Overleveraged

The sub-prime mortgage crisis, which occurred when people could no longer
borrow and home prices stopped increasing, caused a disaster that brought the
world financial system to its knees. What had been a wonderful carriage for the
neglected sector of the American housing market turned into a pumpkin that left
the whole American economy stranded in a debt it can barely hope to repay.

Few people, including most politicians and business leaders, predicted that the
trouble in the sub-prime market would spill over into the global economy. But
that’s just what happened. In fact, it brought the world financial system to
its knees. When the music stopped, it stopped so abruptly that people barely
knew what hit them. One day they were living a life of outsize largesse in
relation to their income and wealth. The very next, many had lost their jobs
and were facing immediate foreclosure.

Wall Street, which had bet big on collateralized mortgages, also lost big. Part
of the problem had to do with the sheer size of its banks; after a decades-long
period of consolidation, Wall Street was left with a handful of huge banks.
When sneezing, they caught the flu and the rest of America got pneumonia. Many
analysts would say a cold, if not an outright flu.

The other problem was leverage. Even given the banks’ unwieldy size, they might
have withstood the sub-prime debacle had they not been so highly leveraged.

Armstrong Williams is on Sirius/XM Power 169, 7-8 p.m. and 4-5 a.m., Monday through Friday. Become a fan on Facebook at www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside.