The Crisis Revealed

Over the weekend after a lovely sushi brunch with my mother, I was struck with a new inspired concept. Well, this isn’t new, it is more like borrowed and reapplied. I see restaurants having trouble in the new economy. Specials and cutbacks abound, even free food is given away. I have a new solution for high end dining. I want to make a subprime sushi restaurant. See, the concept is simple. Not all fish can become sushi. The chefs pick only the freshest, best fish. The rest may or may not be ok, but why risk it. They can send it to the TGI Fridays and any imperfections will be breaded and fried away. But with the need for new innovative ideas for profitability and the rising cost of fish, we need to get creative. We need a way to stop turning away all of this mediocre fish. Enter SubPrime Sushi.

What we do is we take in more of the fish, including the cheaper, normally not sushi grade fish. We cut it all together and then test it for cleanliness. Our menu can offer 3 different levels of sushi. We can call it AAA grade, BBB grade, and then the rest. Anyone who orders the AAA grade is getting virtually perfect sushi. There may have been some fish used in it that would not have passed initially but it is later verified to be as good as any. They win because they get no risk of bad fish and the can get a slightly better deal. The BBB grade people get to enjoy the atmosphere and have only a slightly higher chance of bad fish but the savings will be clear. No more fried fish for them. The last group are somewhat more risk takers. Someone in this last group is going to get sick but the price can’t be beat!

You will probably never eat in my restaurant will you… Well, you have bought into this concept if you belong to a union, have a 401k, took out a second mortgage or even have a pension no matter how small. See subprime mortgages flourished because of this concept and many of our investments ended up buying into it. Some geniuses on Wall Street got together one day and drew up how to take almost all of the risk out of mortgages for some investors at the same time as giving risk takers high yield. Subprime mortgages are like the less adequate fish, but when tangled with prime mortgages and repackaged into CMO’s (Collateralized Mortgage Obligations) they become less risky, so much so that an investor can buy them with prime m0rtgages (the good fish) they may not even notice. To make this even more attractive, an investor who only wants a solid investment can be assured that they will get paid first, even if the subprime or prime mortgages go bad. These are our AAA buyers. The second level gets rated BBB and is still a decent investment since they get paid in full before the next guy. The unrated type of investor gets paid last but they will get very high yield on what they get, even when the money comes from the less risky prime, low rate mortgage. Everyone wins.

This concept was so successful that it works no matter how many subprime mortgages  were made. After all, not every subprime mortgage goes bad so the AAA rated guys will get thier money no matter what, and the unrated guys will see something even if they are getting a house through foreclosure. The floodgate was opened for subprime mortgages. Lady liberty said “give me your low down payments, stated income low credit scores; Bring me your poor, your self employed yearning to own homes” and the investors wanted more. Home prices soared as now anyone could own one. Wall street got rich, the banks got richer, and mortgage brokers were no longer burdened with the thing called responsible underwriting.

Until one day the fish started to go bad. The subprime borrowers started to default and foreclose. Interest rates went up and so did unemployment. Home prices started going down, more people stopped paying their mortgages than anyone thought possible. Not even the AAA rated investments were seeing the cash flow, let alone the BBB rated and unrated investors. Even investments that wanted absolutely no part of the risk involved with subprime like our parents retirement funds or our pension dues were hard hit by the defaults they caused. Many of them didn’t even understand how. After all, it was rated as the most solid investment known to wall street. We were sold bad fish.

See you at Subprime Sushi. Make sure to come early.