disrupter
04-06-2009, 11:38 AM
Toxic assets. Why.
I have had a problem with the term 'Toxic assets'.
It sounded like such a media hype superlative,
until
i started finding out how these supposed assets [aka garbage] were create & what was created.
In 2003 the prime mortgage market was saturated,
but
Wall Street 'bankers' [i use the term bankers VERY loosely here] didn't really give a darn
because
they were ONLY concerned with high dollar volume/amount &
Very high rates of return/interest
Wall Street 'bankers' failed to factor in EXPECTED high rates of default even though they knew these were sub-prime borrowers ie. people with dubious credit ratings ie. problems with repayment. They used historic date based on traditional, prime mortgages.
Wall Street 'bankers' failed to do ANY monitoring of the nature & type of mortgages being created by the criminal gangsters they hired to write them for unsuspecting naive first time home buyers.
Instead of crafting smaller mortgages with provisions that these poor borrowers might have had a snowball's chance in hell of repaying,
they knowingly, calculatedly passed the buck to
3rd Party Mortgage Originators. ( and 'party' is a VERY apt word here )
3rd Party [gangster] mortgage originators got
Bigger bonuses for
Bloated, oversized mortgages [higher dollar volume] &
Very high interest rates
They hid these high interest rates as surprises after deceptive low entry level mortgage payments
with things like a short period of zero interest or 'interest only' initial payments [or they were combined]
Even when people were concerned if they could actually make the payments of a mortgage they were reassured with phrases like you can just flip it [sell it] & probably make money in the process,
which didn't 'sound' unreasonable in the hyperinflationary housing bubble this whole system was creating.
3rd Party originators used outrageous & fraudulent behavior at every turn,
they sold oversized mortgages to people who had no way of keeping up with them,
they wrote down numbers for income & assets with no documentation,
in many cases they lied & changed the numbers themselves to get unsuspecting borrowers approved,
in other cases they convinced naive first time buyers to lie themselves
Much of these absurd practices were allowed under
Bush's "No Down Payment Initiative" that he & congress passed in February 2004
historically unheard of banking practices, because they were fundamentally unsound.
Selling some poor rube an entry level home that is vastly beyond their means to purchase doesn't do them any good. It just hurts them inevitably.
If someone can not even save up ANY kind of down payment for whatever reason,
that means they can not save one dime while they are tied up in this mortgage for 15, 30, or 50 years.
They are stretched tight so that even the most minor of personal calamities will force them to default on the mortgage, because they will not have ANY savings to cushion for that.
This whole scheme falsely created unsustainable, fabricated 'demand'
which drove up housing prices,
which in turn fueled a
Speculative Inflationary Housingprice Bubble.
People thought "If i don't buy now i will never be able to buy",
& others who saw returns of 15, 20 & greater rates of annual return, simply for owning residential real estate & could not resist an investment that equaled or was greater than even Madoff's 65 billion dollar ponzi scheme promised.
How it was 'rationalized':
The reason this whole absurd scheme was seen as 'legitimate' is because of a [ridiculous] math formula created by a math/economist
PhD, David X. Li.
It said one didn't need to examine all those complicated assets behind a security,
one could simply use the price of a Credit Default Swap instead to assess the 'riskiness' of that [or similar] securities.
A 'Correlation' theory.
Analogy: Since we know that planes fly parallel with the ground, consistently, safely, historically,
we don't have to do all that fiddling around with a pilot,
because by Correlation theory the plane can be 'expected' to fly safely parallel to the ground anyway.
Or because cars seem to consistently travel on roads with only occasional accidents, we don't need to steer them or have drivers because we know by correlation theory that they will stay on the roads & get into few accidents, 'predictably' & on their own.
This is insanity.
Using 'Correlation theory' EVERYTHING, ANYTHING was given a Triple A rating.
IMO using this technique the ratings agencies were wildly criminally negligent & should be facing prison & massive fines & punitive damages that will shut their deceptive, reckless selves down Forever.
This allowed Triple A ratings for the bundled mortgage securities based on a recklessly overly optimistic pricing of Credit Default Swaps
Without having to examine a SINGLE mortgage of the thousands in them.
If they had even taken a sample of half a dozen they would have seen these were riddled with fraud & completely impossible terms for borrowers to have any expectation to repay,
but they didn't look at a single one.
Why? because they were making incredible fees.
Ancillary note:
The reason
Credit Default Swaps are explicitly deregulated in the Commodities & Futures Modernization act of 2000 is because if they hadn't been explicitly deregulated many/most states would have categorized them as simple gambling. Betting with one party on the installment plan. No capital requirements. Not recorded on any exchange anywhere.
They could be traded by any two winos or 'bankers' between a couple of dumpsters reeking of garbage in a dark alley in any slum, anywhere.
When the
Mafia finds out that gambling contracts are LEGALLY ENFORCIBLE by simply calling them 'Credit Default Swaps' we will have the final straw in that nightmare complete.
. . . . .
Returning to topic,
So now we know why & just HOW toxic these so-called assets [bundled sub-prime mortgages] are.
When Obama/Geithner is trying to foist this crap on you & me the taxpayers,
& even trying to goad unsuspecting investors into buying them at perhaps between 70 & 90% of their paper value,
they are STILL horrible instruments.
These things weren't worth 60% of paper value,
EVEN at the height of the bubble,
EVEN when the economy was very good.
Now that the bubble has burst?
Now that the entire globe's economy is in the tank?
Now that Millions of Americans & around the globe people are being hammered with unemployment?
These things will be doing good if they get 30 to 40% of their paper value.
There just isn't & NEVER WAS any cogent sane demand for this much American residential real estate.
So when Wall Street 'bankers' are trying to fool you into thinking somehow over time all of these built-in toxicities will be magically erased,
they are either lying through their teeth,
or so foolish they should be locked up in an institution for the criminally insane to protect them from themselves & more importantly the public from them.
Obama may be the only thing between pitchforks* & these 'bankers',
but if he & congress & Geithner don't get a whole lot more realistic it will be them facing the pitchforks.
*Pitchforks is ambiguous whether it is the pitchforks of demons from hell or just the pitchforks of rabidly enraged people.
I have had a problem with the term 'Toxic assets'.
It sounded like such a media hype superlative,
until
i started finding out how these supposed assets [aka garbage] were create & what was created.
In 2003 the prime mortgage market was saturated,
but
Wall Street 'bankers' [i use the term bankers VERY loosely here] didn't really give a darn
because
they were ONLY concerned with high dollar volume/amount &
Very high rates of return/interest
Wall Street 'bankers' failed to factor in EXPECTED high rates of default even though they knew these were sub-prime borrowers ie. people with dubious credit ratings ie. problems with repayment. They used historic date based on traditional, prime mortgages.
Wall Street 'bankers' failed to do ANY monitoring of the nature & type of mortgages being created by the criminal gangsters they hired to write them for unsuspecting naive first time home buyers.
Instead of crafting smaller mortgages with provisions that these poor borrowers might have had a snowball's chance in hell of repaying,
they knowingly, calculatedly passed the buck to
3rd Party Mortgage Originators. ( and 'party' is a VERY apt word here )
3rd Party [gangster] mortgage originators got
Bigger bonuses for
Bloated, oversized mortgages [higher dollar volume] &
Very high interest rates
They hid these high interest rates as surprises after deceptive low entry level mortgage payments
with things like a short period of zero interest or 'interest only' initial payments [or they were combined]
Even when people were concerned if they could actually make the payments of a mortgage they were reassured with phrases like you can just flip it [sell it] & probably make money in the process,
which didn't 'sound' unreasonable in the hyperinflationary housing bubble this whole system was creating.
3rd Party originators used outrageous & fraudulent behavior at every turn,
they sold oversized mortgages to people who had no way of keeping up with them,
they wrote down numbers for income & assets with no documentation,
in many cases they lied & changed the numbers themselves to get unsuspecting borrowers approved,
in other cases they convinced naive first time buyers to lie themselves
Much of these absurd practices were allowed under
Bush's "No Down Payment Initiative" that he & congress passed in February 2004
historically unheard of banking practices, because they were fundamentally unsound.
Selling some poor rube an entry level home that is vastly beyond their means to purchase doesn't do them any good. It just hurts them inevitably.
If someone can not even save up ANY kind of down payment for whatever reason,
that means they can not save one dime while they are tied up in this mortgage for 15, 30, or 50 years.
They are stretched tight so that even the most minor of personal calamities will force them to default on the mortgage, because they will not have ANY savings to cushion for that.
This whole scheme falsely created unsustainable, fabricated 'demand'
which drove up housing prices,
which in turn fueled a
Speculative Inflationary Housingprice Bubble.
People thought "If i don't buy now i will never be able to buy",
& others who saw returns of 15, 20 & greater rates of annual return, simply for owning residential real estate & could not resist an investment that equaled or was greater than even Madoff's 65 billion dollar ponzi scheme promised.
How it was 'rationalized':
The reason this whole absurd scheme was seen as 'legitimate' is because of a [ridiculous] math formula created by a math/economist
PhD, David X. Li.
It said one didn't need to examine all those complicated assets behind a security,
one could simply use the price of a Credit Default Swap instead to assess the 'riskiness' of that [or similar] securities.
A 'Correlation' theory.
Analogy: Since we know that planes fly parallel with the ground, consistently, safely, historically,
we don't have to do all that fiddling around with a pilot,
because by Correlation theory the plane can be 'expected' to fly safely parallel to the ground anyway.
Or because cars seem to consistently travel on roads with only occasional accidents, we don't need to steer them or have drivers because we know by correlation theory that they will stay on the roads & get into few accidents, 'predictably' & on their own.
This is insanity.
Using 'Correlation theory' EVERYTHING, ANYTHING was given a Triple A rating.
IMO using this technique the ratings agencies were wildly criminally negligent & should be facing prison & massive fines & punitive damages that will shut their deceptive, reckless selves down Forever.
This allowed Triple A ratings for the bundled mortgage securities based on a recklessly overly optimistic pricing of Credit Default Swaps
Without having to examine a SINGLE mortgage of the thousands in them.
If they had even taken a sample of half a dozen they would have seen these were riddled with fraud & completely impossible terms for borrowers to have any expectation to repay,
but they didn't look at a single one.
Why? because they were making incredible fees.
Ancillary note:
The reason
Credit Default Swaps are explicitly deregulated in the Commodities & Futures Modernization act of 2000 is because if they hadn't been explicitly deregulated many/most states would have categorized them as simple gambling. Betting with one party on the installment plan. No capital requirements. Not recorded on any exchange anywhere.
They could be traded by any two winos or 'bankers' between a couple of dumpsters reeking of garbage in a dark alley in any slum, anywhere.
When the
Mafia finds out that gambling contracts are LEGALLY ENFORCIBLE by simply calling them 'Credit Default Swaps' we will have the final straw in that nightmare complete.
. . . . .
Returning to topic,
So now we know why & just HOW toxic these so-called assets [bundled sub-prime mortgages] are.
When Obama/Geithner is trying to foist this crap on you & me the taxpayers,
& even trying to goad unsuspecting investors into buying them at perhaps between 70 & 90% of their paper value,
they are STILL horrible instruments.
These things weren't worth 60% of paper value,
EVEN at the height of the bubble,
EVEN when the economy was very good.
Now that the bubble has burst?
Now that the entire globe's economy is in the tank?
Now that Millions of Americans & around the globe people are being hammered with unemployment?
These things will be doing good if they get 30 to 40% of their paper value.
There just isn't & NEVER WAS any cogent sane demand for this much American residential real estate.
So when Wall Street 'bankers' are trying to fool you into thinking somehow over time all of these built-in toxicities will be magically erased,
they are either lying through their teeth,
or so foolish they should be locked up in an institution for the criminally insane to protect them from themselves & more importantly the public from them.
Obama may be the only thing between pitchforks* & these 'bankers',
but if he & congress & Geithner don't get a whole lot more realistic it will be them facing the pitchforks.
*Pitchforks is ambiguous whether it is the pitchforks of demons from hell or just the pitchforks of rabidly enraged people.