Leverage: when you borrow money in order to make an investment or place a bet.
It’s a high-risk, high-reward way to make money… as long as you’re not wrong.
And it’s also how a small loan in Stockton, California can be linked to a worldwide economic collapse all the way to Iceland…
…and how $1.4 trillion in subprime loans became $140 trillion in potential losses…
…also known as the Second Great Bank Depression of 2008.
In last Friday’s mailbag issue, reader Ken M. wrote:
People with no assets were able to borrow tremendous sums to buy real estate with liar loans and 99% financing.
He was talking about the cause of the 2008 financial crisis. And he’s right. Lots of people took on more debt than they could afford to pay back.
But shady financial techniques certainly played their part, too.
Which brings us to today’s book excerpt…
On Friday, I promised to explain the complex financial technique that led to the subprime mortgage crisis… and ultimately, to the 2008 financial crisis.
My 2009 book, It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions, covers this very topic.
In it, I explained that the 2008 financial crisis did not happen because ordinary citizens borrowed a little more than they could afford.
It happened because of a financial feat called securitization.
This involved Wall Street firms converting those loans into assets. These “assets” allowed them to borrow much, much more than they could afford… an estimated $140 trillion more…
And when the underlying loans failed, the whole house of cards came crashing down.
But of course, the Wall Street firms were not held responsible.
Instead, the blame was laid at the feet of the “little guy.”
He borrowed more than he could afford… He couldn’t pay it back… Ergo, he lost his home.
In fact, 10 million “little guys” lost their homes.
But in a system with little-to-no regulatory oversight, the financial institutions responsible collected up to $300 billion in fees and went on their merry way…
…leaving the Federal Reserve and the Treasury Department to fork out $13 trillion.
All to cover $1.4 trillion in outstanding subprime loans.
When Fiction Becomes Fact
If my book was a work of fiction, most readers would shake their heads in disbelief. They wouldn’t believe anything so outrageous could ever happen.
So today, I’m sharing a short excerpt from It Takes a Pillage with you.
It outlines how Wall Street took on up to $140 trillion in debt on the back of $1.4 trillion of subprime loans… and got away with it.
To read the excerpt, just follow this link.
Editor, Inside Wall Street with Nomi Prins
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