Let me tell you the real story that no one out there really wants to tell.
It all started after 9/11 when Greenspan dropped interest rates to one percent and left it there for a few years. He encouraged everyone to go out and get ARM loans and buy a home and people did. As people bought homes and demand rose, home prices began to rise and home flippers started to jump into the market thinking they could put $5,000 down on a new pre-construction and sell it for a $20-30,000 profit the moment they closed.
Lenders packaged their loans into pools and sliced the pools into tranches, overcollateralized and cross collateralized so that the highest tranches were virtuually gauranteed that they couldn't lose any money and that they were as safe as US Treasuries. Everyone made lots of money and the lenders cleaned up on residual excess income and everyone was happy.
Then Greenspan in all his wisdom began raising interest rates 17 times in a row 25 bp at a time until it was time for resets on those 2/28 ARMS to kick in and just in time for the bankruptcy laws to change so you could no longer walk away from your credit card.
As the resets started kicking in a few homeowners who had no problem affording those loans at the lower interest rates all of a sudden couldn't make their payment and started to become delinquent. As the deadline to file bankruptcy came bankruptcy filings increase to very high levels and then plunged to virtually none overnight when the new law went into effect.
Now we still had the home flippers who kept buying the homes and the home builders that kept building and all was still good except for a few delinquencies from some "sub-prime" borrowers, though the delinquency levels were still quite low.
Now all those people who couldn't just file for bankruptcy and wipe off all that credit card debt began refinancing their homes and consolidating their credit card debt and delinquencies increased more as the expected decrease in interest rates never happened.
Then came August of 2006. The big banks got together to create an index to track the mortgage bonds and as a way for them to "hedge" their investments. A few big players like Goldman Sachs and Deutche Bank proceeded to short the crap out of the index and panic began to set in. Bond holders began to short mortgage lenders and drive their prices down to hedge them on the perceived decline in the value of their bonds.
As the ABX index kept dropping credit spreads kept getting wider and no one wanted to buy the securitized asset backed securities. The media pundits were screaming sub-prime every five seconds on TV and credit was cut off to those that needed to refinance. As they were all of a sudden not able to refinance at a critical time and many home flippers, I mean investors, realized that they weren't going to be able to make any money overnight, they began walking away from their homes which created more delinquencies and foreclosures and the spiral continued until it affected the commercial paper market.
It's now to the point that no one trusts anyone else which has left the credit market locked up.
Now what about those sub-prime borrowers that we hear so much about?
Well, so far the bonds that are holding the sub-prime mortgage loans are still paying the bondholders and excess cash flow is still flowing off the deals even though they are all being downgraded to junk status.
To be sure there are a few stinkers out there, mainly such as some crap that Goldman Sachs packaged which is just about all 2nds and have a high foreclosure rate. Some lower tranched will lose some or all of their principal but the higher up tranches will receive all their payments and all their principal unless you think everyone in the United States is going to walk away from their homes and plunge the value of home down to nothing.
So now here we are with companies being forced to write down the value of their assets even though the true economical value of those assets based on cash flow is way higher and not affected. Many companies are being forced into bankruptcy because of the leverage they had on their balance sheet combined with the non-cash write downs.
So now if you don't have spotless credit and a large down payment you can forget about getting a loan to buy a home.
Now that the big banks have succeeded in killing the lenders they are starting to cut each others throats by downgrading each other. Just last week Citigroup downgraded Etrade and said that there was a possibility ETrade would file for bankruptcy large write downs were expected. ETrade's stock plunged on that note. And today Goldman Sachs has come out and said to sell Citigroup because they expect 15 billion in write downs due to the bogus ABX index hustle that they created.
And the Fed sits there saying that the economy is chugging away and the risk of inflation outweighs the collapse of the economy into a depression not seen since our parents or grand parents experienced in the 1930s.
Other brilliant moves by our federal government is the SEC suspending the uptick rule for shorting. You wonder why we have been having so much volatility in the markets? Small companies are also being murdered in the market due the the SEC's refusal to enforce laws that were set in place after the stock market crash of 1929. Failed trades continue to plague the market as Wall Street continues to take your money and never deliver you shares. You just think you own shares because the broker puts an IOU in your account and flags it with a FTR (failure to receive).
What were are seeing in the markets now is the same thing that was going on before the stock market crash of 1929 and the Great Depression which followed. And all you hear is it is because of sub-prime which is a very tiny percent of all loans originated.
And all the politicians say vote for me so they can get in office and get some of that Wall Street handout.