Depending on who you talk to, America might be in the midst of a Wall Street crisis, Main Street crisis, credit crisis, subprime mortgage crisis, or some other dire-sounding crisis. But how many consumers really know what this means or how we got here?

If you ask someone like felon-turned-fraud-investigator Barry Minkow, the situation's primary roots are in those who lied to get mortgages on properties. They got caught up in the hype of owning a home or investing in real estate, and were willing to lie in order to get their mortgages approved. But don't think he's letting Wall Street off the hook. A lot happened there which contributed heavily to the mess we're in now.

Today I found an article that probably gives the most straightforward explanation of the entire situation to date. Mike Flynn, director of government affairs at the Reason Foundation, reminds us all that while Wall Street is having fits, our economy as a whole still isn't doing all that bad. Our economy is still growing, even if it's at a very slow rate, and unemployment is contained at just over 6%. That's in contrast to the Great depression, in which the country's economic output had fallen dramatically and unemployment was extremely high.
Flynn gets a little controversial when he says that we're not having a liquidity crisis. To hear the media tell it, no one can get credit anywhere. Yet, Flynn reports that consumer, commercial, and real estate loans this year are all up from last year. The idea that no one can get credit simply isn't supported by the hard numbers.

Then comes the more complicated part of this equation: the root cause of what's going on with Wall Street. It all hinges on the Mortgage Backed Securities (MBS). This investment vehicle took a bunch of mortgages from different banks, and packaged them together and sold them as an investment. Because the mortgages which were part of these investments were collateralized by real estate, the investments seemed safe.

But as our government officials pushed the idea that more home ownership is better, there was pressure to make mortgages available to anyone and everyone. Government incentives to write the mortgages ensured that fancy footwork got just about anyone through the application and underwriting process.

At some point, however, this strategy can't be maintained. Real estate prices were run up because everyone was competing for property. Newer mortgage products and incentives became available, and more subprime mortgages were being written than ever before. This trend of funding more and more mortgages could only go on so long, and eventually there weren't enough buyers for the real estate. Real estate prices dropped, fewer mortgages were being funded, and buyers of the incentivized mortgages were beginning to default.

Call all of this the perfect storm. Investors were making money hand over fist with the policies that encouraged more consumers to buy property and obtain mortgages. Even though only 1% or 2% of mortgages are in foreclosure, these mortgages had been spread around via MBS and lots of investors are suffering.

The credit market is tighter as banks have less available cash to lend and more mortgages on their books that are looking sketchy. But all of those mortgages won't go bad. It's just that the banks don't know if they're worthless or not, so they can't assign much value to them, and there are not a lot of buyers.

So do we do a "bailout" or not? Flynn suggest that we don't have to. Banks still have money to lend, and if they really want to get rid of the mortgages they deem "bad," there are buyers out there. The buyers just aren't offering the banks as much money as they want for the questionable securities. (Especially if the alternative might be the government giving them a gift by buying them at higher prices.)

Personally, I'd rather not have taxpayer money fund this fix. Let the banks take their lumps and sell their investments for pennies on the dollar if necessary. No need to spend my hard-earned money to give the banks more than they deserve for securities that they should have been more careful with. Let the market decide what those securities are worth and let the banks find their way out of this.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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