The $700 Billion Bailout: Overheard Conversations

Who created a situation that required a $700 billion bailout? Hint: The same group that promised to fix it.

Prelude

Government: Everyone in America should have the right to pursue the American dream, which everyone knows is owning a house. But not everyone can afford it. The dream or the house. Therefore we will legislate that lenders must give loans to anyone who meets certain minimal criteria – and lower the criteria.

Part 1 At the Broker

Customer: I’d like to borrow money for a house but I’ve not saved any money.

Broker: No problem. Since the price of houses will always go up, we don’t require a down payment any more.

Customer: Cool. Oh, and one other thing. My employer is a jerk sometimes and might not fill out the earnings verification form.

Broker: No problem. We have a new financial instrument called the “Liar’s Loan” – we let you verify your own wealth, employment, and income.

Customer: Really? Cool! You’re not worried even a little I won’t pay you back?

Broker: Nah. It’s not my money. A bank will provide the actual funds. I get my commission whether you pay it back or not.

Customer: Cool!

Part 2 At the Bank

Banker 1: We’ve got to get rid of some of these loans. They smell bad. And they’re attracting flies.

Banker 2: But how do we get rid of them?

Banker 1: We’ll sell them.

Banker 2: Who would be dumb enough to buy these stinky things? Especially with all the flies on them.

Banker 1: Nobody will buy them one at a time, but there are people who will buy a whole bunch of them.

Part 3 At the Wall Street Investment Bank

Real Estate Fund Manager: Man, we’ve got to get some fresh money into these mortgage funds. They stink! And they’re attracting flies.

Assistant Real Estate Fund Manger: Have you seen default levels? Who would be dumb enough to buy these stinky things?

Part 4 At the Institutional Investment Firm

School Board Pension Guy: You sure this is a good investment opportunity? I hear there are problems in the mortgage industry.

Advisor: No problemo.  These things are as safe as anything in America. The Investment Banks wouldn’t buy a bunch of stinky individual mortgages and put them in one basket and say they are good would they? Besides, they’ve divided the security into three traunches: good, okay, and bad. Since we’re dealing with your pension funds, we’ll only buy the good ones. They are AAA rated securities. I’d like to get a higher rate of return but that is available only on the bad securities – and you know how the Investment Banks are; they save the good bad stuff for themselves. If you’re still worried just be aware that the Investment Banker even bought bond insurance on your good ones.

School Board Pension Guy: Cool.

Part 5 Back at the Wall Street Investment Bank

Assistant Real Estate Fund Manager: Boss, I know those new securities you came up with are strong sellers but I have one question. Don’t we have to show the mortgages on our books?

Real Estate Fund Manager: (Rolls eyes and gives a little laugh.) Nope. The Government allows us to set up something called an SPV – a special purpose vehicle. We did ours in the Cayman Islands. The SPV carries the stinky loans on their books, not ours. We are AAA rated for those wanting a safe investment. Heck, even our so so securities in the second traunch are rated BBB for those with a little more risk tolerance. The question is irrelevant anyway.  Housing prices always go up.

Assistant Real Estate Fund Manger: Boss, you’re a genius.

Interlude

Government: We are going to hold companies accountable through Sarbanes Oxley and make them declare Market Value on their books every day. Plus we’ll punish rogue CEOs who inflate values. Now everyone knows we mean business. We demand transparency from our investment companies, too. That’s why we have the SEC. The only problem is, too much transparency gets a little confusing. And Americans don’t like confusing.

Part 6 A Meeting of the Minds

School Board Pension Guy: Hey, where are our payments?!

All Others: Sorry, the jerks who borrowed money on the houses can’t make payments.

School Board Pension Guy: But you said that housing prices always go up and they could refinance their mortgages with low interest ARMs if they got in trouble.

All Others: Sorry. We’re as upset as you are. But there’s nothing we could have done to see this coming. Housing prices always go up you know.

School Board Pension Guy: But I only bought the good securities. The AAA ones. That means I get paid back first. That’s what you said.

All Others: Sorry. There are more problems with the loans than we thought. Sarbanes Oxley isn’t helping either. No one is getting paid back squat right now.

School Board Pension Guy: But you bought bond insurance in case this happened!All Others: (Laughter.) Do you really think an insurance carrier has set aside that much money? Sorry.

School Board Pension Guy: Is all you can say, “Sorry.” You’ll pay for this you know.

All Others: Listen, no time to finish the conversation right now. We have a high-powered meeting to attend at a resort in the Cayman Islands.

School Board Pension Guy: You haven’t heard the end of this. Like I said, you’ll pay for this!

All Others: You really think so?

Postlude

Government: People are so gullible and get themselves in such messes. I guess it’s up to me to save them from themselves again. My work is never done. But I’m up to it. I’m about giving them the American dream after all!