How We Got Here 5:16 PM ET Thu, 25 Sept 2008

Greenspan Drops Interest Rates

Then, in the wake of September 11th, the Fed reduced interest rates to make very cheap money and stimulate the economy. The plan worked but triggered a surge in real estate investments of all kinds. (That included people flipping homes, etc.)

Remember, it was easier to get a mortgage now.



SEC Requirements

But here’s the big whammy. In 2004 the SEC failed to properly regulate Credit Default Swaps or insurance policies on mortgages. Financial institutions were allowed to hold only 3 cents for every dollar of risk. And to make matters worse, that happened in secret without transparency.

Those factors came together to create the perfect financial storm. Home prices began falling, home owners began to default on their loans, and those insurance policies couldn’t cover all the losses.

As a result the credit markets have seized up.



Barry Ritholtz, CEO Of Fusion IQ and creator of popular “The Big Picture" blog made an interesting point on Fast Money. He said, "In most of human history credit has been based on the borrowers ability to repay. But for the first part of the 21st century the lenders ability to securitize and repackage mortgages became the basis of credit." In a nutshell, that’s what we’re dealing with today.













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Trader disclosure: On Sept 25, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (MSFT), (WMT); Adami Owns (AGU), (BTU), (C), (GS), (MSFT), (NUE), (INTC); Finerman Owns (GS); Finerman's Firm Owns (MSFT), (NOK), (WM), (DELL), (PM); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM), (COF); Najarian Owns (NOK); Najarian Owns (AAPL) And (AAPL) Puts; Najarian Owns (BBBY) Put Spread; Najarian Owns (FCX) Call Spread; Najarian Owns (GS) Call Spread; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (RIMM) Call Spread; Najarian Owns (WB) Put Spread; Najarian Owns (XLF) Call Spread



Fusion IQ Is Short (AIG); Fusion IQ Is Long (LZB), (PZZA), (WU), (SXE), (AVAV), (CGRB), (GHDX), (NUVA), (LMNX)

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