Now, let me talk about the larger issue of banks just for a second. Because a lot of people, I know, just are so frustrated -- and I am so frustrated with this banking situation,
I just want to just briefly explain to you sort of what's happened.These banks purchased a lot of what are securitized mortgage instruments. They took a lot of these subprime loans and they bundled them up, so they weren't just holding a mortgage, they were holding a whole bundle of mortgages that were made into a security, a stock. And they were sliced up, and so you could buy different pieces of these mortgages. And unfortunately what ended up happening was a bunch of these mortgages -- and this was certainly true in California, it was true all across the country --
a bunch of these mortgages were based on people who never had the income to buy the house, nobody tried to verify whether or not they could actually afford it. It was based on these complicated mathematical formulas.And then what happened -- and this is where AIG and some other companies come in --
what happened was since the banks knew that there might be some risk around having these financial instruments, they bought these things called credit default swaps that were supposed to be guarantees or insurance on these instruments -- on these securities, these mortgage-backed securities.
The problem was, companies like AIG, they'd sell, like, 50 policies without having the money to cover the possibility that they would all go belly-up. So they were way over-leveraged, overextended, just as the banks were way over-leveraged and overextended. And in some cases they'd take a dollar worth of assets and they'd loan or use $30 off that one dollar just to make bigger and bigger bets and take bigger and bigger risks out in the financial system. And these started getting into trillions of dollars.
And as long as nobody was checking to see if anybody was going to be able to pay back these mortgages, and as long as housing prices were appreciating and this housing bubble was continuing, everybody was making a lot of money. So nobody wanted to check and there was no serious regulation to say, hold on, stop a minute, you guys are getting way overextended; you're putting the entire financial system at risk.
So when the economy started slowing down, and in some markets like Miami and here in California, the housing market starts really weakening, and suddenly some of these subprime loans start defaulting,
this whole house of cards just began to collapse.Now, a lot of people say, well, why not just let the banks fail? Right? See, somebody is clapping. Why not just, you know -- they were making all these bad bets; why don't we just let them fail, let them go bankrupt? What's the problem?
Well, here's the problem. If you've just got one small bank -- I mean, unfortunately -- let's take the community bank -- what's the name of your community bank? Fullerton Community Bank. All right, now, let's just say this. If Fullerton Community Bank fails, heaven forbid, we've got something called the FDIC, the Federal Deposit Insurance Corporation, that would take it over, it would guarantee all the deposits so you don't have to worry about your deposits; they're not at risk. And it would be able to kind of sort things out and then resell the bank fairly quickly, and it doesn't threaten the whole system as a whole.
When you've got big banks, Citicorp or Bank of America or, you know, Wells Fargo, that controls 70 percent of the banking system, and all of them are weakening, you can't afford to have all those banks all at once start going under. Even though the deposits might be guaranteed, you've got the entire economy resting on that credit. We've got to get that credit lending, because they can take down businesses large and small alike if we don't make sure that they are still providing loans.
And so we had to step in. And it was the right thing to do -- even though it's infuriating, even though it makes you angry, because you're thinking, I was responsible, and these folks are irresponsible, and somehow I'm paying for them -- it was the right thing to do to step in.
The same is true with AIG. It was the right thing to do to step in. Here's the problem.
It's almost like they've got -- they got a bomb strapped to them and they've got their hand on the trigger. You don't want them to blow up, but you got to kind of talk them -- ease that finger off the trigger.We've got to, over the next several months, come up with a plan that separates out the bad assets, the loans that shouldn't have been made, these credit default swaps, et cetera. We got to separate out some of those from the good assets, because there are a lot of very healthy banks, the vast majority of banks are healthy.
We've got to figure out how to raise their capital -- the point that you were making earlier so that they can start lending again.This is a very complicated, difficult task. It's not easy. We're talking about a huge system that's not just national, but international.
And so we're not going to unwind this all in a day, but what I do have confidence in is that with the plans that we're putting forward, slowly you're starting to see the system stabilize,you're starting to see more loan activity taking place, some of the security markets are coming back.
And if we continue to provide some guarantees and help depositors and help strengthen some of the banks that are weakened, then my expectation is, is that we're going to be able to work our way out of this problem, and we are going to be able to get back to a point where banks are lending, businesses are investing, jobs are being created, and the economy gets back on its feet.
And when that happens, we should get a bunch of the money that has been lent to these banks back. Now, we're not going to get all of it. I just -- you know, we're not going to get 100 percent of it back in some cases. In some cases we may get 100 percent back; in some cases we might even make a profit.
I don't want to pretend that this is going to be cheap. But the point is that instead of looking backwards,
the main thing we've got to do is look forwards and say, how do we make sure that we get out of this mess, but also prevent this mess from ever happening again. And that requires the kind of financial regulation that's going to be so important for our long-term future. (Applause.)
http://thepage.time.com/full-remarks-of-obama-at-costa-mesa-town-hall/