Complicity of Brokers
This is not an indictment on brokers, nor on capitalism. This string of events is the product of a capitalist system where, at a given point in time, each transaction made was logical and moreover, commonly accepted practice. At each stage, someone was well compensated to lubricate the transaction.
Only afterwards did the consequences of selling a subprime loan to a Nevada home buyer indirectly result in a small Norwegian town unable to make municipal payroll.
| Event | Reasoning | Reason it unraveled |
| Lender/mortgage broker sold subprime loan to home buyer | "Everybody should own their own home" / Mortgage broker collects commission by tapping into a new market of home buyers | Yes,
housing prices skidded... but a key reason not discussed for the
initial faith in subprime products was public belief that credit would
continue to be available, i.e. there would continue to be credit (refi)
products they could transition into after their first ARM reset. The
credit crunch was unexpected, although it seems inevitable in hindsight. |
| Subprime loan sold and packaged as CDOs and other investment products | Redistribution of risk allows more loans to be underwritten / Investment banks collect fat commissions for packaging and selling | The credit crunch happened because nobody knows where all those bad subprime loans are hidden within those CDOs. If every bad subprime loan package could be identified, a separate market could develop solely for those loans. But its toxic cloud contaminated all types of debt and resulted in a liquidity crisis based on lender mistrust of many debt instruments. |
| Citigroup subprime loan CDO sold to town of Narvik, Norway by Terra Securities, a Norwegian investment broker | Higher investment returns / Terra and Citigroup brokers collect commissions | Citigroup CDOs hard hit by credit crunch |
| Terra Securities declares bankruptcy | To avoid lawsuits for selling questionable investment products / Bankruptcy lawyers collect fee | Cannot redress customers for selling questionable investment products |
| Narvik, Norway likely lost 1/4 of its $163 million annual budget. Mayor laments that municipal worker payroll has been missed |
h/t to Karl at Viewr.com for passing along this NY Times article on this Norwegian example of the globalization of the financial markets.
Pat,
You are only proving Alexander Hamilton's main point about the strength of the financial system that he essentially constructed. That it is ALL interconnected. Similar maybe to the Ying and Yang throughout all life. What makes you strong is also your weakness. He knew that then, but it was an accepted risk that when you look at the overall performance of the American economy, and the world economy vs. what the Soviet's offered, I'll take ours.
And everybody gets greased for their work. Even Al Gore when he takes a jet to LA and talks about global warming. He get big money.
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Thx Scott... I did a double take on Alexander Hamilton as father of the globalized financial system... LOL.
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