Is Greed Really That Good??

The title has been tweaked and used from a Hollywood block buster “Wall Street” released in 1987, wherein an investor giant said “Greed is good, Greed is necessary for the evolution of Corporate America.” Today look what greed has brought to America, with its national debt approximately at about 15.5 trillion dollars, which is almost 100% of its GDP.

America more than doubled its debt after the 2008 finacial crisis. Nearly half of this debt is owned by China. This is the  country which once spent nearly half that amount that it now owns to China  in cold  war to keep the communists at bay!!! If that is not irony then what is? What was the credit crisis and how did it come along? Why do a handful of people bring about a downfall of so many? When everything is priced, ethics are dumped freely and greed is bought and sold preciously. The crisis brought about the collapse of Lehman brothers and caused worldwide chaos.

It all started in and around the year 2000-2001 after the dot com bubble burst and the 9/11 incident, that the interest on AAA rated treasury bills by US Federal Reserve was reduced to 1% to keep the economy buoyant as this induced easy credit in the market. This increased huge borrowing from the Federal Reserve by banks and other financial institutions which fueled a massive growth in sub prime mortgage. A subprime mortgage is basically a loan amount lent to a borrower who would not qualify for a conventional loan as result of his poor credit rating. These loans carry more interest rates then the prime lending rate and hence are much more riskier. Due to the rise in the housing prices and availability of cheap credit, these type of subprime offerings were often very lucrative as the lenders thought that even if the loans were defaulted the house could be sold at higher prices. Further to this, the risk could be sold as a Collateralized Debt Obligation or a CDO to another investor wanting to make good on the higher interest rates. CDO worth billions of dollars were bought and sold by financial institutions and investment banks. This was a ticking time bomb.

During the year 2006 due to availability of large unsold houses largely due to housing boom of previous years, housing rates began to plunge. The rates plunged as much as 20% of the original house value. Subprime owners could not pay their mortgages as the value of their houses had dropped and they wanted to restructure the mortgage to adjust for the same which was just not possible, so they defaulted and houses were foreclosed. Few simply didn't have that much money to cough up so they too defaulted. Banks ended up holding these so called subprime mortgages or foreclosed houses whose values were going south dangerously. As a result the overleveraged banks simply started collapsing and going bankrupt as they could not sell any of these toxic CDO.

Lehman Brothers was the first one to go belly up, others followed suit. Its implications are felt till today, with Europe still in crisis, America in deep debt and regulation being enforced on banking sectors in the States.

When we try to create something out of nothing, this is when you know you are in deep trouble. The people in US thought they could create a housing bubble and boost the economy but they ended up putting the country in a deep long drawn recession. This is crisis of the credit where greed took over sanity.

- Rupali Ghate