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"Once upon a time, this [securitization] seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’

"Once upon a time, this [securitization] seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them." While the banks shouldn't escape blame, didn't this securitization facilitate shoveling the risk onto the buyers of these 'bonds', encouraging sloppy lending practices?

alexandros 18y ago
I think the problem was the loss of semantics from one side to the other. As long as the buyers are informed, all else should be fine.
- dschobel 18y ago
  Is that even possible when mortgages are leveraged at a rate of thirty to one and sliced and diced and bundled in every conceivable way?
  - jwb119 18y ago
    They are sliced, diced, and leveraged when they are resold to investors as MBS or CDOs, not when presented to the loan recipient
  - alexandros 18y ago
    when they are sliced for specific dimensions, then, yes, the semantics should be a default property of the result. When sliced and diced for obfuscation, not so much. If they were indeed obfuscating purpusefully, then there is a fraud case in here. This however does not make the technique guilty by association.
    - ewjordan 18y ago
      "If they were indeed obfuscating purpusefully, then there is a fraud case in here." Unfortunately, not quite. Our laws regarding these things are very primitive, which often means that you can be in perfect legal compliance, yet still commit some very severe fraud against the people you're making offerings to. I find it rather unlikely that our regulatory system will ever catch up with the state of the art in finance. There's too much money to be made in the short term by shoveling risk off into the cracks and pretending on paper that it doesn't exist, and it's too easy to do.
      - eru 18y ago
        How about regulation that requires revealing everything, but that does not require any minimum standards?
        dmv 18y ago
        One of the flaws of these articles is that they are vastly simplifying the instruments built. From reading, you might think that you understand how to build a CMO or CDO, or to analyze one. I don't, and you don't. I am not actually sure that, after the author of this article's software went into place anyone could. The government has had months to examine the private books of some of our more nationalized-like asset managers, and is still throwing darts. Regulation that requires revealing everything, but does not require minimum standards, is like being able to bypass QA and security reviews by providing access to the source code... to multi-million line programs. Yes, eventually you can work it all out, but not in time to be helpful.
- nas 18y ago
  You have to wonder what the buyers where thinking. One problem was that the rating agencies (paid by the companies creating the products, BTW), rated the stuff AAA.
  - chollida1 18y ago
    > You have to wonder what the buyers where thinking. One problem was that the rating agencies (paid by the companies creating the products, BTW), rated the stuff AAA. The biggest reason why this "stuff" was rated AAA was that banks backed them fully, ie if they defaulted then the bank would step in and make the investors whole again. Hence the CMO's got the rating of the bank that provided them. The thinking was that some mortgages would go bad but certainly not a large percentage of them.

alexandros 18y ago

I think the problem was the loss of semantics from one side to the other. As long as the buyers are informed, all else should be fine.

dschobel 18y ago
Is that even possible when mortgages are leveraged at a rate of thirty to one and sliced and diced and bundled in every conceivable way?
- jwb119 18y ago
  They are sliced, diced, and leveraged when they are resold to investors as MBS or CDOs, not when presented to the loan recipient
- alexandros 18y ago
  when they are sliced for specific dimensions, then, yes, the semantics should be a default property of the result. When sliced and diced for obfuscation, not so much. If they were indeed obfuscating purpusefully, then there is a fraud case in here. This however does not make the technique guilty by association.
  - ewjordan 18y ago
    "If they were indeed obfuscating purpusefully, then there is a fraud case in here." Unfortunately, not quite. Our laws regarding these things are very primitive, which often means that you can be in perfect legal compliance, yet still commit some very severe fraud against the people you're making offerings to. I find it rather unlikely that our regulatory system will ever catch up with the state of the art in finance. There's too much money to be made in the short term by shoveling risk off into the cracks and pretending on paper that it doesn't exist, and it's too easy to do.
    - eru 18y ago
      How about regulation that requires revealing everything, but that does not require any minimum standards?
      - dmv 18y ago
        One of the flaws of these articles is that they are vastly simplifying the instruments built. From reading, you might think that you understand how to build a CMO or CDO, or to analyze one. I don't, and you don't. I am not actually sure that, after the author of this article's software went into place anyone could. The government has had months to examine the private books of some of our more nationalized-like asset managers, and is still throwing darts. Regulation that requires revealing everything, but does not require minimum standards, is like being able to bypass QA and security reviews by providing access to the source code... to multi-million line programs. Yes, eventually you can work it all out, but not in time to be helpful.
nas 18y ago
You have to wonder what the buyers where thinking. One problem was that the rating agencies (paid by the companies creating the products, BTW), rated the stuff AAA.
- chollida1 18y ago
  > You have to wonder what the buyers where thinking. One problem was that the rating agencies (paid by the companies creating the products, BTW), rated the stuff AAA. The biggest reason why this "stuff" was rated AAA was that banks backed them fully, ie if they defaulted then the bank would step in and make the investors whole again. Hence the CMO's got the rating of the bank that provided them. The thinking was that some mortgages would go bad but certainly not a large percentage of them.