Last weekend the American newsmedia took a break from the presidential campaign after intensive coverage of the major parties' conventions. Not that they had no stories to pursue on Barack Obama or John McCain. The reason was that they bumped into a new one that involves so much money that is practically impossible to imagine: trillions of dollars.
The story that filled the frontpages of Monday's papers was the announcement on Sunday by Treasury Secretary Henry Paulson that the U.S. government is taking over the two mortgage companies, Freddie Mac and Fannie Mae. These two firms own or guarantee 5.4 trillion dollars in mortgages, which covers about 84 percent of all new home loans in the United States. The takeover would potentially cost hundreds of billions for the American taxpayers, but the government argues that the whole financial system would have collapsed without this step.
The financial world was watching this announcement very closely and perhaps nervously, but it was also defining the WPI's fellows first working day in L.A. On Monday we went to the office of Bill Dallas, who was the chairman of First Franklin, a lender company that was involved in the mortgage business. In his energetic, dynamic presentation he provided us with an insider's point of view on the reasons that led to the current crisis.
The so-called credit crunch is a very complicated problem, but the bottom line is pretty simple to understand. Dazzled by the rising houseprices, the players in the mortgage market have given loans to people who had no stable financial background, and when the prices started to decrease, the bubble burst.
Probably the most astonishing element of the whole crisis is that it happened with the assistance of the major banks; financial institutions who have the brightest and the best paid economists and analysts of the world. Bill Dallas gave a very simple explanation for this. "Why did this whole market blow up?" - he asked, and then immediately answered his own question: "because of greed".
Now the American taxpayers are going to pay the price of this greed. The government is going to introduce new regulations to prevent another crisis like this, but no one should take such a promise for granted. As Bill Dallas argued, the business is driven by cycles, and this crisis is just a product of them. So if this cycle ends, it will just bring the beginning of a new one.
The story that filled the frontpages of Monday's papers was the announcement on Sunday by Treasury Secretary Henry Paulson that the U.S. government is taking over the two mortgage companies, Freddie Mac and Fannie Mae. These two firms own or guarantee 5.4 trillion dollars in mortgages, which covers about 84 percent of all new home loans in the United States. The takeover would potentially cost hundreds of billions for the American taxpayers, but the government argues that the whole financial system would have collapsed without this step.
The financial world was watching this announcement very closely and perhaps nervously, but it was also defining the WPI's fellows first working day in L.A. On Monday we went to the office of Bill Dallas, who was the chairman of First Franklin, a lender company that was involved in the mortgage business. In his energetic, dynamic presentation he provided us with an insider's point of view on the reasons that led to the current crisis.
The so-called credit crunch is a very complicated problem, but the bottom line is pretty simple to understand. Dazzled by the rising houseprices, the players in the mortgage market have given loans to people who had no stable financial background, and when the prices started to decrease, the bubble burst.
Probably the most astonishing element of the whole crisis is that it happened with the assistance of the major banks; financial institutions who have the brightest and the best paid economists and analysts of the world. Bill Dallas gave a very simple explanation for this. "Why did this whole market blow up?" - he asked, and then immediately answered his own question: "because of greed".
Now the American taxpayers are going to pay the price of this greed. The government is going to introduce new regulations to prevent another crisis like this, but no one should take such a promise for granted. As Bill Dallas argued, the business is driven by cycles, and this crisis is just a product of them. So if this cycle ends, it will just bring the beginning of a new one.
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