Can it really be that bad? Seriously?

Someone at the call asked if I really thought these investment banks were only backed 5% by actual assets. My answer is "yes," and to understand why, I point to a rather long but easy-to-understand article over here. But here's the start:

1. People like buying safe investments.

2. Historically, mortgages are very safe investments: people will go to incredible lengths not to lose their homes.

3. Banks realized that they could make lots of money by taking groups of mortgages, and turning them into bonds that they could sell, earning a commission, and passing the risk to whoever bought the bonds.

4. These bonds became incredibly popular. Lots and lots of people and organizations wanted to buy them.

5. There aren't enough good mortgages to put together the number of bonds that people wanted to buy.

6. So banks started giving out mortgages to people who couldn't repay them, using elaborate and dishonest schemes to pretend that they were actually not bad mortgages.

7. The people who got mortgages that they couldn't repay didn't repay them.

8. The banks act surprised: "My god, no one could have predicted that so many loans would default! Whine, whinge, moan, someone come help us!

The article goes on to describe how this gets tied into insurance and how that helped people convince investors that this big steaming pile of crap was really a "safe" investment. I will concede that at the bottom is still a bunch of actual assets, but the amount of money promised far exceeds a responsible broker's limit. By an order of magnitude or so. Buying up all those obligations frees up the broker to lend money again, but doesn't fix the underlying problem: the assets are still overvalued and backing too many unpayable debts.

In any pyramid scheme, the last buyer is the one who loses the most. That shouldn't be the US Tax-payer. It's one thing for a private bank to welsh on it's debt. It's something else when it's all been transferred to the US Treasury and it has to welsh on its obligations. I say, let a few more banks go under and then get a good price for the actual assets. Find some way to inject liquidity into the system without just paying off the banks. (Is this one serious?)

That's my $.02.