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The Atlanta Journal-Constitution Thomas Oliver column(Atlanta Journal-Constitution, The Via Acquire Media NewsEdge) Sep. 21--Ninja loans. Hedge funds. Securitization. Credit-default swaps. Derivatives. If you don't know the definitions to all of the above, don't feel bad. Not many do. In some cases, the definitions only make matters more confusing. You only need to know the first one to understand why the world's financial system came as close to melting down as it could and still be intact today. No Income. No Job. No Assets -- NINJA. That's all you needed, or didn't need, for a mortgage. It was the last gasp of the subprime adventure, which started out with the admirable goal of extending homeownership to those who might not otherwise afford it, but could with a little help. That helped fuel a building boom across metro Atlanta and the nation. In an attempt to spread the risks for such loans, they were pooled into investment vehicles, or securitized. Since the mortgage was going to be sold to the pool before the first payment was due, the original lender had no risk in whether the home buyer could in fact make the payments. In spreading the risks, however, we created a disconnect between the originator of the loan and those who assumed the risk, explained Roger Tutterow, professor of economics at Mercer University in Atlanta. "The U.S. financial market is known worldwide as the most creative," Tutterow said. But we realized too late that in spreading the risk through such innovative financial instruments, we hadn't really reduced the risk, he added. Which is one way to say we were so smart that we put nearly everybody and everything at risk. But it wasn't just the securitized Ninjas that got us into this mess. Interest rates were so low for so long, thanks to the Federal Reserve, that you could be made to feel foolish if you weren't borrowing money. It wasn't just the folks with poor credit ratings who took the easy money. The second-home wave accounted for 40 percent of the homes sold in 2005, according to the National Association of Realtors. We were living a dream. Now it's a nightmare being lived through in parts of Atlanta and elsewhere. And it's not over, despite Wall Street's two-day celebration last week that Uncle Sam was coming to the rescue. As we begin to put the pieces back together, perhaps we need some common sense returned to our finances. Like not buying things we can't afford. And remembering what our mothers told us: If it sounds too good to be true, then it probably is. Our leaders could use more common sense, too. Like saying if it's too big to fail (Freddie, Fannie, AIG), then it's too big. Regular folks call it not putting all your eggs in a single basket. No one can say how bad this will get or when it'll end. But the businesses that will survive, even thrive, will be, as always, those with the least debt and the most cash. Sounds downright old-fashioned. To see more of The Atlanta Journal-Constitution, or to subscribe to the newspaper, go to http://www.ajc.com. Copyright (c) 2008, The Atlanta Journal-Constitution Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |