Our Money

Sorry for the late post, I procrastinated, and then researched for 2 hours.

On September 25th, JP Morgan Chase overtook Bank of America as the country's largest deposit taking institution by claiming all assets of the Seattle based Washington Mutual, the country's largest savings and loan institution failure ever. Chase did so without incurring any of the defaulted liabilities of WaMu. WaMu's failure related directly to it's numerous defaulted mortgages, resulting in a catastrophic loss of capital. The public company's stock fell from $36 a share a year ago to 14 cents a share as of yesterday.

On September 29th, Citigroup acquired the capital of failed Wachovia in a deal with the FDIC, guaranteeing no acquisition of loses. Wachovia failed for much the same reason as WaMu.

But before all this, on September 16th, the Federal Reserve agreed to loan American International Group $85 billion in capitol, effectively buying the company on the taxpayer's behalf. AIG will be run by either the Federal Reserve or the Treasury. The culprit in this case was AIG's $441 billion venture (nearly half of its $1 trillion balance sheet) into housing and credit linked derivatives. Most simply, AIG was insuring the mortgages that failed Wachovia, WaMu, and 27 other banks nationwide this year.

But how did this happen?

Deregulation's roots are as old as 1969, when Fannie May was "created", formerly the governmental institution Federal National Mortgage Association. This loosened government control over who could receive mortgages, and what percentage of the market of homes were in sub-prime loans, loans given to high risk individuals.

What occurred over time was a market driven push to deregulate, to allow the market to decide the make up of its own loans overall. Sub-prime lending, heavily regulated until 1969, was an astronomical supply of capital waiting in the wings.

Valued at $50 billion in 2001, sub-prime lending is now worth $1.3 trillion, accounting for 1 in 3 mortgages nationwide. It now appears that nearly the entire sub-prime mortgage market will be paid for directly by the taxpayer, as almost $800 billion has already been injected back into the market by the federal government.