The Unnanounced Class War

[kimmy]

Oh Moses smell the roses...

Is that the new "Complete Nonsense ™"? If you're going to say something like that, at least let us know which parts you object to.

The ones who need to wake up and smell the roses are the ones who still cling to this idea that "it's not the banks fault! the government made them do it!"

-k

[Argus]

The ones who need to wake up and smell the roses are the ones who still cling to this idea that "it's not the banks fault! the government made them do it!

And the ones who think government CAN tell banks what to do when it's clearly the other way around.

[blueblood]

Is that the new "Complete Nonsense "? If you're going to say something like that, at least let us know which parts you object to.

The ones who need to wake up and smell the roses are the ones who still cling to this idea that "it's not the banks fault! the government made them do it!"

-k

To put the blame solely on the banks is laughable, there was also bad govt policy, and not to mention idiots who think they are entitled to a 300-400k house on less than 50k per year salary.

Banks will make their money in any environment you put them in, Canada is a prime example of that. Canada is approaching a similar type of debt situation as the USA and at least this time you have the government pretty much screaming at people to get their debt under control, yet the banks still make money. The environment in the USA in the early 2000s with extremely low interest rates, poor govt policy, and entitled idiots basically gave direction to the banks to operate the way they did to maximize profits, and it all came apart when everyone got buried in debt and couldn't pay the bills. Had people down there been smarter and not so entitled, there wouldn't be the market demand for these ridiculous mortgages and the banks would have to act accordingly.

In my opinion it's like drug use, we have a bunch of stupid entitled people who want to get high as it makes them feel good. As we all know getting high has it's share of risks, rewards, problems, and benefits. let's take crack for example; there are people who want to get high and want to use crack to do it, people process the cocaine into crack, grow the cocoa plant, and people sell it, and others protect the sellers. And we all know the problems that arise out of crack use, now there's two main approaches to going after this problem, he great game of going after the dealers, processors, and growers (like you guys wishing to go after the banks), or if people got their heads out of their ass and decided that drug use is stupid and ceased wishing to get high, thus killing the demand and forcing the dealers et. Al to find anoer means of obtaining finances (forcing the banks to offer smarter mortgages, demand keeping a cap on home prices, smarter depositors/clients picking smarter banks)

People always get what they ask for.

[Bonam]

To put the blame solely on the banks is laughable, there was also bad govt policy, and not to mention idiots who think they are entitled to a 300-400k house on less than 50k per year salary.

The government purposefully implements policies to maintain and inflate the housing bubble as much as possible. Even as buying a house became far far out of the reach of affordability of most people, governments did what they could to keep house pricing growing. They set ultra-low interest rates, and they let people write off mortgage interest on their taxes, and provided other tax incentives for home ownership. Anything to keep the bubble growing.

It's not the idiots thinking they are entitled to 300-400k houses, it's that the tiniest plot of land with a falling apart old junkhouse has inflated to cost 300-400k, because of very deliberate government policy to try to keep housing prices growing eternally at an unsustainable rate.

The housing market is still in dire need of about a 50-90% correction (depending on area) to return to reasonable levels. Unfortunately, governments will continue to do everything in their power, even if it puts their nations under inescapable debt burdens, to prevent such a correction from happening.

Edited January 29, 2013 by Bonam

[Pliny]

And the ones who think government CAN tell banks what to do when it's clearly the other way around.

If that is true then there is something wrong with government isn't there? Is this another argument for nullifying the individual vote? Should we not bother and just bank at the right bank?

Are you talking about central banks? Check the Canadian central bank website and see who they say owns it? The Federal Reserve is privately owned. Are you talking about the IMF and the World Bank?

The banking system is run by bankers. The central banks of most countries advise the national governments on monetary and financial policy. Economists attempt to determine the best policy.

If you are talking about Wall street investment banks they are entirely private and do lobby government, if they did tell the government what to do there would be no necessity to lobby. If they are buying politicians as you suggest then that is a question of the morality of politicians.

And for those who think Wall street "caused" the collapse here is the complete story of the housing bubble.http://tjhancock.wordpress.com/housing-bubble-financial-crisis-detailed-comprehensive-assessment/

[blueblood]

The government purposefully implements policies to maintain and inflate the housing bubble as much as possible. Even as buying a house became far far out of the reach of affordability of most people, governments did what they could to keep house pricing growing. They set ultra-low interest rates, and they let people write off mortgage interest on their taxes, and provided other tax incentives for home ownership. Anything to keep the bubble growing.

It's not the idiots thinking they are entitled to 300-400k houses, it's that the tiniest plot of land with a falling apart old junkhouse has inflated to cost 300-400k, because of very deliberate government policy to try to keep housing prices growing eternally at an unsustainable rate.

The housing market is still in dire need of about a 50-90% correction (depending on area) to return to reasonable levels. Unfortunately, governments will continue to do everything in their power, even if it puts their nations under inescapable debt burdens, to prevent such a correction from happening.

I'm saying EVERYBODY is at fault, and a big part of that is the idiots with <50K salaries wanting 300-400K house. If they get their heads out of their ass and make smarter decisions then we don't see this ridiculous madness. Blaming scapegoats for their blatant lack of responsibility isn't going to solve anything. Not only that, they elect govts who implement policy to facilitate their entitlement attitude.

[kimmy]

And for those who think Wall street "caused" the collapse here is the complete story of the housing bubble.http://tjhancock.wor...ive-assessment/

This dude's case falls apart in the very first paragraph with these nuggets of misinformation:

"When someone gets a mortgage from a bank or mortgage broker, that lender can hold the mortgage, but more often sells it to a GSE."

* he was correct, right up to the last 3 words.

"Today, Fannie and Freddie alone either own or guarantee roughly more than half of the nation’s outstanding mortgage total (the ratio would be higher if not for estimated private arrangements)."

* that is true today, and it was true in 2000, but it was NOT true during the housing crisis. During the early 2000s, when the bubble was forming, private securitizers were buying mortgages so quickly that the ratio of mortgages held by Fannie and Freddie plunged from half to less than 1/4.

Trying to pin the bubble on Fannie and Freddie is dishonest. Your source, whoever he is, is omitting crucial pieces of information to support a false narrative.

-k

[cybercoma]

Those no arguing with alternate reality.

[kimmy]

I'm saying EVERYBODY is at fault, and a big part of that is the idiots with <50K salaries wanting 300-400K house. If they get their heads out of their ass and make smarter decisions then we don't see this ridiculous madness. Blaming scapegoats for their blatant lack of responsibility isn't going to solve anything. Not only that, they elect govts who implement policy to facilitate their entitlement attitude.

Ok, this is ridiculous.

Why didn't the people who were lending the money say "no" to people who wanted mortgages they couldn't afford?

Why didn't the people who were lending the money say "no" to people who wanted mortgages they couldn't afford?

Why didn't the people who were lending the money say "no" to people who wanted mortgages they couldn't afford?

You guys (collectively--- Pliny and Shady included...) apparently believe that the answer to that question is that the government forced them to to comply with quotas. But only a small fraction of subprime mortgages were a result of those requirements. The truth is, they lent these mortgages because they wanted to. It was profitable. It was so profitable that they were advertising heavily to convince people who couldn't afford mortgages to come to their offices and sign up for mortgages they couldn't afford. They *wanted* those "entitled idiots" to come apply for mortgages. They didn't *care* that those "entitled idiots" were poor risks.

How can that be?

If a hobo asks you for $20 and promises to pay you back with $5 interest, who is to blame when you don't get your $25? You're asking us to believe that the poor financial decision was 50% yours and 50% the hobo's. Wrong. The hobo made a great financial decision!

But now imagine a situation where you know a guy who is willing to buy hobo promises from you at $24. You sell it to him, right? A guaranteed $24 is better than an iffy $25. This is such a great arrangement that you decide to go back to Hobotown and lend money full time. Soon Hobotown is full of happy hobos, and you have $24 in cash in your pocket for each happy hobo.

What about the guy who is buying those hobo promises? What's in it for him? Well, he's selling them too. Each time he gets 100 hobo promises, he puts them in a package called a "Credit Debt Obligation", and sells it for $3000. He's happy too. He's hoping you can bring in a hell of a lot more hobo promises.

So who is buying all these hobo promises? Who ends up holding the bag when these hobos don't pay up? By the time the hobo promises find their eventual owners, they're part of a portfolio of assets that includes lots of other things, sold to people who don't even know that some portion of the financial investments they're making is made up of loans that the loan originators know perfectly well are unlikely to get paid back. And the end holder of these hobo promises might not even notice what a crappy return the hobo portion of his portfolio has provided, because his portfolio is made up of big composite financial products that are so complex that he doesn't even know that some portion of it is made up of hobo loans that are likely to fail.

Now, imagine that the hobos are home buyers, and you are Countrywide Mortgages, and your friend who buys your hobo loans is Bear Stearns, and the suckers who are buying the end financial products are me and Argus and everybody else who puts money into their RRSPs.

-k

[cybercoma]

I get it now!

IT'S THE GOVERNMENT'S FAULT FOR MAKING THEM TAKE ON THE LOANS!

[Moonlight Graham]

I'm saying EVERYBODY is at fault, and a big part of that is the idiots with <50K salaries wanting 300-400K house. If they get their heads out of their ass and make smarter decisions then we don't see this ridiculous madness. Blaming scapegoats for their blatant lack of responsibility isn't going to solve anything. Not only that, they elect govts who implement policy to facilitate their entitlement attitude.

People buying the houses are certainly responsible for their decisions. But so are the banks who peddle these predatary loans and then sell these risky loans off to other investors (also at fault) who make money betting that they these loans will go bust. If a home-buyer goes to every bank and they are all telling you that you can afford the mortage because housing prices have perpetually increased so they can leverage that future profit to afford the mortage, is it entirely the fault of these home-buyers for believing what every bank is telling them?

[Moonlight Graham]

You guys (collectively--- Pliny and Shady included...) apparently believe that the answer to that question is that the government forced them to to comply with quotas. But only a small fraction of subprime mortgages were a result of those requirements. The truth is, they lent these mortgages because they wanted to. It was profitable. It was so profitable that they were advertising heavily to convince people who couldn't afford mortgages to come to their offices and sign up for mortgages they couldn't afford. They *wanted* those "entitled idiots" to come apply for mortgages. They didn't *care* that those "entitled idiots" were poor risks.

It's US buyers fault for not doing enough homework and taking on mortgages they couldn't afford

It's the banks/lenders' fault for shoving out these bad loans they knew would go bust and then selling off the risk

It's Wall Street's/investors fault for creating a huge scheme of betting on bad loans to go bust and creating demand for these investments for the banks by buying them up

It's the US government's fault for removing regulations that allowed all of this to happen, and in great part encouraging it

[Bonam]

Now, imagine that the hobos are home buyers, and you are Countrywide Mortgages, and your friend who buys your hobo loans is Bear Stearns, and the suckers who are buying the end financial products are me and Argus and everybody else who puts money into their RRSPs.

So what you're saying is everyone along the chain made great financial decisions, except you and Argus and everyone else who put money into investments without doing your due diligence on what they contain and why you should invest in them.

[Argus]

To put the blame solely on the banks is laughable, there was also bad govt policy, and not to mention idiots who think they are entitled to a 300-400k house on less than 50k per year salary.

First of all, Blueblood, let's start out with a few givens. The ordinary person does not understand economics very well. Huge numbers of people think they know about what's financially savvy by reading newspapers.

So here is the ordinary guy. He's told houses basically are an investment. It doesn't matter what he pays, because he only needs to hold onto the house for a few years and the price will double! Then he can sell, and make a ton of money! Everyone's doing it, Blueblood! What are you doing living in a rental! Are you stupid!? Look at all your friends living in big houses with granite counters and pools in the yard! They're laughing at you!

So who should have been telling him differently? Well, the people he tried to borrow half a million from. After all, they don't want his loan to fail. Or at least, that was once the case. Now they don't care a damn! They'll loan him money no matter how ridiculous his income! Because they get their bonuses from loaning money, and then immediately passing them off to the banks. But the banks care, right? Nope. The banks ignore all the warnings from their risk management people, because they just package these mortgages up and resell them as virtually risk-free investments! And who's buying these? Well, the people listening to the banks, and the rating agencies like Moodies, telling them they're first rate!

The environment in the USA in the early 2000s with extremely low interest rates, poor govt policy, and entitled idiots basically gave direction to the banks to operate the way they did to maximize profits

Hang on. Give me a few minutes to laugh my head off.

The US government? Uhm, giving directions to... the banks?

Government financial policy is set BY the banks! Half of congress is in the pockets of Wall Street, dependent on huge campaign contributions, money to PACs, and promises that after their political career comes to an end, the real rewards will be forthcoming. You ever follow what happens to these obedient congressmen and senators when they finally leave office? They usually wind up working for corporate America for a million plus per year.

Edited January 29, 2013 by Argus

[Argus]

So what you're saying is everyone along the chain made great financial decisions, except you and Argus and everyone else who put money into investments without doing your due diligence on what they contain and why you should invest in them.

No, everyone along the way lied through their teeth in order to make bundles of money. Due diligence? What kind of due diligence is an ordinary person supposed to be making when he buys a house, Bonam? He has a house inspector, sure. But what else? Is he supposed to conduct an economic study into the housing industry first to determine the likely direction in housing prices over the coming years? How many economists saw the housing crash coming?

[Shady]

I get it now!

IT'S THE GOVERNMENT'S FAULT FOR MAKING THEM TAKE ON THE LOANS!

Yes, it is. It was part of their policy. They actually sued banks for not lending enough to minority and lower income individuals.

[punked]

Yes, it is. It was part of their policy. They actually sued banks for not lending enough to minority and lower income individuals.

This is a well documented lie. They sued the banks for giving loans to white people who lived in the same areas and made the same money as minorities who were rejected from the same loans. Shady loves him some racism though.

[Shady]

This is a well documented lie. They sued the banks for giving loans to white people who lived in the same areas and made the same money as minorities who were rejected from the same loans. Shady loves him some racism though.

Nope, it's a well documented truth. So is the government pushing for low income home ownership and the lowering of mortgage standards.

[punked]

Nope, it's a well documented truth. So is the government pushing for low income home ownership and the lowering of mortgage standards.

Want tell us the percentage of loans given out in the high risk category that were to meet the government requirements?

BTW it is about 15% that means 85% of all these horrible loans were given out by lenders just for the fun of it. You are talking out your butt this is why Conservatives are in trouble they listen to know nothings who don't actually want to fix the problems.

[WIP]

If that is true then there is something wrong with government isn't there? Is this another argument for nullifying the individual vote? Should we not bother and just bank at the right bank?

Are you talking about central banks? Check the Canadian central bank website and see who they say owns it? The Federal Reserve is privately owned. Are you talking about the IMF and the World Bank?

The banking system is run by bankers. The central banks of most countries advise the national governments on monetary and financial policy. Economists attempt to determine the best policy.

If you are talking about Wall street investment banks they are entirely private and do lobby government, if they did tell the government what to do there would be no necessity to lobby. If they are buying politicians as you suggest then that is a question of the morality of politicians.

You got the tail wagging the dog again! Take a look at who the administrators are for the central banks. Find one who is not an insider from one of the major national or international banks! The Bank of Canada is set up as a crown corporation; so technically it's a government office that's hands-off from the government of the day. But, the activities of our central bank and the cabal of major banks in the U.S. that make up their federal reserve system act in an identical pattern of doing what's best for the banks...not the people!

The Wall Street banks do more than "lobby the government;" they have their people in and out of the NY Federal Reserve (Jamie Dimond for example!) Ben Bernanke and Tim Geitner are among the banking insiders who have taken the wheel right in the political structure to gerryrig the government policymaking on finance and budgets. And that gives you this figleaf argument to complain about what the government is doing! Take a closer look.....the bankers own both political parties when it comes to setting banking regulation and responsibilities, just as the oil and other energy companies owned the M.M.S. to the point where that department stopped doing any investigative and regulatory work entirely. The BP fraud revealed that an MMS stocked with former oil company executives (who usually go back to the boardroom after a few years of "public service"). Same corrupt system where corporations run the government functions that count....most of them couldn't give a shit about gay rights and marriage and such...so they'll leave that one, but when it comes to the money, they have their fingerprints all over every policy decision made by either Democrats or Republicans.

And for those who think Wall street "caused" the collapse here is the complete story of the housing bubble.http://tjhancock.wor...ive-assessment/

That's what you're calling a "complete story?" Sure are a lot of details missing....such as how Alan Greenspan made sure the whole investment derivatives markets (bets on existing investments) went unregulated, leading to what's estimated to be a multi-trillion dollar ponzi scheme that will eventually bring the whole international banking system crashing down on regular investors....like those expecting a return on their pension funds.

A.I.G. created an insurance policy for derivatives (credit default swaps), made sure that Greenspan lobbied for them not to be regulated as insurance products, and then when real estate markets started crashing...what do you know, AIG runs to the Bush Admin. guy - Henry Paulson, and tells him 'we don't have the reserves to cover all of the CDS contracts out there, and we will declare bankruptcy and let the hedge funds and major national and international banks come crashing down too.' And that was the start of the bailout.

Why was there a real estate bubble that the U.S. allowed to bankrupt homeowners rather than the banks? Because another secret derivative investment was created - Collateralized Debt Obligations - so that mortgages created by banks could be bundled up and resold to third party investors, and set up in a phony risk categorization scheme to instill confidence from gullible institutional investors -- the creation of tranches or three levels of risk, with corresponding rates of return based on risk. The buyers didn't know that the CDO's were frauds right from the ground up, and this bundling scheme made it possible for mortgage companies to write liar loans to potential buyers even if they didn't have jobs or credit ratings. Notice that they first changed the bankruptcy rules for average Americans a few years previously, so that (unlike wealthy investors and corporations), the bankrupt mortgage-holder can never escape their debts and will be paying a "debt" on money to a banking system that created the damned money out of thin air in the first place! If this sort of system seems fair and justifiable to you, give your head a shake!

[blueblood]

Ok, this is ridiculous.

Why didn't the people who were lending the money say "no" to people who wanted mortgages they couldn't afford?

Why didn't the people who were lending the money say "no" to people who wanted mortgages they couldn't afford?

Why didn't the people who were lending the money say "no" to people who wanted mortgages they couldn't afford?

You guys (collectively--- Pliny and Shady included...) apparently believe that the answer to that question is that the government forced them to to comply with quotas. But only a small fraction of subprime mortgages were a result of those requirements. The truth is, they lent these mortgages because they wanted to. It was profitable. It was so profitable that they were advertising heavily to convince people who couldn't afford mortgages to come to their offices and sign up for mortgages they couldn't afford. They *wanted* those "entitled idiots" to come apply for mortgages. They didn't *care* that those "entitled idiots" were poor risks.

How can that be?

If a hobo asks you for $20 and promises to pay you back with $5 interest, who is to blame when you don't get your $25? You're asking us to believe that the poor financial decision was 50% yours and 50% the hobo's. Wrong. The hobo made a great financial decision!

But now imagine a situation where you know a guy who is willing to buy hobo promises from you at $24. You sell it to him, right? A guaranteed $24 is better than an iffy $25. This is such a great arrangement that you decide to go back to Hobotown and lend money full time. Soon Hobotown is full of happy hobos, and you have $24 in cash in your pocket for each happy hobo.

What about the guy who is buying those hobo promises? What's in it for him? Well, he's selling them too. Each time he gets 100 hobo promises, he puts them in a package called a "Credit Debt Obligation", and sells it for $3000. He's happy too. He's hoping you can bring in a hell of a lot more hobo promises.

So who is buying all these hobo promises? Who ends up holding the bag when these hobos don't pay up? By the time the hobo promises find their eventual owners, they're part of a portfolio of assets that includes lots of other things, sold to people who don't even know that some portion of the financial investments they're making is made up of loans that the loan originators know perfectly well are unlikely to get paid back. And the end holder of these hobo promises might not even notice what a crappy return the hobo portion of his portfolio has provided, because his portfolio is made up of big composite financial products that are so complex that he doesn't even know that some portion of it is made up of hobo loans that are likely to fail.

Now, imagine that the hobos are home buyers, and you are Countrywide Mortgages, and your friend who buys your hobo loans is Bear Stearns, and the suckers who are buying the end financial products are me and Argus and everybody else who puts money into their RRSPs.

-k

If you and argus are stupid enough to put money into investments without actively managing them, you deserve the bath that you take.

If you are stupid enough to buy a house thats 400k and you only make 50k per year, you deserve the bath that you take.

Had there not been the huge demand for housing, these loans wouldn't be created in the first place, along with the government policy to bail out said banks. It's been well documented that bad gov't policy is part of the problem. The banks are going to create a way to make money no matter what rules are laid in place. The rules in the USA led the banks to do what they did, in Canada we have different rules that are basically an insurance on banks and up until now more responsible bank clients.

Oh and if a hobo asks me for $20 I'm going to tell him to fuck off, unless hobo gives me 10$ down and his pants as collateral.

Once again I blame EVERYBODY, banks, government, and mortgage clients. They were all pigs and got slaughtered.

Keep playing the blame game.

[blueblood]

No, everyone along the way lied through their teeth in order to make bundles of money. Due diligence? What kind of due diligence is an ordinary person supposed to be making when he buys a house, Bonam? He has a house inspector, sure. But what else? Is he supposed to conduct an economic study into the housing industry first to determine the likely direction in housing prices over the coming years? How many economists saw the housing crash coming?

Cry me a river. It's not hard to make a real estate decision, I make 50K a year and have 5K in the bank and the house is 400K, golly gee darn, looks like I'm renting.

Ordinary person needs to read a book, newspapers, and news stories on how the markets are doing and look into trends.

[blueblood]

First of all, Blueblood, let's start out with a few givens. The ordinary person does not understand economics very well. Huge numbers of people think they know about what's financially savvy by reading newspapers.

So here is the ordinary guy. He's told houses basically are an investment. It doesn't matter what he pays, because he only needs to hold onto the house for a few years and the price will double! Then he can sell, and make a ton of money! Everyone's doing it, Blueblood! What are you doing living in a rental! Are you stupid!? Look at all your friends living in big houses with granite counters and pools in the yard! They're laughing at you!

So who should have been telling him differently? Well, the people he tried to borrow half a million from. After all, they don't want his loan to fail. Or at least, that was once the case. Now they don't care a damn! They'll loan him money no matter how ridiculous his income! Because they get their bonuses from loaning money, and then immediately passing them off to the banks. But the banks care, right? Nope. The banks ignore all the warnings from their risk management people, because they just package these mortgages up and resell them as virtually risk-free investments! And who's buying these? Well, the people listening to the banks, and the rating agencies like Moodies, telling them they're first rate!

Hang on. Give me a few minutes to laugh my head off.

The US government? Uhm, giving directions to... the banks?

Government financial policy is set BY the banks! Half of congress is in the pockets of Wall Street, dependent on huge campaign contributions, money to PACs, and promises that after their political career comes to an end, the real rewards will be forthcoming. You ever follow what happens to these obedient congressmen and senators when they finally leave office? They usually wind up working for corporate America for a million plus per year.

Once again cry me a river. I've had all sorts of neighbors get destroyed in the 1980's when interest rates took off when they went on spending sprees, I paid off my debts and could only buy what I could afford. I survived, they did not. They laughed at my little house, older truck, and older machinery; I laughed at their bank account and debt payments.

The fact the gov'ts are writing off mortgage tax deductions and insuring bank accounts is bad enough policy, let alone the suggestions they give to central banks to drop interest rates.

You keep believing the fantasy that the banks run everything, Obama got elected by pork barreling and trashing rich people. People wanted housing, they got it.

[Bonam]

No, everyone along the way lied through their teeth in order to make bundles of money. Due diligence? What kind of due diligence is an ordinary person supposed to be making when he buys a house, Bonam? He has a house inspector, sure. But what else? Is he supposed to conduct an economic study into the housing industry first to determine the likely direction in housing prices over the coming years? How many economists saw the housing crash coming?

If you would note, I was not talking about the purchasers of houses, but rather people investing in CDOs. People buying CDOs should indeed have done their due dilligence.

As for people buying homes, ordinary people buying a home don't need to conduct an "economic study into the housing industry", but they should make sure that their financial situation will be sustainable given possible swings in the housing market. They should not assume perpetual uninterrupted growth in the value of their home, but should realize that the value may dip at times, and be prepared for that eventuality.

[kimmy]

If you would note, I was not talking about the purchasers of houses, but rather people investing in CDOs. People buying CDOs should indeed have done their due dilligence.

Bonam, you may know how to make an ion drive out of a wrist-watch and an aspirin, but you probably don't know what assets you have money invested in unless the only investments you have are stocks that you selected yourself.

Nobody walks into a bank and says "hi, I'd like to buy a CDO and an MBS, please!" If you're like me (and I suspect I'm pretty typical in this) you got to your bank once or twice a year and talk to your banker about your RRSP contributions, and you do a questionnaire to identify your investment objectives, and then based on that your banker gives you some recommendations that fit into general headings-- "steady growth", "aggressive growth", "diversified investments", and so on. And you're buying into a big pool of assets that will generate returns for you, and these assets are run by capable professionals who do the due diligence and research for you, because it's a full time job that most of us don't have the time or the knowledge to do competently.

So I talk with my banker and we decide to put 40% of my contributions into SteadyFund, 40% of my contributions into ExplosiveFund, and 20% into FunFund, and each month the bank takes some of my paycheck and buys shares of those funds. And they send me a quarterly update with graphs and pie-charts telling me how things are going.

And things go along fine for a couple of years, but then I'm looking over my update and I notice that ExplosiveFund is generating negative returns on my investment! ExplosiveFund is losing money. But I've been assured that their aggressive growth strategy can be risky, so I give it some time, but more quarters go by and they're still losing money. And I go to my banker and say "ExplosiveFund sucks! I don't want to buy anymore!" And so we adjust my contributions so that 60% goes into SteadyFund and 40% goes into FunFund, and I'm not buying ExplosiveFund anymore. I'll live. My RRSP contributions generated less return than I wanted for a couple of years, but for me it's not the end of the world.

Meanwhile, Steve, the guy who runs ExplosiveFund, is pretty upset. His fund has been struggling and he's losing customers. He's been investing in CDOs and MBSs, and they've worked well in the past, but now it's 2006 and the CDOs and MBSs are really hurting his fund's value. Steve and his staff have been analyzing the US housing market, and they've concluded that things are going to get worse before they get better. So not only is Steve not buying anymore CDOs for his fund, he's also trying to unload the ones he already has. Steve and ExplosiveFund take a hit on this, but luckily for them, CDOs and MBSs aren't the only assets in the fund, and they'll bounce back.

But you know who *is* screwed? The investment banks that are holding all of these CDOs and MBS products that, suddenly, nobody wants to buy from them. They've bought billions of dollars of mortgages from companies like Countrywide, and they've been planning to sell them to fund managers like Steve, but Steve no longer wants to buy those products because they're tanking. This is extremely bad for these banks. They have billions of dollars tied up in assets that are rapidly becoming *worthless*.

So what did they do? They got the government to buy these "Troubled Assets" from them.

-k