Mo' Money, Mo' Problems

Those of you who have been reading my blogs for a while now know that I try to keep things light-hearted. But I felt compelled to share an article I recently came across in The New York Times which attempted to explain the "credit crisis" that has been making headlines for the past several months.

Why bore you with this stuff? Because last week I found myself thinking, "Hmm... I spent over a decade in the financial industry and have two business degrees, but I don't understand what in the hell is going on."

I figured I wasn't alone.

So I asked my husband to explain it to me, and he did. And I was going to attempt to write out everything he said, but then the very next day I found this article. It made me realize that the vast majority of people, including those in the thick of (and who possibly are responsible for) the crisis, don't really know what happened to get the financial industry to the precarious state in which it now finds itself.

I won't lie and say that the piece makes things crystal clear, but the journalist tried. He's basically saying that after people started buying homes they really couldn't afford (with the encouragement of banks and mortgage companies, who were whispering sweet nothings in their ears), those high-risk loans were bundled up, then split apart various ways and sold off to investors. Investors such as... almost every major financial institution in the country, if not the world. They were attracted to these mortgage bundles because, since they were high-risk loans in the first place, that meant that the interest rates on them were also higher than average. (You know the old adage, "High risk, high reward"...) Everything might have been OK if housing prices continued to rise, but they didn't. Party's over!

The story is much more complex than that, but you can read it for yourself. The same thing is going on with credit card debt... people charge more than they could ever possibly pay off, they are billed really high interest rates in the process, and then those "portfolios" of debt are bought and sold to investors. All of this is eerily similar to an account of massive derivatives blow-ups in the 1990s (remember The O.C. going bankrupt?) that I'm reading right now: F.I.A.S.C.O. by Frank Partnoy. While what is covered in F.I.A.S.C.O. is highly sophisticated, it provides a heads up to anyone who invests in almost anything. Its lesson: What you invest in usually not what you think you're investing in (ranging from single-company stocks to mutual funds to pension plans). Buyer beware!

OK, that's enough seriousness for a Friday. I'm going to go stuff $20 under a mattress now. (I kid... but maybe I'll just put $5 under for good measure.)

- e