What a long strange trip it's been
The stock market effectively crashed yesterday on October 9th exactly one year after setting a record high and how did we get here. To quote the Grateful Dead, "what a long strange trip it's been". Back in February of last year I wrote about the tip of the iceberg.
"HSBC (Hong Kong and Shanghai Banking Corporation) was the first to shock the market with their announcement in early February that they were setting aside additional reserves to cover bad debt expected to be 20% higher than forecast. HSBC is the 3rd largest bank in the world and smaller lenders immediately started toppling. ... and I would expect some kind of hit to the financial system. Of course, if that would occur, the US Government would likely step in and help out, in plain English or American, such as it is, that means the taxpayers will bail out the losers."
(emphasis added - and little did we realize then how big the bailouts would be).
John and Jane Doe wanted to buy a house and the real estate market was soaring, they didn't necessarily have good credit or any money to put down but mortgage loans were still available. John and Jane Jones wanted to buy a home but didn't earn enough money and had a lot of debt but they could find a mortgage tailored to their specific needs. John and Jane Smith wanted to buy a home but couldn't afford the monthly payment but a mortgage tailored to their needs was available as well.
It was because the credit wizards invented subprime loans, alt a (a no documentation loan also called the NINJA loan - no income, no job and no assets) and of course, the Option ARM with its treacherous negative amortization feature if not understood carefully and of course, with all these loans, who bothered to understand what they were really signing, everyone just wanted to buy a house.
And you could always refinance later.
Wall Street then repackaged the loans as mortgage backed securities and then "collateralized" them with credit default swaps, a fancy name for insurance in case John and Jane defaulted. And dismissing the fact that only about 5% of all the loans have effectively gone bad, the leveraging of the debt has cost firms Trillions of dollars of losses, seen several financial institutions collapse and now, significant losses of Trillions more in the stock market.
The chart of the Dow for the past year and past 10 years courtesy of BigCharts.com
Not pretty.
Back to the credit wizards, I was amused when I opened my mail yesterday with a letter from MasterCard advising me that my credit line was being lowered to reflect my spending history. Since I generally spend about $300 or $400 per month and pay my bill in full each month (thankfully), I didn't need the $8500 credit limit previously offered and they were reducing it to only $6000. Smart?
I would think that the credit wizards should look at those customers who have balances at the high end of their limits and are at best, only making the minimum payment. To me, that indicates trouble brewing on the horizon. But then, I would have never thought to give a mortgage to someone who didn't pay their rent, car payment or credit card either.