the exceptionally greedy ultra-rich powerbrokers manipulating the markets through innuendo and rumor mongering. These pukes are robbing us blind while government regulators turn a blind eye due to either sheer incompetence or disregard, and all the while these greedy SOBs are raking in the money while our country goes deeper into debt and average citizens watch our life's savings become worthless.

The best part about it is that NOBODY GOES TO PRISON! I'd really like to see some of these guys catch a few 'virtual colonoscopies' in prison because Inmate Roscoe's mother lost her savings due to these guys and he's not forgetting about it. I want to see the SEC chairman hang from the rafters of the US House of Representatives for doing NOTHING while you and I lose everything we have because of these guys. I want to see the bankers jumping out of windows of the 100000th floor of the beautiful glass and gold buildings they work at because the Feds are indicting them for fraud, theft, and other high crimes and misdemeanors.

In short, the only way that anyone can be sure to save money these days is to shoot a Senator so they can't spend any MORE of our contry's treasure!!! (Secret Service...it's a joke - I only condone the FIRING of Senators, not the FIRING AT of Senators)
Total Comments 4

Comments

Old
Einar's puppy's Avatar
Yeah, it's totally not right. John McCain wants to fire that SEC guy too (even though he can't)...or was it the FEC guy?

The long and short of it is this: everyone not part of the corruption wants these guys to hang. But, I thought it was a senator(who happens to be McCain's campaign advisor) who decided he was goign to get rid of the 1920's regulations.
Posted September 21st, 2008 at 01:43 PM by Einar's puppy Einar's puppy is offline
Old
yagyuninja's Avatar
Cool, thanks for the info in a nutshell.
Posted September 22nd, 2008 at 11:58 AM by yagyuninja yagyuninja is offline
Old
SuperflyTNT's Avatar
N/P I am familiar with nutshells...I am a nut.
Posted September 23rd, 2008 at 12:18 AM by SuperflyTNT SuperflyTNT is offline
Old
Hahma's Avatar
Are you thinking of Phil Gramm Einar's Puppy?

http://abcnews.go.com/Politics/story?id=5835269&page=1

Nice blog Superflytnt, I think all of those greed jagbags should do serious time in the pen. The law enforcement agencies are so concerned about putting petty crimminals in jail for long terms but they don't seem to be concerned about the crimminals that ruin the entire country's economy.
Posted September 25th, 2008 at 10:48 PM by Hahma Hahma is offline
 
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