The whole thing depends on there being many more good loans than bad, so that the losses are covered by the gains.
That's only part of the issue. Another was that it was expected and even hoped for that a certain percentage of loans would be defaulted on. Say you lend $100,000 under a "creative financing" arrangement, with balloon payments and a steep interest rate rise after 24 months. Your poorly-paid mortgagee cannot pay and the house is foreclosed on, but in the real estate bubble, that property is now worht $180,000, so the lender pockets a nice profit off of the foreclosure and subsequent flip. This is one way these seemingly risky debt packages could be promoted to the buyers as "low-risk."
The banks presumably knew that the real estate bubble would eventually burst, but they probably also knew from prior experience that when push came to shove, the Fed and the US taxpayers would pick up the pieces. As Chomsky says, profits remain private but losses are passed on to the public.
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timeasmymeasure
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Date: 2008-08-08 08:59 pm (UTC)That's only part of the issue. Another was that it was expected and even hoped for that a certain percentage of loans would be defaulted on. Say you lend $100,000 under a "creative financing" arrangement, with balloon payments and a steep interest rate rise after 24 months. Your poorly-paid mortgagee cannot pay and the house is foreclosed on, but in the real estate bubble, that property is now worht $180,000, so the lender pockets a nice profit off of the foreclosure and subsequent flip. This is one way these seemingly risky debt packages could be promoted to the buyers as "low-risk."
The banks presumably knew that the real estate bubble would eventually burst, but they probably also knew from prior experience that when push came to shove, the Fed and the US taxpayers would pick up the pieces. As Chomsky says, profits remain private but losses are passed on to the public.