Can someone explain the finacial crisis?

Can someone please explain in lay terms the current financial crisis?

• What is the current financial/economic crisis about? How did it start? What happened with Freddie Mac, Fannie Mae, Lehmann Brothers, Merrill Lynch, and AIG? Why is it such an emergency to "fix" it? How will the government bailout help, and why is the bailout so controversial? Whose fault is all this? Are we really on the brink of financial collapse, and if so, what does that actually mean? I'm not an unintelligent person, I just do not understand economics, and if anyone could explain it simply, I would so appreciate it!

• Answer:

  The government, wall st., and everyday average citizens wanted more people to buy and own houses. Instead of traditional loan procedures like good credit, jobs, income level, collateral, and 10-20 percent downpayments, ALL of the above mentioned people thought it would be a good idea to sell loans to people with a good interest rate and low downpayment, when these people couldn't afford it, had bad credit or no credit, little to no collateral, and maybe even no job. These people, obviously, began to default on these loans because as you can imagine, they could not afford it in the first place. Now, again, the blame lies EVERYWHERE. From Wall St. to the Clinton presidency to the Bush presidency to everyday people like you and me. Everyone thought, for some reason that this would, in the end, be a good plan to increase home sales and ownership. These loans were then used to back or leverage other deals and transactions, thinking that the interest/payments paid on these loans would more than pay for any other transactions made. These transactions were "mortgage backed" transactions. When people started missing their payments, all of the sudden these "mortgage backed" transactions were not funded any longer. This drove the value of these mortgages as investment tools down to almost nothing. No one would buy them, no one would sell them- which equals death in the market. They became what people call "toxic" or unable to move at all either buying or selling, they are worthless. These investment houses and banks owned so much of these mortgage backed expenses that it absolutely overwhelmed them. It would be like if you owned a business that sold furniture. All of the suddent the furniture was worthless, but you still owed your creditors, the utilities, the rent on your store, and could not pay them because your inventory was worthless. You would go out of business. That is a weak example, because it doesn't take so many things into consideration, but you get the idea. However, there are real houses out there that are certainly "worth" something, AS LONG AS THERE ARE PEOPLE IN THEM MAKING PAYMENTS ON THEIR MORTGAGES.. That is the government's "bail out" plan. To infuse enough money back into these "toxic" assets in order to get them trading again, and to get people back in them that will pay their mortgages fully and on time. Then, in the near future, these assets will no longer be "toxic" because this money infusion goal is to get people back in them paying their mortgages, which in turn will hopefully make them EXTREMELY valuable, and maybe even make the government 7-10% in gains over the next few years. All of this also leans into the credit market, especially the overnight lending which usually occurs between banks to keep loans/etc. a float. This has virtually stopped. I heard yesterday that if you want a car loan, unless you have at least a 720 credit score, you will 100% not get one. Loans for businesses & banks to stay active, trading and working is crucial. So this is the "credit crisis". Banks are hoarding cash and not lending it to ANYONE without the most pristine credit. So this adds to the already terrible problem. So much more but I have not the time to explain it all. SO, the big question is, will all of this work? Let's all hope so because there are seemingly no other options on the table. Whether you agree with Democrats or Republicans, it doesn't really matter in this case. We will ALL come down if this doesn't work. Oversight, Oversight Oversight on the money is needed. Brilliant people need to be in charge, and like I said, politics must take a back seat. Paulson, by all accounts, and from EVERYONE I know and have heard, is a brilliant man. Whether this power corrupts him is yet to be seen but I am sure he has the best intentions.