Years ago, a friend of mine thought he was buying a video camera from a street merchant in New York City. The heavy package appeared unopened and in mint condition. When he got back his hotel room and opened up the box, he found two nice sized bricks. The tuition in the school of hard knocks cost him about two hundred dollars.
What does this have to do with the bailout? Well, a lot of banks and investment firms thought they were buying good mortgages from FHLMC (Federal Home Loan Mortgage Corporation),and FNMA (Federal National Mortgage Association). The packages looked good and had all the proper guarantees attached to them. Plus, they were backed up by federal regulations and the United States government. But when they began to inspect the contents, they found out that they bought nothing but bricks. In this case, the bricks were foreclosed mortgages, extremely risky loans and bankrupt patrons. Basically worthless financial assets.
Let’s take it a step further. Say my friend met another friend on the way back to the hotel room and showed him the video camera package. His friend was impressed and offered him three hundred dollars for it. Repeat this process five times and add one hundred dollars for each exchange. Suddenly, two thousand dollars worth of business would have transpired on the basis of a couple of worthless bricks!
Now throw another wrinkle into the mix. Say friend three and friend five didn’t have the cash to buy the package and so they went out and borrowed the money using the package as collateral. Their lenders let them have the money on the basis that they could confiscate the camera and get their money back in case of default on the loan. That means that a thousand dollars of the two thousand dollars has now turned into bad credit. Not only have the lenders been ripped off, there was no camera in the box to begin with. Who is the real culprit? The street merchant who cooked up the hoax in the first place. Good luck catching him.
Multiply the money in the example by billions. Nobody can pay back the loans because it is just too much money. That’s why FMAC and FNMA are now on the hot seat. They were overseers, promoters and participants in cooking up bad loans upon which billions of dollars were invested.
Two more twists. What if my friend would have gone to a group of a hundred friends and offered to supply them with video packages just like the one he bought. They all eagerly gave him up front money to the tune of $200,000! He takes the money, spends it and then cannot find the street merchant who sold him the worthless merchandise in the beginning. Now, we have a huge mess. There is no way to recoup the losses for each customer because it was all paid for nothing.
Last, who is to be blamed? What if the street merchant said to my friend. “If you don’t buy my camera, I know where you and your family live and I will pay you a not so friendly visit some time?” What if Freddie Mac and Fannie Mae agents went to banks and said, “If you don’t make loans to people who can’t afford to pay you back, we will cause you so much grief that you will go out of business?” Hmmm?
Finally, what if the street merchant who caused the entire fiasco in the first place dressed up like a federal representative and got all the investors together and said, “If you lend me the money, I will get you out of this mess…maybe?” We would like to tar and feather him and run him out of town on a rail. We can’t. He’s the sheriff, the chief of police, and the mayor all rolled into one.
Unless we can fire the congress, we’re stuck. They invented Freddie and Fannie. They ran it, expanded it, exploited it, lied about doing it, cursed anyone who tried to stop them from doing it, and now they want us to give them money to fix it. They have the nation over a barrel.
America is in trouble. And we elected the very people that did this to us.