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# Keeping the nation’s economy on the bike
- URL: https://www.smdp.com/keeping-the-nations-economy-on-the-bike/
- Published: 2007-08-29T15:00:00.000Z
- Updated: 2026-10-25T00:48:58.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By MIKE HEAYN is a Washington Mutual Multi-Family Loan Consultant. He 310-428-1342, or emailed at*

WHAT HAPPENS WHEN YOU ARE RIDING a bike and you stop peddling? Eventually you and the bike fall over. Now think of the U.S. economy as a bicycle. Except instead of peddling to keep the bike upright, liquidity or cash needs to be continually poured in to keep the economy up right. The major problem today is that there is a liquidity crisis in the markets. Investors are not investing money into the markets and banks are hesitant to provide liquidity. However, to understand the current liquidity crisis you must understand the key players and one of the issues at hand — securitization.

The first two players are the banks and borrowers. The borrowers took loans from the banks for home purchases and refinances. The banks loaned money to the borrowers, qualifying them with credit criteria, income verification and bank statements. Traditionally, the borrowers paid the banks each month, with the banks earning a profit by taking a percentage of the interest rate. However, about a decade ago something changed. Someone had the clever idea of having banks sell loans to investors on Wall Street by cutting them up into pieces — known as tranching — and selling them as tradable bonds known as securities. The only problem was that home loans were considered risky by the third player — rating agencies. To understand how risky securities took on the illusion of safe securities you have to understand the creativity of Wall Street and the securitization process.

Securities are a type of bond, which can be bought, sold or traded. Asset-backed-securities, or ABS, are a type of bond secured by an asset. Mortgage backed securities, like their name suggests, are tied to home loans, which in turn are collateralized by a home. Another term to understand is collateral-ized-debt-obligations, or CDOs, which are asset backed securities that are cut up and sold off. CDOs are the brainchild of Wall Street. They are bonds that are tranched into risk categories. The tranches with the highest yielding pieces carry the highest risk.

What transpired in the 1990s went something like this: Rating agencies looked at pools of securities and gave them ratings. The best ratings — designated by a series of letters such as AAA — were reserved for the best securities. The best securities were perceived to have the lowest risk and were known as investment grade securities. In the mid 90s, banks were looking for ways to improve securiti-zation pool ratings. The better the rating, the easier it was to sell the pools of securities, which was important considering that banks made a profit with each sale. Over time, banks asked the rating agencies how they could improve the ratings on the pool of securities. Rating agencies gave suggestions on how to improve the pool and before long, a pool of loans that was not investment grade was given investment grade ratings. Since, the rating agencies are paid to rate securities — it is in their best interest to rate fairly so their customers — many times banks — come back to them with future business.

Now the blame game begins. You have homeowners who have lost their homes because they could not afford monthly payments due to the banks aggressively, giving unaffordable loans. The banks cannot sell securities to investors because investors do not know what risk exposure the securities the banks sold them actually have. Finally, you have rating agencies blamed by banks and investors for rating securities too aggressively.

It is easy to see the problems with the markets when they are in turmoil, but it is important to remember that markets correct themselves. Sometimes it is a long, slow and tedious process. However, the securitization of many types of debt helped keep liquidity in the marketplace over the last several years, which helped fuel the greatest U.S. real estate boom of all time. Over the next few weeks, months, and possibly years, the U.S. and world economies’ resilience will be tested. Ultimately, the market will rebound and liquidity will return, helping to keep that bicycle known as the U.S. economy rolling for future generations.

*Originally published in the Santa Monica Daily Press print edition on August 29, 2007.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/082907.pdf?ref=smdp.com)