Now that the subprime crisis has snowballed into a real financial meltdown that has engulfed the entire world, I thought let me write it not only for the specialist bankers and financial analysts but for the pensioners or the neighbor next door whose savings have been eroded substantially or in some cases evaporated completely. In the US, many people's accumulations in 401 K, a very popular pension fund, has been completely wiped off.

Initially subprime lenders used to be independent enterprises; with the development of secondary mortgage market, the existing players came into play but with a different name like Merrill Lynch started First Franklin, GE came with WMC and so on. Traditional bankers could not give loan to the subprime lenders but could extend loan to financial institutions or financial intermediaries who in turn could give loan to the subprime borrowers. Financial institutions could get rid of the loan from the balance sheet through Real Estate Mortgage Investment Conduits (REMIC), like Enron did with the deals off the balance sheet transactions. Here the question arises about ethical practices on accounting and finance.

Most of these loans were meant for and sold to REMICs which are typical investment vehicles that hold residential and commercial mortgages in trust and issue securities representing undivided interest in these mortgages. Any entity can start a REMIC as there is no minimum equity requirement. It was created as part of financial reform in 1986. Many investment bankers started REMIC and offloaded the high risk instruments to the newly created entity. Thereafter, they created many derivatives and other instruments that were sold all over the world as a part of de-risking strategy.

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