What happened with the banks?

Imagine if you will that the federal government believes all Americans have the right to home ownership as an inalienable right as the pursuit of happiness. So in its infinite wisdom instructs the largest mortgage purchaser in the world, Federal National Mortgage Association (Fannie Mae), to require banks to loosen lending requirements to sub-par borrowers to make the dream of home ownership a reality to those who otherwise could not afford a home. As a sweetener Fannie Mae provided liquidty to insure banks and mortgage companies had plenty of easy money for what would later become and known as toxic loans. The risk was cut out of the equation by Fannie Mae's backing and so went the oversight. Loan committees that recommend granting loans for its borrowers to its bank board of directors no longer had to evaluate risk or health of the borrower. Fannie Mae would bear the brunt of the risk.

But what if CitiBank or any other AAA credit-rated company decides to do just that. Lend to people that qualify by merit (financially capable)and lend to people that do not qualify to satisfy a dream of home ownership with a quota backed by Fannie Mae. So, Citi Bank, that is AAA rated bundles the good loans with the bad loans (now known as toxic loans)to create a loan package that is sold to investors, funds, etc. The loan portfolio has a AAA rated credit grade on it due to Citi Bank even though the loans in the loan portfolio when blended (package) is sub-par at best and certainly not AAA rated loans.

Along comes Lehman Brothers who purchase the loans and leverages them 30 times against their value for borrowing purposes and at the same time have them insured by AIG which became easy because AIG believes the loan portfolio to be AAA rated quality but it was not. So as a result Lehman borrows huge sums of money aginst the bad loans. As the loans become uncollectable the market punishes Lehman and starts putting pressure on them to reduce thier lending. And eventually they run out of money. The loans are brought into question and as the market value of homes erode so does the value of the portfolio. As the loan value dimminishes more pressure is put on Lehman to shore up the portfolio usually by putting up more cash. Cash it does not have because it cannot borrow. So the cycle continues. Lehman seeks insurance releif thorugh it's policy with AIG. Now AIG unravels insuring loans that were toxic. An so does Fannie Mae.


Welcome to the free market. Where is the oversight? Where is the Congress? Where are the internal and external auditors? With freedom comes responsibility. Where are the fiscal hawks when you need them?