Why did the bubble burst - a simple explanation to the US financial meltdown

Published on: 2008-10-6

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Why did the bubble burst - a simple explanation to the US financial meltdown


Taken from an article in The Hindu: Following is an extracted transcript of a chat session I had with Rohit back in 2004: Me: So man, you must feel like you are on top of the world. Rohit: Yes dude, the job here is amazing, I get to interact with people around the world, investment managers who want to invest millions of dollars Me: Great…so tell me something interesting. What’s your job all about? Rohit: You know there is a great demand for American home loans, which we buy from the U.S. banks. We then convert these into what is called as CDOs (Collateralised Debt Obligations). In plain English, this refers to buying home loans that banks had already issued to customers, cutting them into smaller pieces, packaging the pieces based on return (interest rate), value, tenure (duration of the loans) and selling them to investors across the world after giving it a fancy name, such as “High Grade Structured Credit Enhanced Leverage Fund”. Me: Wow! I would’ve never guessed that boring home loans could transform into something that sounds so cool! Rohit: Hahaha…actually we create multiple funds categorised based on the nature of the CDO packages they contain and investors can buy shares in any of these funds (almost like mutual funds…but called Structured Investment Vehicles or SIVs) Read more The core of the issue is this - in the globalized, networked world, money has been transformed to numbers stored within a computer which can be manipulated in *very* interesting ways. Even before hi-tech entered the scene, our "desi" frauds and crooks had invented creative pyramid/ponzi schemes to cheat people - in the hi-tech world, these schemes have become more and more ambitious. Brilliant people with fancy degrees (Forget the silly MBA's - I am told that it is not unusual for guys with PhD in Math and Physics to be found working in "financial" companies) are lured into mega-corps and made to work on inventing ever more creative "schemes". With the so-called "integration" of economies all over the world into this global greed matrix, the impact of a collapse at one point will be felt all through the system. Money and financial systems are human creations - and if something is wrong with them, it can be corrected. That people are writing books like this is an indication that maybe, things will change for the better.


Mon Mar 16 10:37:35 2009

Hello sir.... u simply presented the whole thing. Only now im seeing your blog... u r doing great here....

Pramode C.E

Tue Mar 17 09:34:24 2009

VIshnu: Thanks for visiting!


Mon Oct 6 14:48:44 2008

It's a very good article, for the lay man to understand what's really going on. It's shocking what these "brilliant" people with astronomical salaries are dreaming up. What "creativity"...