5 ms·

The banks weren't victims, but co-conspirators. The banks were looking the other way on these "liar loans" because they weren't going to be keeping them on thei

by ahi 15y ago

The banks weren't victims, but co-conspirators. The banks were looking the other way on these "liar loans" because they weren't going to be keeping them on their books anyways. The banks just packaged them up into neat bundles, slipped the ratings agency a couple fivers, and resold them as AAA debt.

alexqgb 15y ago
Liar's loans were closely related to NINJA loans - No Income, No Job, No Assets. These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk. Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft. All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'. Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.
- mdda 15y ago
  Sidestepping the editorial : The basic problem with NINJA loans was that the historical payment/default characteristics were very encouraging. When the rating agencies modeled up new asset classes, they naturally gathered as much historical data as possible. For NINJA loans, the historical dataset was pretty small, since banks don't normally lend to such hopeless cases. However, when they did lend, the facts of the particular loan normally went something like : House buyer works for himself as a builder/developer, gets paid in cash, plays golf with the bank manager - and everyone knows that he's good for repayment (even if his tax returns don't show any income). The major problem with this is that the statistical data did not contain these qualitative factors, and showed only that people with No (declared) Income, No (on-the-books) Job and No (visible) Assets paid back their loans consistently. That became codified into a simple fill-in-the-form application which missed the entire point... And loan brokers went to town, with the loans eventually packaged up and dumped into a pool. At it's heart, the root cause of the problem is that rating agencies did a horrible job of understanding the risks that were embedded in the different types of loans. And no-one had an incentive to let them in on the 'trick' (and, perhaps, the rating agencies were willfully blind to what was going on). Since the middle-men were only short-term holders of each mortgage, the risk got transferred from modeling spreadsheet to investors in pools who trusted the ratings agencies within months or weeks. Frankly, the politicians were completely outside the loop, and the regulators trusted that the Rating Agencies were doing a good job. Terrible assumptions.
yummyfajitas 15y ago
If that were the case, then the collapse of the bubble should not have harmed the banks. In fact, banks typically sold off the AAA tranches and kept the toxic waste for themselves. If housing continued to go up this would not have caused any problems. Regardless, even if banks and homeowners were conspirators, why should regulators punish one while rewarding the other? Shouldn't both parties be punished?
- Klinky 15y ago
  Both the retail & investment side of banks held garbage which is why it harmed them. There was no "AAA" tranche, all the tranches were garbage. Magnetar Capital used the fallacy of the "A Tranche" to their advantage by selling off most of the CDO to suckers, then buying insurance against the whole thing. Housing would have only continued to go up so long as people bought houses & people could only buy houses because they were being given loans they could not repay. This is the first time I've heard that "foreclosure" is rewarding someone. I would agree that if the borrower knowingly falsified their income without influence or misguidance by the bank then they should be held responsible, but often that was not the case. The banks created a culture that lowered it's standards to the lowest levels, then either helped guide people into lying about their financial information, didn't ask about it or never verified it. They also helped promote things like ARMs which were big at the time because the low initial rate made it much easier to fit people into these loans. The banks didn't really check how feasible it would be for the person to pay back the loan once their rate adjusted though.
  - yummyfajitas 15y ago
    There was no "AAA" tranche, all the tranches were garbage. I suggest you go educate yourself. The banks constructed securities which were rated by various agencies as AAA. Regardless of whether the AAA rating was deserved, the which the banks sold had a lower risk than the non-AAA rated tranches which the banks kept on their books. Why would they do this if they knew the securities were unlikely to pay off? This is the first time I've heard that "foreclosure" is rewarding someone. According to the article, regulators are pressing banks to pay $20B, "with much of the money earmarked to reduce mortgages of homeowners facing foreclosure." That's a reward for people unable to meet their obligations, many of whom are likely to have lied on their application. ...the bank falsified the application themselves. [citation needed]

by ahi 15y ago

alexqgb 15y ago

Liar's loans were closely related to NINJA loans - No Income, No Job, No Assets. These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk. Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft. All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'. Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.

mdda 15y ago
Sidestepping the editorial : The basic problem with NINJA loans was that the historical payment/default characteristics were very encouraging. When the rating agencies modeled up new asset classes, they naturally gathered as much historical data as possible. For NINJA loans, the historical dataset was pretty small, since banks don't normally lend to such hopeless cases. However, when they did lend, the facts of the particular loan normally went something like : House buyer works for himself as a builder/developer, gets paid in cash, plays golf with the bank manager - and everyone knows that he's good for repayment (even if his tax returns don't show any income). The major problem with this is that the statistical data did not contain these qualitative factors, and showed only that people with No (declared) Income, No (on-the-books) Job and No (visible) Assets paid back their loans consistently. That became codified into a simple fill-in-the-form application which missed the entire point... And loan brokers went to town, with the loans eventually packaged up and dumped into a pool. At it's heart, the root cause of the problem is that rating agencies did a horrible job of understanding the risks that were embedded in the different types of loans. And no-one had an incentive to let them in on the 'trick' (and, perhaps, the rating agencies were willfully blind to what was going on). Since the middle-men were only short-term holders of each mortgage, the risk got transferred from modeling spreadsheet to investors in pools who trusted the ratings agencies within months or weeks. Frankly, the politicians were completely outside the loop, and the regulators trusted that the Rating Agencies were doing a good job. Terrible assumptions.

yummyfajitas 15y ago

If that were the case, then the collapse of the bubble should not have harmed the banks. In fact, banks typically sold off the AAA tranches and kept the toxic waste for themselves. If housing continued to go up this would not have caused any problems. Regardless, even if banks and homeowners were conspirators, why should regulators punish one while rewarding the other? Shouldn't both parties be punished?

Klinky 15y ago
Both the retail & investment side of banks held garbage which is why it harmed them. There was no "AAA" tranche, all the tranches were garbage. Magnetar Capital used the fallacy of the "A Tranche" to their advantage by selling off most of the CDO to suckers, then buying insurance against the whole thing. Housing would have only continued to go up so long as people bought houses & people could only buy houses because they were being given loans they could not repay. This is the first time I've heard that "foreclosure" is rewarding someone. I would agree that if the borrower knowingly falsified their income without influence or misguidance by the bank then they should be held responsible, but often that was not the case. The banks created a culture that lowered it's standards to the lowest levels, then either helped guide people into lying about their financial information, didn't ask about it or never verified it. They also helped promote things like ARMs which were big at the time because the low initial rate made it much easier to fit people into these loans. The banks didn't really check how feasible it would be for the person to pay back the loan once their rate adjusted though.
- yummyfajitas 15y ago
  There was no "AAA" tranche, all the tranches were garbage. I suggest you go educate yourself. The banks constructed securities which were rated by various agencies as AAA. Regardless of whether the AAA rating was deserved, the which the banks sold had a lower risk than the non-AAA rated tranches which the banks kept on their books. Why would they do this if they knew the securities were unlikely to pay off? This is the first time I've heard that "foreclosure" is rewarding someone. According to the article, regulators are pressing banks to pay $20B, "with much of the money earmarked to reduce mortgages of homeowners facing foreclosure." That's a reward for people unable to meet their obligations, many of whom are likely to have lied on their application. ...the bank falsified the application themselves. [citation needed]