Everywhere I turn these days, I hear about a purported loan crisis in this country.  Frankly, I think it’s just the news media being their usual dramatic selves.  To believe in the loan crisis means you have to believe in a lot of other foolish, silly things.  Seriously, this whole business is just not believable.

Let me explain.

Back in the day when a billion dollars meant something (about ten years ago), bankers were stuffy folks who actually expected to make loans that people could pay back.  Take home loans, for instance.  The bankers would ask nettlesome questions like how much is your income, debt, expenses, etc., in an effort to determine if you had the ability to repay.

No ability to pay – no loan.  It was as simple as that.

Then, not so long ago the situation changed.  The politicians decided everyone in America should own a home.  Politicians spew out these high falutin’ ideas so they can keep their jobs by getting re-elected.  They do this with our money.  It’s good work, if you can get it.

So they instructed quasi government institutions with names like Fanny (I told you this is unbelievable) to just buy any loan the bankers made and pay the bankers a fat loan origination fee.  The bankers caught onto this and said, “Geez, we could make a lot of money selling loans to Fanny, and once we sell the loan we don’t care if it gets paid back or not.”

So, ability to pay or no, the Bankers started making loans to anybody that could breathe and fog a mirror.

A typical loan transaction would go like this…

Banker: Do you have any income?
Applicant: What’s income?
Banker: No matter, have you ever heard of the word income.
Applicant: No, not really.
Banker: Whatever — would you mind just signing this paper that has the word income on it.
Applicant: Sure, where do I put my X.
Banker: Anywhere on the page.

The Applicant signs, and the banker, neglecting to mention little details like the loan payment, beams at the thought of the juicy loan origination fee Fanny will give him and says, “Thank you  Mr. X, you’ve been approved for your $1.2 million mortgage on your $800,000 home with $400,000 cash back.

Applicant: Gee, thanks.

The banker would then call Fanny and say, “Hey, I have a great, qualified loan for you.”  Fanny would assume the loan, and pay the banker his fat fee.

This loan scene was played out millions of times throughout America.  Loans like these even came to have a name.  They were called Liar Loans, although no amount of research I’ve conducted has given me a clue why they were given this name – I assume it’s a technical financial term.

Fanny then threw the Liar Loans in a big trench where they got all mixed up and coagulated with millions of other loans from other Mr. and Mrs. X’s, and then covered the trench up – presumably because it kind of smelled.

One day, someone at Fanny got the great idea of dividing the coagulated mortgages up into chunks and selling them as great investments that paid principle and interest.

Hearing about this, along came the Hedgehog fund managers and they said, “Hey, we could make a lot of money if we borrowed funds to buy these because then we would be leveraged.”  Hedgehogs loved leverage because it let them make a boat load of money without having much skin in the game.

A typical HedgeHog / Investment Banker conversation would go like this…

HedgeHog: Hey Joe, I’d like to borrow $10,000,000,000 with $5 down to buy coagulated mortgage securities in the stock market.
Investment Banker: Sure, Josh.  But why don’t you just put $1 down, that way you are leveraged 500% more.
HedgeHog:  Hmmmm … okay, but do you think that’s safe?
Investment Banker:  Oh yeah, these coagulated mortgages have been rated as triple A to the tenth power by ImSoMoody.
HedgeHog: Okay, man, let’s do it!

Now, ImSoMoody was a rating agency.  Their job was to impartially grade investments on how safe and secure they were.  They achieved this impartiality by receiving their income and fees from the very investment bankers who were sponsoring the coagulated mortgages, and wanted their products rated as very safe.  Given this type of arms length relationship, of course, ImSoMoody always rated everything triple A to the tenth power.  This made the investment bankers happy and they would pay ImSoMoody a big fat fee for seeing it their way.

Well, the coagulated mortgages were bunched into securities that sold just like stocks on the stock exchanges around the world.  More and more HedgeHogs, and retirement funds, and other investors started buying them, so naturally their prices started going up.  This was great because the HedgeHogs were so leveraged that every time a coagulated mortgage security went up $1, they would make a ziptillion more dollars.

Now, just to mention it, there was one insignificant little scene at ImSoMoody’s where Wilber, a little known analyst trainee asked, “What if the coagulated mortgage securities go down a dollar, won’t the HedgeHogs then lose a ziptillion dollars they don’t have, crash the stock market, destroy the economy, destroy the bankers and cause them to not make loans?”

But nobody wanted to hear this and they all took to calling him Mr. PoopyPants, labeled him as a radical and fired him straight away.  He was last heard of working on the LittleMilliSoft help desk in India (not the real company name).

So things went along swimmingly for a while until one day, a little ol’ 82 year old grandmother in Peoria named Edna was writing out a check to make her final mortgage payment.  Unknown to Edna, her loan had been sold off to Fanny and thrown in the coagulated mortgages trench with all the other loans.  She wrote the check out for the full amount of $100.72.  However, just as she was writing the 7, her cat Troubles jumped in her lap, causing her hand to squiggle just a tad, and the 7 came out looking kind of like a 2.

Upon receiving the payment at Fanny, a clerk misread the final payment as $100.22 instead of 100.72.  The clerk thought Edna was 50 cents short.  He reported this to his supervisor, who panicked, and reported that all the coagulated mortgages were going into default.

The HedgeHogs got wind of this and started selling their coagulated mortgage investments as fast as possible.  This caused the price to go down, causing them to lose ziptillions of dollars per day that they didn’t have.

To raise the money, they started selling their other millions of shares of stock, which caused these stock prices to start plummeting as well.

Seeing the stocks plummet caused the HedgeHogs to start selling their stocks short, a way to make money when stocks are going down.  Selling stocks short is really selling shares you don’t own; you just borrow the shares and sell them.

Nothing wrong with this, really, but the HedgeHogs had convinced the politicians and other government watchdogs in the past that this was an arcane policy and a real bother to actually borrow the shares before they sold them.

Of course, the politicians were down with this because they had been doing the same thing to the US dollar for decades by just printing money out of thin air when they needed it.  Also, the HedgeHogs had made big contributions to their political campaigns so they could keep their jobs.

So now the HedgeHogs were just selling millions of shares they hadn’t bothered to borrow and that didn’t even exist.  This caused a flood of nonexistent stocks to be sold on the market, which diluted the price of the real shares, and made the market start plummeting even worse.

Now perhaps all would not have been lost except for another change the HedgeHogs had convinced the politicians and government watchdogs to make to the uptick rule.  The uptick rule was created after the cataclysmic stock market crash during the Great Depression, to keep stocks from going into a free fall.  As an historical note, the rule got its name from the fact that the stockholders got real ticked off when this happened.  Anyhow, the uptick rule states you can sell stocks short, but only after the stock price had gone up one tick.  This puts a natural brake in the system.

But the HedgeHogs had convinced the politicians that this was also a bother because it kept them from driving the price of a stock down, and then swooping in and buying up all the shares real cheap.  Of course the politicians were down with this as well because of their political contributions.

So with no brakes in place, and the HedgeHogs flooding the market, shorting it with millions of non-existent shares, it went into free fall.  Millions of 401k’s were virtually destroyed, the economies of the planet tanked, millions of workers lost their jobs and the world stood on the brink of another great depression.

Also, the bankers, who had lost a lot of money and were running around like scalded cats, stopped making loans to anybody.  And I mean ANYBODY!  I have it on good authority that Bill Gates (not his real name) with a credit score of 7000 was recently turned down for a home improvement loan.

So there you have it, and so much for the loan crisis myth.  Like I said, simply unbelievable.

Now, if my fanciful little tale were true, I think there would be a serious lesson to be learned here.  That is to say, I think Edna acted very irresponsibly by writing a squiggly 7 that looked like a 2.  Look at all the damage this one careless act created.

But of course, no one could possibly believe that Edna, or the politicians, HedgeHogs, Fanny, Investment Bankers, ImSoMoody Rating Agencies and other government watchdogs we trust are capable of doing so many foolish things.

It’s just not credible.

So you see, there really can’t be a loan crisis.

Sometimes I just make stuff up.

J. Daniel