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How Did This Happen?

Friday marked one of the hallmark moments in US history as the US govt voted to pump $700B into failing financial institutions to hopefully avoid a massive credit crisis.  This is the single biggest financial intervention since the Great Depression. 

I don’t understand, how did this happen?

In a nutshell…

1. Banks began lending money to people to buy real estate through programs (sub prime loans) that set weaker borrowers up for failure. FACT: Borrowers with subprime mortgages fell behind on their monthly payments at a rate more than four times that of prime borrowers, according to the Washington-based Mortgage Bankers Association.
2. More and more banks jumped on the bandwagon, b/c of the amount of money that was being made (greed)
3. As these sub prime programs began adjusting, more and more loans went into loan default
4. Banks, large and small lend money to one another in short turn around loans
5. When a bank has more bad loans on their books, it becomes more expensive for them to borrow money
6. As more and more larger banks begin having more bad loans on their books, the flow of money begins to slow down
7. Banks with a large number of bad assets (loans) are no longer able to keep money flowing b/c of the growing number of defaults and the increasing cost of borrowing money
8. Bank goes under or is bought by stronger banks
9. But wait, aren’t banks insured by the US govt?
10. No..  Money in accounts at banks is insured by the US govt (FDIC), but not banks themselves
11. The bailout money has been appropriated to buy these bad loans/debts and get capital flowing again.

There is a lot more involved in the bailout program, which we’ll cover in a future post. The hope, however, is that these loans/debts will eventually recover and when they do, the govt will liquidate them and recover the tax payer money that was used to purchase them.

Given the recent news and the uncertainty of how this will affect Real Estate, especially Austin Real Estate, Dwellgo will be hosting a “What Does this Mean for Real Estate?” Town Hall Event next Thursday, Oct. 16, 2008.  For more information on this event, click Financial Crisis & Austin Real Estate - Town Hall Event

Have questions or thoughts for the event, let us know in the Comments below:

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