Reply #38: No, I'm absolutely serious about this

[Tansy_Gold]

I've got several friends who were enthusiastic Obama supporters two years ago. They read the Arizona Republic, the Mesa Tribune, USA Today. They watch local but not much national news on TV, no Fox, maybe a little CNN.

They have no clue what a derivative is. They asked me -- and I can't tell them because I don't know.

They believe Obama is bailing out the banks and have asked me if that's true -- I can't say it isn't.

They're hearing that Social Security is going broke and will be cut -- they're all retirees and concerned about this and Medicare.

Some of them believe the entire housing collapse was due to poor people lying about income to get houses they couldn't afford. I have told them of my own personal experiences when I worked for the cities of El Mirage and Surprise, Arizona, in the early years of the boom and my own personal experience living for 18 years in Buckeye, Arizona, leading up to the boom and then the bust. It's not that they don't believe me -- it's that they get much more information (?) from the other side.

They are against the failed war in Afghanistan and do not believe boooosh was justified in invading Iraq. They think Sarah Palin is dumber than, well, than the dumbest member of our group (who is pretty damn dumb, and even SHE doesn't like Palin! though she does believe Obama was born in Kenya and that Joe Arpaio is going to save all of us from the hordes of headless illegals invading our border. I kid you not.).

They have children in their 20s, 30s, 40s who are losing stable jobs. They don't understand why Obama hasn't done anything to "fix" the economy, and these are people who understand the loss of manufacturing jobs to China and other cheap-labor markets.


Most of these people know absolutely nothing about economics/banking/etc. Some have some stocks, some have some 401k investments, but none of them are savvy at all. Hell, *I* am not savvy!

So let's start over. No sarcasm.

Hypotehtical Bank of Apache Junction has $1,000,000 on deposit. They lend it out to 10 borrowers, $100,000 each, to buy houses in 2000. All the money is gone, into the hands of the developers of Eagle Rock Ranch housing development out on Baseline and Geronimo.

The depositors are insured by FDIC, so they don't have anything to worry about, but they need to have access to their funds for day-to-day transactions, so BAJ has to get that money back.

The loans have an ultimate value -- in round numbers -- with interest payments over 25 years of $2,500,000. BAJ can sell those mortgages outright to another lender, say Royal Bank of Phoenix, and split the profit. So BAJ sells the 10 mortgages to RBP for $1,250,000. Way less than what they would have got eventually, but they got the profit up front. RPB paid more, but they're in it for the long haul. They've got more on deposit, have already made substantial profits, and they see this as a good deal. BAJ is now clear on those mortgages, RBP is on the hook if they go bad.

BAJ did so well on these, that they decide they want more profits. They can lend out the $1,250,000 again, but they have expenses, and they can't tie up every cent in mortgages if they want to keep their depositors liquid.

So they sell "bonds." Bonds aren't like stock because they don't convey any ownership, and rather than "dividends" paid out of profits, bonds have a fixed interest rate. And the income from the sale of the bonds comes directly to BAJ.

However, BAJ has a legal obligation to pay that interest, and they also have to establish a reserve to pay off the principal on those bonds. The bonds are actually a debt -- the buyers of the bonds are "lending" their money to BAJ for a set period of time, just as if they were a bank lending it to a fellow bank.

So far, everything is on the up and up, right?

And has Tansy Gold got anything wrong so far?


I'll check back after I have coffee with the aforementioned . . . . voters.