The housing boom. For the last few years, prices of houses were going up and up in the US driven by ever-increasing demand. So much so that people, many many of them in fact, started thinking like Mr. Bullah below:That's just a small sample. It's an excellent introduction of the whole credit crisis, in a language hindi-movie-goers would be able to easily understand, specifically those who saw, and liked the movie 'Gunda'.
“Hey this house is worth $500,000. In a year it will be $600,000. So if I can sell it then, I can get a 20% return on investment. ”
Of course there is a small problem. Bullah’s net worth, in terms of his savings, are $10,000 (2% of the house’s cost). And just to make things worse, he has a bad credit history having defaulted on his credit card bills a few times. In order to make the very basic minimum down-payment for the house (usually 20% of the cost), he needs $100,000 i.e. $90,000 more straight away.
He goes to the bank.
Now in normal situations, the loan officer would look at Bullah’s bank statement and his credit history and show him the door telling Bullah politely (after all his name is Bullah) that he just does not have the equity to make such an expensive purchase.
However these are not normal times.
What happens is that on seeing Bullah’s loan application, the loan manager smiles, shakes Bullah’s hand and provides him the loan on his down-payment. Yes the full $90,000. Plus the loan manager also provides as loan the rest of the house cost (i.e. loans him an additional $400,000) enabling Bullah to take possession of the house right away with zero-down.
So what does Bullah provide as collateral? Nothing.
The only catch is that in exchange for the high (and unreasonable) risk the bank is taking on giving this loan , it expects a very high rate of interest from Bullah. This transaction between Bullah and the banker (let his name be Lucky Chikna) is what is known, in common parlance, as “subprime lending”. Lucky Chikna is happy because he is going to get a lot of money as interest for his investment (albeit more than a bit risky), which, in turn, is going to translate to a higher commission for him.
And Bullah—he is only too glad to get any loan.
A ‘Gunda’ Credit Crisis Intro
If you want to read a "Gunda" based take on the Financial Meltdown (and if you have to ask what "Gunda" is, your answer is no), read the Great Bong.