... Part of the problem with some mortgages was you could lend money to unworthy borrowers and it did not matter if the loans went bad. You could sell the loans in packages to others so there was no real downside for the lenders. ...
It maybe worse than you think. Sorry about the long quote from
The Miscreants’ Global Bust-Out (Chapter 21): How a Small Gang of Organized Criminals Wrecked the World | Deep Capture
"... The typical media story reported that “skyrocketing default rates on subprime mortgages” caused the mortgage markets to collapse. This was plainly false.
According to
data provided by the Mortgage Bankers Association, default rates on subprime mortgages were above 8 percent every year from 1998 to 2002. In 2001, the default rate on subprime mortgages reached nearly 10 percent. But in those years there was no “mortgage crisis.” And after those years, subprime default rates steadily
declined.
The 2006 vintage of subprime mortgages (the vintage of mortgages commonly blamed for the 2007 “mortgage crisis”
defaulted at an average rate of only 6.8 percent. The 2007 default rates were not much higher than that. And even by the second quarter of 2008, long after the mortgage markets had collapsed, the default rate was still only around 8 percent. So the link between default rates (even on the least credit-worthy subprime mortgages) and the mortgage crisis is not at all clear.
The Financial Crisis Inquiry Commission (FCIC) said as much in its February 2011
report to Congress. According to the FCIC, the “mortgage crisis” was not primarily the result of “reckless” lending to subprime borrowers. It was, rather, largely the result of the 2007 collapse in the market for collateralized debt obligations (CDOs). And the CDO market collapsed because more than half of all CDOs issued in 2006 and 2007 were so-called “synthetic” CDOs.
Regular CDOs are packages of mortgages that trade like securities. So-called “synthetic” CDOs do not contain mortgages themselves. They contain
bets against mortgages, usually in the form of credit default swaps. That is, the sellers of these “synthetic” CDOs (more than half of the overall CDO market in 2007) were people who were betting against mortgages and therefore
wanted the mortgage markets to collapse.
As the FCIC also made clear, just a few specialist firms (working with no more than fifty short sellers) created
all of the “synthetic” CDOs that came to comprise more than half of the overall CDO market. Importantly, those specialist firms did not package these “synthetic” CDOs with bets against
average subprime mortgages. They and their short selling clients packaged them with bets against the worst possible mortgages in the nation—a select number of handpicked mortgages that seemed
certain to default.
Thus, over half the market was actually comprised of securities that had been designed to implode by people who were betting that they would.
According to the FCIC, the firms that specialized in creating “synthetic” CDOs actually fueled a demand for
fraudulent mortgages. Merely crappy (subprime) mortgages were not adequate because they were defaulting at a rate of less than 8 percent–and the short sellers were looking for default rates of 100 percent. The only kind of mortgages that defaulted at a rates of 100 percent were, of course, fraudulent mortgages—mortgages that were taken out by people who had zero intention of paying them back.
As is happened, there were people prepared to meet the demand for fraudulent mortgages. Beginning in early 2005, there was a massive surge in mortgage fraud. In March 2007, the FBI
announced that known incidences of mortgage fraud had doubled over the past three years. And those were only the mortgage frauds that the FBI was investigating. It is more than likely that the actual incidences of mortgage fraud tripled or quadrupled between 2005 and 2007, when the mortgage markets collapsed.
This sudden surge in mortgage fraud correlated precisely with the proliferation of self-destruct CDOs. In fact, there appears little question that the creation of self-destruct CDOs could not have occurred
without the mortgage fraud."
"One reason to believe this is that many of the same people who were creating the self-destruct CDOs in 2006 had also seized control of major mortgage companies. Once in control of the mortgage companies, the financial operators loaded them with debt that they used to finance fraudulent mortgages, which were precisely the sort of mortgages they needed for their self-destruct CDOs (i.e., their bets against the fraudulent mortgages they had created).
In other words, with one hand they promoted the fraudulence that with the other hand they bet against. This is what is called a “bust-out.”
Indeed, the DOJ
says that insiders at some mortgage companies worked in cahoots with organized criminal gangs that descended on cities buying as many homes as they could get their hands on. Often, these criminal gangs (with help from the mortgage company insiders) would take out mortgages valued at twice or more than twice the listed price of the houses they were buying.
Of course, the mortgage company insiders churned out these criminal mortgages knowing full well that the mortgages would never be paid back. That is, the insiders looted their companies—and in many cases the companies, of course, eventually imploded. If these actions were in fact connected, it means that those companies were
deliberately destroyed—at great profit to affiliated short sellers who helped put them out of business, and at great profit to the people who used the fraudulent mortgages to create self-destruct CDOs.
Fraudulent mortgages represented only a small fraction of total mortgage lending, but bets against fraudulent mortgages were packaged into multiple “synthetic” CDOs. As a result, the health of the entire CDO market (and therefore the health of the mortgage market, the property market, and the banks that purchased property and CDOs) depended disproportionately on whether a relatively few fraudulent mortgages would, in fact, default. Which, of course, they would.
This must be stressed: a small number of specialist firms and short sellers
deliberately created financial weapons of mass destruction that they
knew would destabilize the banks and the American economy. As U.S. Senator Carl Levine
stated (singling out “synthetic” CDOs as evidence): “The recent financial crisis [of 2007-2009] was not a natural disaster; it was a manmade
economic assault.” [the emphasis was Senator Levin’s]
To the extent that the media, regulators, and politicians have picked up on this scam, the focus has been on the banks (especially Goldman Sachs) that worked with some specialist firms and a few short sellers to broker the sale of self-destruct CDOs to unwitting customers. Goldman Sachs and a few other banks are certainly culpable. They knew that some CDOs were (in the words of one Goldman executive) “shitty”—and they sold them as if they were good investments.
However, Goldman’s executives did not know just how “shitty’ they were. They did not know that the CDOs were, in fact,
guaranteed to self-destruct. That’s because the specialist firms that created these things “specialized” in hiding the outright fraudulent mortgages in the paperwork describing the CDOs.
Indeed, the specialist firms displayed a perverse sort of genius in admitting to Goldman and others that the CDOs were (in a general sense) “shitty”, but not revealing that they had a 100 percent chance of self-destructing and wiping out the markets, thereby paving the way for a financial crisis that would bring even Goldman Sachs to the brink of collapse.
The paperwork for a given CDO would state (vaguely) that it contained bets against a selection of mortgages that had been given to, say, especially low income people in Michigan. The paperwork (written up by the specialist firms) would also state that these low income people had poor credit ratings and thus a higher than average likelihood of default. The specialist firms then sold the CDOs as investments that were risky (perhaps even “shitty”
, but nonetheless had the potential for a big payoff for anyone with an appetite for risk.
What the paperwork did not do was identify the individual mortgages. So while the banks that brokered the sales of the CDOs (and the banks that bought them) knew in a general sense that CDOs contained selections of risky mortgages, they did not know that many of those individual mortgages were outright fraudulent.
Again, only the specialist firms and the short sellers who picked the mortgages (and in many cases
created the mortgages in cahoots with organized gangs) knew that they had manufactured instruments that were guaranteed to self-destruct. That’s why they were able to find people who were willing to take the other side of the bets.
The banks, the credit rating agencies, and others deserve blame for not scrutinizing these CDOs more carefully. But all of them genuinely (and not irrationally) believed that even if mortgages defaulted at rates higher than expected—even if there was a historic and disastrous upsurge in default rates—the buyers of these CDOs could still expect to recoup some portion of their investment.
Because they did not know about the organized criminals taking out the fraudulent mortgages that were being selectively inserted into the CDOs, they did not know that these CDOs would be worth
nothing.
But the specialist firms and the short sellers knew. And because they knew the self-destruct CDOs comprised half the overall market, they knew what would happen when the CDOs destructed. They knew this would not be a mere correction, or crash, or bursting of a bubble. They knew that the market would be calamitously vaporized—the first time in history that a market for a class of securities would literally drop to
zero.
They also knew that the collapse of the CDO market would seriously hobble the banks. Moreover, the creators of self-destruct CDOs and/or closely affiliated financial operators took other steps to ensure that the banks would be crippled. For example, as we will see, they worked with compromised insiders at some banks (notably Lehman Brothers) to get the banks to buy overvalued Real Estate Investment Trusts (REITs) that would be wiped out once property prices plummeted as a result of the collapse of the CDO market.
Unsurprisingly, these same financial operators and their affiliates perpetrated much of the manipulative short selling that finished off the banks that had been hobbled by CDOs and toxic REITs.
One reason why the banks were so easily induced to buy these toxic assets is that they were drunk with leverage and greedy for commissions. But it must be stressed that the banks did not ultimately collapse simply because of a generalized buying spree. They collapsed because they had bought a specific selection of especially toxic assets from a specific selection of financial operators who were deliberately poisoning the banks and would subsequently perpetrate the short selling attacks that would finish them off."
