| Desroko said: And since our OP brought up the CRA (not by that name - he doesn't know whatc the fuck he's talking about, so it stands to reason that he doesn't know the name of applicable law) I thought i'd squash that now. The CRA did not cause the crisis. First, it was passed in 19fucking77. Yeah, yeah, I know. It was biding its time. Second, most subprime loans were not made under CRA. Perhaps 25% were, probably less. Third, institutions not covered by the CRA were over twice as likely to give out subprime loans, and at higher interest rates. Fourth, subprime loans themselves did not cause this. Selling these mortgages as securities did. That's a practice that exploded during this decade. |
Exactafucktamundo. People defaulting on loans happen all the time, ESPECIALLY when they are subprime. Thats why such an unreliable security shouldn't be traded in trillions of dollars.
The payout was VERY HIGH but the risk was even higher, yet the firms rating these securities would make more money by rating them higher, so they did (Think about it, who pays credit firms to rate CDO's credit? How much money do you think they were making from CDOs? If they rate them lower, the demand becomes lower for CDOs and credit firms lose revenue.)
If a whole bunch of people defaulted on loans alone, no biggie, they lose their house and the bank loses a little money but makes most of it back from selling the house. If you are using some unreliable individual with bad/no credit as collateral for billions of dollars in loans a potential problem WILL (not may) arise eventually, usually with the onset of lots of broke people not having enough money to pay those loans. The intiator would be an economic slowdown or crash, or high inflation (perhaps gas prices going up because of Iraq?).
People go from paying $40 a week, twice a week, to paying $90 a week twice a week for gas. For someone already on a tight budget because of their subprime loan, this is a huge hit (some people really only make $200-$300 a week). Consumer spending goes down, jobs fire people, and people default on their loans, the cycle continues.
