Safeguards ignored, financial ruin occurs

Our financial system has worked pretty well for more than 200 years. The big game changer that spawned the real estate bubble and financial crisis occurred when investment bankers figured out a way to off load inferior debt on to unsuspecting investors.

Sure there were many contributing factors, but all of them would have been held in check, as was the case for 200 years, until the investment bankers stepped in.

Loan companies made questionable loans because they would not have to be responsible for those loans. The investment bankers would bundle these loans, derivatives, and sell them. The good loans (AAA rated) sold quickly. The poor quality loans along with credit card debt, home equity loans, car loans, etc., were scrambled together and submitted to the ratings agencies: Standard & Poor’s, Moody, etc.

Wanting to keep their fees rolling in, these agencies obligingly rated much of the poor debt AAA.

Unsuspecting investors, commercial banks, pension funds, foreign banks, etc. bought this inferior debt. When the defaults began, this house of cards came tumbling down. These unregulated derivatives made the financial crisis possible.

But for this unregulated derivative trading, the excessive borrowing by real estate speculators and homeowners would have been nipped in the bud. Loans would not have been made to, for example, the Las Vegas stripper who bought five townhouses with little money down. She walked away from the townhouses when they failed to appreciate and she couldn’t sell them.

The normal safeguards in the system were bypassed. The investment bankers and their “partners” the ratings agencies, created the mechanism that “allowed” the financial system to collapse. They should be prosecuted for fraud and sued for damages.

Ron Mengarelli

Gilberts