GOP to blame for subprime crisis

Banks take your money and give you interest. They are able to pay interest by finding people that they loan your money to. The interest they charge is higher than the interest they pay.

Under Fractional Reserve Lending, a bank will lend many times over the cash they have in their reserve. They do this under the theory that people will not withdraw their money because they are earning interest.

Bank employees are paid commissions by the number of loans they bring into the bank. Adjustable Rate Mortgages (ARMs) pay more commission than regular mortgages.

Agents sold ARMS to people they knew could not afford the mortgages once the rate was adjusted just to earn the higher commission.

These ARMS were packaged and sold as security instruments on Wall Street. The loans were sliced up, bundled with less risky mortgages and sold as mortgage-backed securities called "collateralized debt obligations" (CDOs).

The banks used a computer model to estimate the percentage of foreclosures in a typical CDO and they determined each CDO still made a handsome profit. These CDOs were sold to other banks that used them as collateral to make even more loans and then those loans were used as collateral to make even more loans.

Unfortunately, the computer model was wrong.

As mortgage defaults grew beyond anybody's wildest imagination, the value of CDOs became suspect so nobody wanted to buy them.

So banks that invested in CDOs are now stuck with financial instruments of no value, and do not have enough in reserve to cover this debt. And there are no more borrowers to cover this.

This, of course, is all the fault of Republicans because they have more faith in free markets than in regulation. The S&L crisis under Reagan was a puddle compared to the ocean of debt from the sub-prime crisis under Bush.

John D. Morgan

Arlington Heights