Sunday, September 26, 2010

They really don't know what they're talking about!

When I started this blog, part of the reason was because I was doing is because after the financial meltdown  it confirmed to me that making my own decisions was the best way to do. Sure,  I may miss out on some great runs, but I also haven't lost several BILLION dollars.  The question that keeps coming up is how did they lose so much money? Simple, THEY DIDN'T KNOW WHAT THEY ARE DOING!

First, here's the Cliff Notes version of what happened when the whole financial world went crazy:

  1. People were being given fixed and adjustable rate mortgages they absolutely could not afford (yours truly included). In some cases, the person getting the mortgage didn't have to verify that they even had a job.  They figured they could always sell the house at a higher price and make money. Remember all those house flipping shows on A&E on Saturday mornings?
  2. Because so much money was so easily available, housing prices kept increasing. This is what was known as the housing bubble. (um, bubbles pop..)
  3. These mortgages were grouped together and sold to investors as a big block of A-rated assets. Why?  Because the rating agencies and the financial institutions selling them did not actually look at the individual mortgages that were making up the blocks. They kinda sorta took each other's word that it was all good.  They then borrowed money, using these "assets" as collateral.
  4. It's more complicated, but some people looked into the blocks and realized what a mucking fess they were. They then made bets against the assets, realizing they were eventually going to blow up. It got so crazy that some fund managers were having blocks put together that were as bad as they could make them, sell them to their clients, then bet against the same block they told their clients were rock solid. These were all still getting A-ratings.
  5. Eventually, when the adjustable mortgages reset to their final rate the mortgage payments shot up, much higher than the mortgagee could afford. And the fixed rate mortgagees couldn't sell the house they shouldn't have bought anyway, nor could they afford the payments. As a result, a few new things happened:
  • Housing prices stopped rising because there were no new people to get ridiculous mortgages.  For more info, take a look at Tulipmania.
  • Mortgagees started defaulting like crazy because they couldn't afford the payments.
  • Because the mortgages started defaulting, the blocks of mortgages lost value.  Remember these blocks were used as collateral for loans. If suddenly you don't have collateral, your loan can get called in. If you don't have the money to replace the lost value, screwed is an understatement. By the time the mortgages were defaulting and taking the investors with them, Wall Street had been buying each other's crappy crap crap, so when one went over the cliff, they were all handcuffed together and they all went.

That's the truly Cliff Noted version of the mess.  For a more detailed and entertaining summary, read Michael Lewis's The Big Short: Inside The Doomsday Machine.  I recently heard Mr. Lewis in an interview on NPRs Wait Wait Don't Tell Me game show. The one thing he reiterated is that Wall Street still doesn't have a clue. (Read his book Liar's Poker for a more in depth discussion of Wall Street's cluelessness.)

I guess the long overdue point I'm making is, why would anyone blindly trust their future to an industry that does not have anywhere near your best interest at heart and take their fees up front whether they actually make you money or not?  Trust me, investing in stocks and bonds is not rocket science  So long as they make you believe 1) it's too hard to do on your own and 2) they know what they're talking about, they have you.

Before I get beat up, I have no ax to grind with financial advisors or investment bankers. I just think that those "experts" on Wall Street that almost destroyed the economy of the planet are probably as collectively stupid as they appear.

As for me, my portfolio has been on a roll as of late.   My return has doubled in the last month. Still looking at Fanny Mae and Freddie Mac, they're still under $.30 a share so I'm still watching it.

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