Financial Crisis Explained in concise plain English

To understand the financials crisis that were currently in, you need to understand that it's a perfect storm of 3 things.

1) Commodity Futures Modernization Act of 2000 was enacted Dec 21, 2000
2) Comparitive bonus structures of executives
3) The Uptick Rule was eliminated on July 6, 2007


Basically in plain English, here's what happened.

The Clinton Administration passed CFMA of 2000 introduced by 5 Republicans and 1 Democrat in the House, and 4 Republicans and 2 Democrats in the Senate. This was a minor piece hidden in an overall budget bill. It's intent was to allow corporations to trade risk in derivatives such as Credit Derivatives Obligations and Credit Default Swaps. (A Credit Derivative is at it's base an obligation that is derived on credit risk, A Credit Default Swap is an instrument that insures a CDO of downside risk) However... note: a swap is not insurance, and therefore NOT REGULATED.

Because these were inately dangerous and high risk positions, most conservative funds would opt not to be involved with them. However, fund managers are paid bonuses not on their gains, but on their gains relative to their competitors. (they're usually paid based on money that flows into their fund. the more profitable they are as compared to their rivals... the more money goes into their fun... the more they make) often percentage points can make significant differences in bonuses that are paid. So risky investments are made, because their competitors are making risky invesments. And if their competitors take a dive... so do they.

The most profound issue was the elimination of the uptick rule in July 2007.
The elimination of the Uptick Rule gave short sellers the abililty to force sotcks down uncontrollably, beyond what their true market value should yield. Basically thay could force artificial or leveraged negative market pressure.

So.. here's what happened....
Housing kept going up because lending terms allowed anyone to buy a house. They were able to do so, because the initial underwriters of the mortgages were selling them immediately to an open market of mortgage buyers. These folks repackaged them and sold them to other markets (including foreign markets and banks. The people who sold these were able to do so, because they offered Credit Derivative Swaps (They guaranteed the downside risk for a fee.) They made a fortune in doing this, so it became common pactice for the entire industry. Unforuntately NOBODY actually looked at the abiliity of folks to pay these mortgages.

So the defaults started rolling in.... Well.. AIG, Lehman, and Bear Stearns tried to issue more stock. Immediately the bears saw an opportunity. Because they had no limit on stock crushing (the uptick rule used to handcuff them) they immediately forced these stocks down so fast that they couldn't raise capital through a release of more stock. So therefore they went bankrupt (or nearly).

Greed works. But it needs to be regulated.
The Bush Administration and the republicans should have not been asleep at the wheel.