What Went Wrong? – The Only Explanation You’ll Ever Need To Read
As Wall Street struggles to find a way forward, many on Main Street are asking how we got here in the first place.
Throughout the crisis the Fast Money team has provided one of the most succinct and spot on explanations you’ll hear anywhere. If you’re confused, and quite frankly who isn’t, this should help.
The Fannie Act
It started in 1999 with very good intentions when we passed the Fannie Act. The purpose was to make Fannie and Freddie able to take lesser credits. In other words people with lower credit scores were approved for mortgages so they could achieve the American dream of home ownership.
Greenspan Drops Interest Rates
Then, in the wake of September 11th, the Fed reduced interest rates to make very cheap money and stimulate the economy. The plan worked but triggered a surge in real estate investments of all kinds. (That included people flipping homes, etc.)
Remember, it was easier to get a mortgage now.
But here’s the big whammy. In 2004 the SEC failed to properly regulate Credit Default Swaps or insurance policies on mortgages. Financial institutions were allowed to hold only 3 cents for every dollar of risk. And to make matters worse, that happened in secret without transparency.
Those factors came together to create the perfect financial storm. Home prices began falling, home owners began to default on their loans, and those insurance policies couldn’t cover all the losses.
As a result the credit markets have seized up.
Barry Ritholtz, CEO Of Fusion IQ and creator of popular “The Big Picture" blog made an interesting point on Fast Money. He said, "In most of human history credit has been based on the borrowers ability to repay. But for the first part of the 21st century the lenders ability to securitize and repackage mortgages became the basis of credit." In a nutshell, that’s what we’re dealing with today.
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Trader disclosure: On Sept 25, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (MSFT), (WMT); Adami Owns (AGU), (BTU), (C), (GS), (MSFT), (NUE), (INTC); Finerman Owns (GS); Finerman's Firm Owns (MSFT), (NOK), (WM), (DELL), (PM); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM), (COF); Najarian Owns (NOK); Najarian Owns (AAPL) And (AAPL) Puts; Najarian Owns (BBBY) Put Spread; Najarian Owns (FCX) Call Spread; Najarian Owns (GS) Call Spread; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (RIMM) Call Spread; Najarian Owns (WB) Put Spread; Najarian Owns (XLF) Call Spread
Fusion IQ Is Short (AIG); Fusion IQ Is Long (LZB), (PZZA), (WU), (SXE), (AVAV), (CGRB), (GHDX), (NUVA), (LMNX)
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