Completely hidden behind what is seen in the whole "sub-prime" mess are forces more insidious and destructive than one could hardly imagine...and quite complex as well. I will try to boil it down into a few simple statements, but if you would like to study it in more detail, I know of no one who has a better handle on it than Jim Sinclair (www.jsmineset.com). He writes daily free editorials. For the past year he has covered the problems of sub-prime in great detail...being far ahead of events, and exposing the rotten underpinings of the whole situation which are completely hidden to the average person.

In a nut shell, what happened was that the big banks (Citigroup, J. P. Morgan, etc) and large investment bankers (Merrill, Bear Stearns, Lehman, etc.) packaged (securitized) these mortgages for sale to investors, dividing them into traunches, and getting the rating agencies to put a credit quality rating on each traunch. The highest rated traunches (AAA) would get the first portion of the principal payments made each month, the next rating down would be paid, and so on down, whatever was left went to the bottom rated traunch. Nothing wrong with this in principle. It is a way of matching risk with return. But it didn't stop there.

The investment people in these institutions began writing derivatives (put and call options) on these packages, and sold these "derivatives" to individual investors, hedge funds, etc. all around the world, taking a substantial commission off the front as they did so. Warren Buffet calls derivatives "weapons of financial mass destruction." Each option has a buyer and a seller. The buyer pays the seller a small "premium," and the seller agrees to make additional margin payments if the option goes in favor of the buyer. As long as things are stable, and real estate values are increasing, things work out.

But when real estate starts going down in value, and when the people who signed mortgages default on their loan payments, well you know........... 

To make a long story shorter, these derivatives represent "bets" in the hundreds of trillions of dollars (that's right). Many will become worthless, and the banks and investment bankers will have to write them off as losses (happening every day). If nothing is done about it, many of them will go bankrupt. (While all the guys who took the commissions are long gone with the money). 

The government and Fed are in a panic (without ever explaining what went on behind the scenes...due to the greed of the banks, etc.), so they are lowering rates, and printing fiat paper money. Bottom line: they are attempting to bail out the big banks on the backs of the poor and lower middle class. This is evil, fraudulent and unconstitutional, as they are putting the last nails in the coffin of the US dollar as a stable reserve currency in the world. I cannot imagine how the judgment of God will play out on all this. It's no surprise that people are gradually realizing gold and silver are the only money in the world with intrinsic value (as God intended, in my opinion). 

There will be thousands of law suits against these institutions, against the rating companies, and against many individuals.

This article is public domain.  It was written by Mr. Jay O'Keefe, a financial adviser for several decades.. 
This page was last updated on 17 August 2008 .