One Response to “Understanding the credit crunch and economic situation”

1. Craig on October 6th, 2008 11:12 pm

   I looked at this initially and thought you were venturing into a fringe area which I thought was an overly liberal interpretation of this situation and not at all helpful to getting where we are all headed, since it seemed like a Michael Moore version of how all investors have screwed America. Obviously this is not the attitude we want to reflect to potential investors in our venture. However, I watched the whole thing and actually think it is a fairly accurate broad explanation of what has happened.

   In fact, in the early years of loan seuritization I put together the first securitized offering of farm mortgage backed securities through DLJ, which was a subsidiary of Equitable (where I worked at the time). At that time we had only three “tranches” and all were rated investment grade. So presumably, no investor had a real problem, even if their real returns did not exactly meet their prior expectations. This was in the early days of loan securitization when everyone was still cautious.

   As with many things in the 90s and early 2000s, things got progressively more aggressive with the overall success in the economy, and investors were willing to buy more complicated securitized securities as their overall risk threshholds gradually decreased in order to keep up with the competition’s profit margins. Also Congress played a big part in this trend because they saw this as a way to dramatically increase low income/minority ownership of housing (a worthy goal but not at all calculated about the potential risk of the consequences of drastically increasing the power/loan volumes of the Fannie/Freddie federal mortgage lending agencies).

   I am taking the time to give a broader perspective to this because the quick and subtle implication of just reading your blog and viewing the video is that most people with money to invest are bad, and taking advantage of most other people. As you well know, most investors are very good people, who have worked their asses off to make what ever good money they have made, and overall have made a great contribution to funding new businesses (like ours).

   The US and World economies go through up and down cycles in the economy every 7-10 years because that is the nature of a free economy so this is not now exactly a political event which will be changed by an election. Democrats and Republicans encouraged the ups, because it made their constituents happy and profitable, and should share in the resulting inevitable correction. The economy historically goes in cycles, excascerated in the last 20 years by consumer expectations that they could borrow themselves into a great lifestyle. This was encouraged by government and business.

   I spent a lot of time writing this response because I want to make sure you understand that the cause of this current economic crisis are not due soly to the simple video explanation about securitized loans. Our society in general has promulgated this economic crisis through a “material goods aspiration”. And this will correct gradually over the next 10 years so we need to be thoughtful about that as we plan for the future.

   Obviously by my actions to date I have been a big supporter. I recommend we not get into potentially politically charged areas where things are really so complicated. This video is really good in explaining the CDO securities but it does not represent the bigger picture of what is happening in our economy, and the history of how it has all come about. Go Event-Seek!…Craig

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