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Originally Posted by flstf
I skimmed this document and halfway understand how bad loans were made. What I don't understand is how or why the institutions involved took these loans and bundled them into leveraged packages that totaly collapsed the world's banking systems because the inflated real estate market corrected. Why couldn't they just take the loss? Why were they leveraged so much that a reasonable drop in real estate prices caused most of the major banks to go belly up? And the most important question is why did our government regulators allow this to happen?
I realize that there is probably greed and political corruption involved but even the ruling classes should not want to kill the goose that lays the golden eggs.
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I don't think the banks expected it to crash. They probably thought that it might go down a little or not have any growth for a few years, but not crash. In the 60 minutes interview they looked at a Miami condo that sold for $2 million, and when the buyer walked away, the bank sold it for $935,000 or something. That is a 1 million dollar loss that the banks expected the insurance agency to cover. Then repeat this all over the country. But when the investors saw the mess that was coming, and realized that they were going to have to pay out a lot of money and weren't going to make any profits, they all sold. With their stock price really low, they couldn't survive and had to get bailout by the fed or sold to another company.
Here is last week's Frontline. It explains it pretty well.
FRONTLINE: inside the meltdown | PBS