The Best Years of Your Life… Now!

Mark my words and the date of this post. 

Nobody has any idea what the full extent of the financial crisis really is. 

It’s not a cut and dry situation where a person takes out a loan and then defaults on the loan.  If it was that easy to understand there wouldn’t be any financial crisis.

It’s the unknown nature of the “fantasy financial products” —  that have been sold around the world —  which is causing the problems.  Because the underpinning — the collateral – those “real” things that are supposed to maintain value over time –  which were used to justify the value of those derivative financial products has dissolved.

In a nutshell here’s what I believe caused the financial crisis we’re now facing:

An enormous number of “sub-prime” mortgages were sold.  That is, people who could not afford a mortgage or would not have been considered credit worthy — in much saner times — were given mortgages.  Many were “sold” on an initial lower mortgage payment which was affordable.  That payment — part of an adjustable loan — was only for a relatively short period of time — 3 to 5 years.  Then the loan adjusts itself upwards.

Suddenly after a few years of affordable house payments people are faced with substantial increases.  So much so that their household income cannot cover the increase.

Long before this happened the mortgage loan was already sold as a financial product using the appraised / market value of the house as collateral.  Since housing had continuously increased in value — the house was worth more than the money owed on the mortgage.

Now comes the financial institutions and their “fantasy derivative financial products”

The financial institutions began purchasing and  bundling these loans using the appraised value of the houses as “collateral” and the expected increasing loan payments as the revenue. 

Now here’s where things get out of control:  The “financial products” sold as investments valued themselves as being worth 12 to 30+ times the value of the collateral! — are you with me?  In other words, only a portion — 1/12 to 1/30 of the value of the  investment products are  based upon the actual value of the houses with sub-prime mortgages.

Using a smaller foundation of  “hard assets” in order to create new “value” is called leverage. 

Banks loan out 10 to 12 times the amount of their actual cash deposits and have been doing so for years.  As long as people paid their loans — with the anticipated defaults on loans figured in — this system has enabled our economy to grow and prosper.

But here’s where the system got off track:

The sub-prime mortgage backed “derivative” investment products were sold all over the world. Mutual funds, hedge funds, union retirement funds, even local governments, here and abroad, purchased these investments — because they were told they were sound! 

They relied upon trusted “rating services” who rated these products as fairly risk free… 

Looking for the best return on investment, these entities purchased these “derivative” financial investment products.  It’s important to remember that they weren’t investing directly into the sub-prime mortgages — it was a “derivative” or product leveraged against the “value” of those mortgages.

Here’s what brought the house of cards down:

The people who should never have been given a mortgage in the first place stopped paying their loans.  In a surprising number of cases, they just walked away from their houses — to a degree that had never before happened!

This caused the loans to go into “default”. 

So many of these loans started going into default that there was a sudden and substantial number of houses placed on the market by the mortgage companies.  This glut of houses started driving down the market price of all houses.  The worst depreciation — not surprisingly taking place in the geographic areas where the largest number of these sub-prime mortgages where being sold.

Now, the hard-assests used to leverage the derivative financial products being sold all over the world starts to fall in value — and the loan payments —  which created the profit that allows the return on investment promised by the “investment products” — are no longer being made.

The “investment banks” which purchased the sub-prime mortgages and then resold them as derivative financial products all over the world — suddenly had the foundation which supported the “perceived” value of their ” derivative financial products” collapse.   

The really frightening part is no-one knows how many levels of new “derivative” financial products were created and sold — This is why nobody can predict how bad the financial crisis really is…

When all is said and done, our financial system is based upon the faith — of the investor –  that investments will be safe. The underpinnings of what makes investors feel safe has dissolved.

In tomorrow’s blog I’ll explain the other “half” of the financial crisis — “short selling” and “naked shorting” — It has nothing to do with sex!

If you see this financial crisis differently, I would love to hear from you — This is the best take I have on it with the information that’s available — But then, even the so-called experts aren’t coming forth with anything more than speculation.

My concern is that too much time will be spent on assigning blame and political posturing in the coming days and weeks.  I believe we are not being told the whole story.  That, I’m afraid will only become apparent after the election…

Intentional Prosperity™ — understanding how the world really works.

Hold onto your wallets!

-Bob Baran

The world as we know it has changed forever…

The events in the world of finance last week, will go down in history as the most  dramatic change in “the American Way of Life” since the founding of the United States.

As with the greatest changes that happen to societies, this one slipped in under the door — suddenly upon us –  and  required extreme immediate  action in order to deal with it.  

According to Secretary Paulson, of the US Treasury and Bernanke, of the Federal Reserve we were hours away from a complete meltdown of the global financial system.

A complete meltdown of the global financial system?  How come I didnt’ hear about this on any of the mainstream media — before it was only “hours away”?

What a minute — why is it only the pundits, conspiracy theorists and nay-sayers —  who inhabit late night radio, web sites and blogs —  have been calling attention to this “global problem” for months and years? 

How is it that the so-called “fringe” could see it coming and our trusted main stream media wasn’t picking up on the story?

It’s called denial

Nobody wants to point to reality and call attention to a looming problem.  Hey,  it would be way too much common sense to deal with it before it became a potential global financial meltdown.

Are those guys who are in charge —  that out of touch with reality?  YES!

Am I the only one who’s getting this?

But then you shouldn’t be surprised. The way most people deal with the reality of their personal lives — denial — is going to translate into how “society” deals with it’s growing problems.  Oh, and did you notice nobody’s taking blame for the obvious out of control nature of the system which led to this potential meltdown?

Many psychologists believe that real change only comes as the result of emotional truama.  In other words, something that “wakes you up” out of your complacency. 

Like finding out your credit card no longer has that line of credit you thought was available to you —  because the financial institution can’t borrow the funds it needs to cover it’s promise of credit to you… That’s the financial meltdown part.

For those of you already immersed in the Intentional Prosperity philosophy, you know you’re going to weather this coming storm.  

You’re going to be okay no matter what happens.

Whatever changes come in the coming weeks and months — understanding how the human operating system works gives you an unprecedented advantage over the ups and downs of life.  You will be fine.

Maybe I’m over reacting to Secretary Paulson’s  “the sky is falling”  proclamation about the global financial meltdown.

But what it the sky really is falling?

How strong is your inner foundation?  Is it going to support your roof if something unexpected falls on it?

-Bob Baran