CDO

A Diary A Day - Let's Name Names at that crap table

snackdoodle — Sun, 22 Mar 2009 21:39:28 -0500

(8pm - promoted by Edger)

I have been asked some interesting questions in my series A Diary A Day. Like is it possible a single home mortgage is represented in multiple bundles, or has trigger multiple insurance payments.

Let explore the possibilities below the fold.

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Historically banks used Commercial Paper (CP) to cover short falls and keep the credit market moving. CP has rules, probably not enough but there are rules. One is the maturity, CP can run no more than 270 days, nine months and they carry the same rating as the issuing bank and the interest is very low, usually tied to the LIBOR average. Because of these basic rules CP can be issued without further regulations and need not be registered with the SEC. CP is most often purchase by money market mutual funds because even with low interest they are safe. But it isn't just banks who use CP, it is also big businesses like GM and Ford. Now they are all having problems getting anyone to buy their CP, this is part of what the Treasury is trying to address because more 2 trillion dollars in CP is going begging with no buyers in sight.

Those rules were too much, after all with CP the issuing bank not only pays interest on the note, but it is essentially a loan, they are expected to pay it back on the due date no more than 270 days in the future. In February of 2005 with the housing market booming and sub prime just finding it's legs, five high powered Wall Street investment banks met and sold you and the global economy down the river.

Known as the "group of five. The host was Greg Lippmann, then 36, a fast-talking Deutsche Bank AG trader who aspired to make mortgage securities as big a cash cow for Wall Street as the $12 trillion corporate credit market.

His allies included 34-year-old Rajiv Kamilla, a trader at Goldman Sachs Group Inc. with a background in nuclear physics, and 32-year-old Todd Kushman, who led a contingent from Bear Stearns Cos. Representatives from Citigroup Inc. and JPMorgan Chase & Co. were also invited. Almost 50 traders and lawyers showed up for the first meeting at Deutsche Bank's Wall Street office to help set the trading rules and design the new product.

The new standardized contracts they created would allow firms to protect themselves from the risks of subprime mortgages, enable speculators to bet against the U.S.housing market, and help meet demand from institutional investors for the high yields of loans to homeowners with poor credit.

Now with the new synthetic securitization credit default swap it was possible to transfer the risk associated with the assets to the investor but not transfer the assets themselves. Remember synthetic means the issuer of the bond doesn't even have to own the asset they are insuring nor do they have to suffer a real loss to collect.

They created their own index to track these bonds, the ABX.HE Index. The new contract also allowed them to bundle good loans and bad loans into one bond. To take these derivatives unbundle and recombine in new and lucrative ways. They then colluded with the Wall Street credit rating agencies to give these bonds a AAA rating. But with every new iteration and sale the risk was pushed further down the line of investors, many unsuspecting who believed the AAA ratings. Is it possible in this frenzy of greed a single mortgage has triggered multiple insurance payments, probably. It is just as possible the wrong people have been paid as well. People with absolutely no tangible stake in the asset beyond paying and insurance premium.

Consider the case of no deed no foreclosure. It happens, in fact happened recently to Deutsche Bank AG who were trying to foreclose on 14 homes in Ohio and were not allowed to seize the property because they couldn't prove they had a security interest in any of them. Many times investors aren't matched up with specific mortgages until AFTER default. Because of this it is increasingly difficult for the investor to prove they were in anyway injured by a default.

Here is a partial list of who is responsible.

Greg Lippmann Deutsche Bank AG
Rajiv Kamilla Goldman Sachs Group Inc.
Todd Kushman Bear Stearns Cos.
Citigroup Inc.
JPMorgan Chase & Co.
S&P
Fitch Ratings
Brian Clarkson Moody's Investors Service

Add Congress, the Treasury and the Federal Reserve for not taking decisive action when the handwriting was on the wall and for in some cases still believing this mess represents a realistic framework for the future without substantial regulation.

A Diary A Day - a Humongous Heaping Healthy Helping of FRAUD

snackdoodle — Fri, 20 Mar 2009 18:34:26 -0500

(5pm - promoted by Edger)

Yesterday I diaried about my understanding of how the meltdown happened, here. But there is part of the diary worthy of a diary on it's own. The very important part played by Wall Street's three biggest arbiters of credit. We will look at their part combined with how these instruments were allowed to be traded that may be the largest fraud ever perpetrated against the American people. We will discuss the illegal actions that can and MUST be pursued below the fold.

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Years ago, in the 70's my "was-band" worked as a commodities broker for Merrill Lynch. In those days Merrill's biggest issue was their unwillingness to promote women to positions on the trading floor. It was during the time Nelson "Bunkie" Hunt and his brother tried to corner the silver market. Known as Silver Thursday, the very idea one person could come so close to cornering a global metals market, set Wall Street and much of the world back on their heels.

Beginning in the early 1970s, Hunt and his brother William Herbert Hunt began accumulating large amounts of silver. By 1979, they had nearly cornered the global market. In the last nine months of 1979, the brothers earned an estimated $2 billion to $4 billion in silver speculation, with estimated silver holdings of 100 million ounces. During the Hunt brothers' accumulation of the precious metal, prices of silver futures contracts and silver bullion during 1979 and 1980 silver prices rose from $11 an ounce in September 1979 to $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later. The largest single day drop in the price of silver occurred on Silver Thursday. Hunt filed for bankruptcy under Chapter 11 of the Federal Bankruptcy Code in September 1988, largely due to lawsuits incurred as a result of his silver speculation. In 1989 in a settlement with the United States Commodity Futures Trading Commission, Nelson Bunker Hunt was fined US$10 million and banned from trading in the commodity markets as a result of charges of conspiring to manipulate the silver market stemming from his attempt to corner the market in silver. This fine was in addition to a multimillion-dollar settlement to pay back taxes, fines and interest to the Internal Revenue Service for the same period.

Please read the aftermath from Time magazine, a lot of familar faces and familiar solutions. In the end laws were changed. Nelson Hunt lived a life of privilege, he had it all and it still wasn't enough ... “People who know how much they're worth aren't usually worth that much.”

Today we have another kind of meltdown still caused by greed compounded by an absence of or ineffective regulations. Problems started with SIV. Invented by Citigroup in 1988, SIV is part of the shadow banking system and start as a SIV, a Structured investment vehicle. SIV and all their children like ABS represent a virtual bank.

Historically banks have instead of relying on depositor funds to cover monies loaned for short term cash flow issues, money is gotten by selling short term commerical paper. The interest on this paper is low and usually close to the LIBOR average. This paper is also rated by the big three of credit arbiter with the rating as the issuing bank. Commerical paper isn't new, it has been used for years to cover things like payroll, not unlike any other business. Normally these notes have no collateral. Again from WIKI

As defined by American law, commercial paper is a financial instrument that matures before nine months (270 days), and is only used to fund operating expenses or current assets (e.g., inventories and receivables) and not used for financing fixed assets, such as land, buildings, or machinery. By meeting these qualifications it may be issued without U.S. federal government regulation, that is, it need not be registered with the U.S. Securities and Exchange Commission. Commercial paper is a type of negotiable instrument, where the legal rights and obligations of involved parties are governed by Articles Three and Four of the Uniform Commercial Code, a set of non-federal business laws adopted by each of the 50 U.S. States.

SIV and ABS is available to non-bank financial institutions. These institutions borrow and lend thru credit derivatives and in that way circumvent banking laws and regulations. The value of these credit derivatives are based on credit risk. There is a significant advantage in so much as it allows the issuer to package of assets they couldn't easily borrow against otherwise. Unlike legitimate CP, ABS and SIV can be renewed over and over again.

From Investopedia: Structured Investment Vehicle - SIV
What Does Structured Investment Vehicle - SIV Mean?
A pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns profits on the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. SIVs often employ great amounts of leverage to generate returns.

Also known as "conduits".
Investopedia explains Structured Investment Vehicle - SIV
SIVs are less regulated than other investment pools, and are typically held off the balance sheet by large financial institutions such as commercial banks and investment houses. They gained much attention during the housing and subprime fallout of 2007; tens of billions in the value of off-balance sheet SIVs was written down as investors fled from subprime mortgage related assets.

Many investors were caught off guard by the losses because little is publicly known about the specifics of SIVs, including such basics as what assets are held and what regulations determine their actions. SIVs essentially allow their managing financial institutions to employ leverage in a way that the parent company would be unable to due to capital requirement regulations.

Investopdia: What Does Credit Derivative Mean?
Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments).
Investopedia explains Credit Derivative
For example, a bank concerned that one of its customers may not be able to repay a loan can protect itself against loss by transferring the credit risk to another party while keeping the loan on its books.

From Investopedia What Does Asset-Backed Security - ABS Mean?
A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt.
Investopedia explains Asset-Backed Security - ABS

An ABS is essentially the same thing as a mortgage-backed security, except that the securities backing it are assets such as loans, leases, credit card debt, a company's receivables, royalties and so on, and not mortgage-based securities.

So what does all this mean? It means banks are able to leverage to their heart's content because they have a ready unregulated market for their poor judgement. And they can securitize virtually anything, including fees. These securities and their derivative children CDO, CLO and CDS etc. are rated without regard for the issuing bank. Moody's Investors Service, S&P and Fitch Ratings gave us 80 percent AAA rating on these securities, the same designation given to U.S. Treasury bonds.

Their ratings put toxic paper on the same investment plane as US Treasury notes, the gold standard, implying these investments couldn't fail. What made them so insanely attractive and created the hottest capital market in the world is these securities paid 2-3 percent higher interest than Treasuries.

Rating agencies are supposed to be impartial, in fact they need to be for the system to work, they are the first and one of the most important check and balance. This expansion could not have happened without the aid of the rating agencies. Issuers of securitized investments were not only coached and given guidance by the rating agencies on how to shape these investments, but the rating agencies gave bankers the software to use to make it even easier to commit this fraud. Yet to this day the rating agencies contend they do not offer consulting services or have any part of the structuring of the instruments. The rating agencies charged the issuers for this service and the subsequent ratings. The software and the AAA rating for 98% of these securities say they are liars.

This isn't the first time the rating agencies have betrayed our trust. In 2001 Moody's came underfire and were sued by stockholders because of their failure to downgrade ENRON in a timely manner. In 1994 the big three were criticized for keeping bonds sold by Orange County, Calif., at investment grade while the county filed the nation's largest municipal bankruptcy. After ENRON, in September of 2006 Congress passed the Credit Rating Agency Reform Act, giving the SEC the power to investigate, designate and regulate these agencies. In January of 2007 the SEC made their recommendations regarding new regulations. The SEC took action again in June of 2008 adding more regulation. The problem is the regulations are mostly toothless in addressing the real problems. The SEC after their investigation found insufficient disclosure between the issuers and the rating agencies and conflicts of interest. We know from testimony and emails that the rating agencies were fully aware they are giving a AAA rating to what was essentially junk bonds. The rules most needed were dropped from the final regulations after they came underfire from Wall Street. Because of laws regarding investments and what certain large buyers can purchase what the problem is far from fixed.

By law, certain investors must rely on the ratings of a handful of Securities and Exchange Commission designated “Nationally Recognized Statistical Rating Organizations” (NRSROs). For example, most state insurance regulators require that only assets rated in the top four ratings categories by NRSROs are eligible investments. Similarly, money market funds can only invest in securities with the highest NRSRO ratings. In fact, innumerable institutions – public and private, and domestic and international – mandate asset quality levels predicated on the major rating agencies’ due diligence.

Standard & Poor’s Ratings Services, Moody’s Investors Service (MCO) and Fitch Ratings Inc. are all SEC-designated NRSROs. They are the largest, best-known and most-profitable ratings firms in the tiny, $5 billion-a-year universe of ratings firms. S&P is a part of The McGraw-Hill Cos. Inc. (MHP), while Fitch is a subsidiary of France’s Fimalac SA.

Moody’s was spun out of financial publisher Dun & Bradstreet Corp. (DNB) as a public company in 2000. Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B), apparently having spotted a diamond in the rough, bought into D&B before the divestiture, and ended up with a hefty 19% stake in Moody’s after the spin-off was completed.

The problem with the business of rating the issuers of securities, and rating the securities they issue – such as mortgage-backed securities and collateralized mortgage-backed obligations – is that the rating agencies are paid by the issuers to rate them. Objectivity aside, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. It’s like all the contestants in the Miss World pageant paying the judges with country funds … who’s not going to be judged beautiful?

It is interesting the SEC is addressing what they see as a conflict of interest between the issuers and the rating agencies, when the two clearly enabled the other in committing fraud. Apparently I'm not the only one who believes fraud was committed.

March 11th 2009 A US District Court judge says Moody’s Corp. investors can go ahead in part with a lawsuit accusing the credit rating agency of securities fraud. The class action lawsuit accuses Moody’s of claiming it was an independent body that impartially published accurate financial instrument ratings when such misrepresentations artificially inflated its stock price (until media reports about its compromised objectivity caused the value of its stocks to drop).

And there were problems. Lots of them. According to a Feb. 15 “Review & Outlook” piece in The Wall Street Journal, Joseph Mason, professor of finance at Drexel University, studied collateralized debt obligations rated “Baa” by Moody’s and determined that they were 10 times more likely to default than equivalently rated corporate bonds. The article went on to say that an S&P spokesperson, when asked if they actually examined the underlying mortgages in the pools, answered: “We are not auditors; we are not accounting firms.”

While S&P – and to a lesser degree, Fitch – were just playing the game, Moody’s actually ran away with the ball. An eye-popping and brilliant April 11 Aaron Lucchetti article by Aaron Lucchetti exposed the unseemly underbelly of Moody’s greed. What stood out the most in the article was Moody’s willingness – under the direction of Brian Clarkson, who joined the firm in 1991 and became president and chief operating officer – to bend over backwards to accommodate issuers of mortgage-backed and structured finance paper. Clarkson was willing to switch analysts if clients complained, which several did, including Credit Suisse Group AG (ADR: CS), UBS AG (UBS), and Goldman Sachs Group Inc. (GS).

Under Clarkson, Moody’s expanded and grabbed a huge piece of the deal-ratings-market pie. By 2006, the company was rating $9 out of every $10 raised in mortgage securities. For all of that year, the firm’s structured finance group generated more than $881 million in revenue, about 43% of Moody’s revenue. And in 2007 it was estimated that the firm rated 94% of the approximately $190 billion in mortgage and structured-finance CDOs floated during the year.

Like any other stock or bond you can play/bet the come don't come line. This is why in the casino know as Wall Street millionaires are made in down markets. Options are an important part of this model. You are betting on the future performance of a stock or bond, not unlike futures trading int the commodities market. For a small premium you can get a buy option at a certain price at sometime in the future. An option to sell is essentially the same thing in the reserse, but the kicker is you don't have to own the stock to offer to sell it in the future. Eventually if the day comes when to option to sell is exercized by the price asked then you have to scramble to buy and sell. If the day comes and the price has not been met, all you lose is the original premium paid on your buy option. Cheap fun and it gets better. "Naked Call Writing" is the term used when you own no part of the trade. While not illegal it is dangerous and many brokerage houses won't write them. Options are derivatives, a thing made from the pieces of something else. The scarey thing as Cramer pointed out is they can be securitized. You can make and trade and investment based on parts of a thing, in this case stock and not even own it. If the deal works out and you guess the market correctly it is possible to collect billions in profits on the misery of others. There are books written about this being the future of investments. They teach you to ride it up and down, crashes and slow downs mean nothing if you are clever and greedy.

This is how Hedge Funds work. Because Hedge Funds limit their number and type of investors they are exempt from regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. The funds are specialized each having its own strategy and areas of interest, they also dominate the high yield market. We have identified a literal alphabet soup of corruption that needs to be severely regulated or outlawed entirely. The idea bailing out AIG may also bail out Hedge Funds is repugnant.

I would suggest the people who brought us to this party and caused the headache ought to be paying for the cure. There needs to be an investigation if one isn't currently underway along with prosecutions for at the very least fraud and conspiracy to commit fraud. And why not "tax" stock and bond trades? Why not add a little bit to each stock or bond? In 2008, 894.5 billion shares passed thru the NYSE. Just 10 cents added to each stock or bond could add at least $89 billion to a fund to pay back the bail out. Once paid back with interest, the fund should continue, perhaps at a reduced amount to provide money for future bailouts if necessary.

A Diary A Day- Get this math - It's VEGAS BABY!!!!

snackdoodle — Thu, 19 Mar 2009 21:43:23 -0500

(8pm - promoted by Edger)

In researching my Sunday diary I ran across some interesting facts and figures I thought I would share with you. Grab a pencil and paper, your pocket calculator and pop some pop corn because this is going to be entertaining in a sick and disgusting sort of way. Follow me below the fold for a trip to the house of cards where our dreams live, located at the intersection of greed and larceny with a little betrayal along for the ride.

between 2001 and 2006, the number of terminated subprime purchase-money loans — those used to purchase rather than refinance a house – outweighed the estimated number of first-time-homebuyers with subprime mortgages. According to the analysis, many subprime borrowers may have intended to make a quick exit from subprime loans — using the loans as “bridge financing” to speculate on house prices and then sell for a profit after values increased.

The study also found that subprime lending did not increase homeownership, as subprime activists believed it could. The number of defaults in a sample of subprime purchase-money mortgages within two years of origination is almost equal to the estimated number of first-time homebuyers who held subprime mortgages, the analysis found.

The report goes on to say the big defaults in 2006 and 2007 weren't caused because the quality of the loans, since the quality of loans had been declining for the previous 6 years and as the housing market slowed defaults over took prepayment exits. Of the loans originated between 2001 and 2006 after 3 years 80% were no longer in effect either thru prepayment or default. Sub prime loans have always been very risky, easy money and booming housing market created a perfect storm.

This would have been bad enough but for Credit Default Swaps which made it exponentially worse. CDS were invented in 1997 by a team working for JPMorgan Chase. They were designed to shift the risk of default to a third-party, and were therefore less punitive in terms of regulatory capital. CDS swamped the global economy and sunk ours almost completely bit not without significant help and enablers.

In February of 2005 the "group of five", the most powerful and influential Wall Street bankers met to rewrite the rules of Wall Street that led to the housing collapse and with it the global economy. The new standardized contracts they allowed banks to protect themselves from all the risks of sub prime loans and created the hottest capital markets in the world.

The banks wanted more mortgage-backed securities to sell to clients. Creating a standardized "synthetic" instrument, or derivative, would leverage small numbers of subprime mortgages into bigger securities. In that way, the firms could produce enough to meet global demand.

From Investopedia
What Does Synthetic Mean?
A financial instrument that is created artificially by simulating another instrument with the combined features of a collection of other assets. For example, you can create a synthetic stock by purchasing a call option and simultaneously selling a put option on the same stock. The synthetic stock would have the same capital-gain potential as the underlying security.

Synthetic Collateralized Debt Obligation
What Does Synthetic Collateralized Debt Obligation Mean?
A form of collateralized debt obligation (CDO) that invests in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets. Synthetic CDOs are typically divided into credit tranches based on the level of credit risk assumed. Initial investments into the CDO are made by the lower tranches, while the senior tranches may not have to make an initial investment.

Synthetic CDOs are a modern advance in structured finance that can offer extremely high yields to investors. However, investors can be on the hook for much more than their initial investments if several credit events occur in the reference portfolio.

The issuer of the CDO, typically an investment bank, earns a commission at time of issue and earns management fees during the life of the CDO. The ability to earn substantial fees from originating and securitizing loans, coupled with the absence of any residual liability, skews the incentives of originators in favor of loan volume rather than loan quality. This is a structural flaw in the debt-securitization market that was directly responsible for both the credit bubble of the mid-2000s as well as the credit crisis, and the concomitant banking crisis, of 2008.
Creating CDOs from other CDOs creates enormous problems for accounting, allowing large financial institutions to move debt off their books by pooling their debt with other financial institutions and then bringing these debts back on to their books calling it a Synthetic CDO asset. This not only has allowed financial institutions to hide their losses, but has allowed them to inflate their earnings. This has the unfortunate effect of doubling potential losses book-wise.

As the five-year real estate boom approached its peak in 2005, Wall Street marketed a new type of security backed by high-interest subprime mortgages issued to the least credit-worthy home buyers. Blessed by the biggest credit rating companies as safe investments, these instruments offered higher returns than government bonds with the same ratings.

Investment banks, including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc., sold $1.2 trillion of these securities in 2005 and 2006, said Brian Bethune, director of financial economics for Global Insight Inc. in Waltham, Mass.

None of this could have happened without the participation of Wall Street's three biggest arbiters of credit -- Moody's Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.

The companies' ratings underpinned Wall Street's expansion of the global market for securities based on high-risk subprime loans.

Issuers got guidance from rating companies on how to shape their subprime securities to win the ratings, says Joshua Rosner, managing director of the New York-based research firm Graham Fisher & Co. Investment banks used software distributed by the ratings companies to show them how to meet the requirements, then paid the companies to have the securities rated, he says.

I've been pretty hard on the investors, but honestly with the bond rating companies giving what is essentially junk bonds the same rating as Treasury Bonds but with significantly higher rates of return, they are telling investors these bonds are solid can't fail instruments.

Even as the market continued to tank and the hand writing was on the wall, even more exotic instruments came into being, betting on the fall. Mortgage brokers were now selling the bet on a borrowers ability to refinance their existing loan rather than their ability to repay.

Home prices had been on a five-year tear, rising more than 10 percent annually. Bass conceived a hedge fund that bet on a crash for residential real estate by trading securities based on subprime mortgages to the least credit-worthy borrowers. The investment bank, which Bass declines to identify, owned billions of dollars in mortgage-backed securities.

Within six months, Bass was right. Delinquencies of home loans made to people with poor credit reached record levels, and prices for the securities backed by these subprime mortgages plunged. The world's biggest financial institutions would write off more than $80 billion in subprime losses, while Bass, his allies and a handful of Wall Street proprietary trading desks racked up billions in profits.

The risks were amplified by the derivatives, contracts whose values are derived from packages of home loans and are used to hedge risk or for speculation. The vehicles allowed investors to bet against particular pools of mortgages.

The magnified losses caused by derivatives made it possible for a small number of defaulting subprime borrowers to freeze world credit markets.

That's what happened in July after payments in the first quarter stopped on 13.8 percent of subprime mortgages representing 4.8 percent of total U.S. borrowers.

At the time this happened there were approximately 44 million mortgages in the US, of those 4 million were considered at risk. 2,112,000 million mortgages of those 291,456 were in default and started the downward spiral. 291,456 homes out of 44 million or barely .005 percent of all mortgages. Of course when one is leveraging not 3 or 4 to 1 but 40 to 1, 50 to 1, even 70 to 1 eventually .....

The defaults caused demand for subprime securities to dry up. Uncertainty over the value of the financial products spread to investment funds globally. Corporate lending stopped because no one knew what the collateral was worth. By Aug. 10, the Federal Reserve and the European Central Bank were forced to inject a combined $275 billion into the banking system to keep money flowing.

Everybody pimping, making obscene amounts of money and completely ignoring any warning signs or urgings from the Federal Reserve to tighten their credit standards. If this isn't enough there are still mega banks wanting to do the same thing to Alt-A loans, betting when they will default. Its Vegas baby!

These financial instruments are so tangled it is unlikely they will ever be figured out. But I find it interesting 1.2 trillion dollars in these securities were sold between 2005 and 2006, isn't 1.2 trillion the amount Geitner wants to buy toxic paper?

Certainly, not all of the bad mortgages sold in 2005 and 2006 are still in the toxic catagory if you are to believe the Federal Reserve. Since 2004 7 million homes have already been lost to foreclosure. In 2003 there were $332 billion outstanding in sub prime loans, in 2007 the figure was $1.3 trillion. Proportion of completed foreclosures attributable to adjustable rate loans out of all loans made in 2006 and bundled in subprime mortgage backed securities a whopping 93%. Those foreclosed homes helped trigger the run on AIG. It is estimated it costs the lender about $50,000 per home to foreclose, but foreclosure triggers the insurance pay off, leaving absolutely no incentive to "work" with home owners.

The lenders made the bad loans (up to 50% with no income documentation) bundled them in investment securities and sold them, getting their money back. They then issue CDS to protect against the defaults they knew were coming, to recover their non existent losses because they bundled and sold these bad loans. Next come the CDO to take one more crack at whatever is left of the market. The big lenders are also writing off billions in these loans. Didn't they receive billions in TARP funds to help cover these write downs? Now we are pouring billions into AIG, billions going to banks here and abroad, which for me begs the question why do we need 1.2 Trillion to buy toxic paper. Homes foreclosed in 2007 and the first three quarters of 2008 are long gone. At the very least the lenders now own the home and aren't intitled to any additional compensation. If they lost money, oh well, the cost of doing unsound business.

They fucked investors, they fucked other banks, they fucked each other, they fucked borrowers and they fucked us. A giant fuck fest orchestrated and led by a bunch of criminal opportunists who were too clever by half. So clever they ultimately fucked themselves right out of business.

When you look at how it all came to be it isn't even a house of cards, it is a house of tissue, nothing air, investments existing largely in the imaginations of the profoundly greedy. It is fraud. Pouring trillions into these banks via AIG only rewards them. There has to be a better more effective way to spend those dollars, seize the banks, protect the depositors, perhaps the share holders and investors after excess assets have been sold. Save the healthy parts, sell them or spin them off and let the rest die. Along with strict regulations to keep this from ever happening again there must be prosecutions of bank management, the Wall Street "group of 5" and the bond rating companies. Since Bernanke seems to still not get it and Geitner hasn't said enough to inspire confidence, team Obama will probably not be the first source of redress. I would expect the law suits from the investors to start long before anything meaningful comes out of Washington. In any event no more money should be given to AIG or any bank until the government has seized, audited and directs exactly where the money goes.