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Are you wanking about the Savings & Loan fiasco of the 1980s? You're all over the place & incomprehensible.
Are you ignoring the facts and proving to everyone here that you are too ignorant to discuss the issue and why it's related? That's on you not me.
Quote:
Originally Posted by ChiGeekGuest
If you're talking about the 1980s, here you go, here's the guy who ushered in the casino-like atmosphere, he says, "All in all, I think we hit the jackpot." Who we? Not US.
If you're deflecting because you are uneducated about the subject then stay out of the conversation. You wont come across as ridiculous.
Keep making it about me instead of deflecting and you'll be embarrassed yet again.
Here's the best part and why you post is absurd. "Quote:
Remarks on Signing the Garn-St Germain Depository Institutions Act of 1982
~October 15, 1982"
Yoiu posted this so dont try and deflect. Again how does somehting that passed on Mar 31 1980 cause 85 percent of all S and Ls to loose money in 1980? how did that cause the industry as a whole to be 120 billion in debt. Qhat ever you do, don't answer that question. Don't even acknowledge it. Just deflect and ignore your own inability to understand the simple fact that something which happens after the fact isn't the cause. Get it yet? School is out.
Are you ignoring the facts and proving to everyone here that you are too ignorant to discuss the issue and why it's related? That's on you not me.
If you're deflecting because you are uneducated about the subject then stay out of the conversation. You wont come across as ridiculous.
Keep making it about me instead of deflecting and you'll be embarrassed yet again.
Here's the best part and why you post is absurd. "Quote:
Remarks on Signing the Garn-St Germain Depository Institutions Act of 1982
~October 15, 1982"
Yoiu posted this so dont try and deflect. Again how does somehting that passed on Mar 31 1980 cause 85 percent of all S and Ls to loose money in 1980? how did that cause the industry as a whole to be 120 billion in debt. Qhat ever you do, don't answer that question. Don't even acknowledge it. Just deflect and ignore your own inability to understand the simple fact that something which happens after the fact isn't the cause. Get it yet? School is out.
you literally have no clue- you think you know but you don't. Here's a decent quick read of the whole thing. losing money =/= insolvent, Goldman lost >1Bn in 2008 yet they are still around..... Read, learn, evolve a bit. IF you still need it explained to you let me know. Removing regulations allowed the banks to buy riskier assets which dug them into holes they couldn't recover from. Unless you think holding Drexel backed junk bonds after the bubble burst isn't what did many of these guys in.....
My god, you really do put your head in the sand don’t you?
Ny god you really do deflect and ignore ths issue.
Quote:
Originally Posted by Metsfan53
No matter how many times you get proven wrong you double down on your gibberish.
You made this up. One more time for everyone to see. Any deregulations or regulations after the fact didn't cause the S and L collapse. None of that had to do with the S and Ls being 120 BILLION in debt with 85% losing money in 1980. Nothing. Quit deflecting from that fact.
You never addressed what I said, you deflected the entire time AND STILL HAVEN'T PROVEN ME WRONG
Quote:
Originally Posted by Metsfan53
You’ve been proven wrong over and over again by those who actually understand the topic st hand but you’ve served yourself a nice big slice of Dunning Kruger effect here instead.
No I haven't and you no proof. none whatsoever. I've addressed the gibberish you spouted while you've not addressed what I've said. Instead you deflected and made things up.
Quote:
Originally Posted by Metsfan53
Please just let the grown ups talk this topic out and just sit on the sidelines here.
Grownups don't deflect, Grownups are adult enough to discuss the actual issue instead of running away. You don't get to make the rules for me because you are ignorant on the cause and don't want your inability to identify the cause, exposed. That's on you.
Again Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
You wont address this since that would espose your entire thought process as defective.
It's not a discussion when you refuse to comment on what I've said. Address what I've said.
Last edited by Loveshiscountry; 05-25-2018 at 03:45 PM..
If you don’t get that banks thought the by securitizing loans they could eliminate default risk by mixing up loan profile among things like fica score, ltv,geography etc you don’t understand the topic. Increasing subprime was a way to juice the coupon as investors demanded more yield and this was only way to do it really. 9”of course were only discussing comforming loans here. Non comforming is a while other story. But again we know by now that you don’t really understand the topic at hand. But please come back at me by telling me I’m “making this up”
Again one more time in hopes you get it and don't deflect from the truth. What you have said is after the fact. One can make a very good arguement that this made matters worse but in no way is the cause of the collpase.
Address this statement and quit hiding. Quit deflecting and trying to make it about something else.
Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
But you won't. It's laughable that you keep running away from this point.
Last edited by Loveshiscountry; 05-25-2018 at 03:47 PM..
you literally have no clue- you think you know but you don't. Here's a decent quick read of the whole thing. losing money =/= insolvent, Goldman lost >1Bn in 2008 yet they are still around..... Read, learn, evolve a bit. IF you still need it explained to you let me know. Removing regulations allowed the banks to buy riskier assets which dug them into holes they couldn't recover from. Unless you think holding Drexel backed junk bonds after the bubble burst isn't what did many of these guys in.....
Goldman Sachs was bailed out by government. That's why they are still around. duh Not that that has anything to do with the cause of the crash. It's just more silly deflection by you.
That you deflect is business as usual for your silly posts. Nothing to do with buying bad loans as that is after the fact. But you wont address that. that would prove your point is incorrect and you'd be exposed as someone who doesn't understand cause and effect.
Address this statement and quit hiding. Quit deflecting and trying to make it about something else.
Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
I have an idea. Lets get the economy going by lowering standards and make loans that were RARELY made before because they were considered too risky.
Ny god you really do deflect and ignore ths issue.
You made this up. One more time for everyone to see. Any deregulations or regulations after the fact didn't cause the S and L collapse. None of that had to do with the S and Ls being 120 BILLION in debt with 85% losing money in 1980. Nothing. Quit deflecting from that fact.
You never addressed what I said, you deflected the entire time AND STILL HAVEN'T PROVEN ME WRONG
No I haven't and you no proof. none whatsoever. I've addressed the gibberish you spouted while you've not addressed what I've said. Instead you deflected and made things up.
Grownups don't deflect, Grownups are adult enough to discuss the actual issue insteaqds of running away. You don't get to make the rules for me because you are ignorant on the topic and don't want your inability to identify the cause, exposed. That's on you.
Again Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
You wont address this since that would espose your entire thought process as defective.
You keep saying I am deflecting- I've clearly laid out facts time and time again and you harp on some nonsense that you're clinging to. I've tried to engage you on the actual facts and all you do is tell me I don't get to make the rules- so what are the rules- you get to ape same point over and over again and even when proven wrong you just claim you're right. I've highlighted numerous times on here when you're out of your element yet you claim it's deflection. Deflection is not addressing topics you don't comprehend and just bulldozing on and on with your nonsense.
for S&L- they were indeed losing money- but the deregulation that allowed them to lever up on risky assets that went bust and took the S&L down with them (google Michael Milken fora clue). Again- losing money =/= insolvent...you might do well to remember that. RTC was 1989 so somehow insolvent banks held on for a decade according to you? Were they frozen in time, suspended animation? did they get a "time out"
2008- here's a clue - banks make bad loans all the time, many of them not even from banks but from shadow banking sector- but again you don't comprehend this for some reason (you're S&L fantasy is another time bad fans caused an issue- why didn't this threaten to bring down global economy at that time??). The liquidity crunch from short term borrowing and long term lending, derivatives, CDO's and securitization, CDS, leverage, along with role of shadow banking sector all played a part. But again- I know this stuff b/c I was in the room in 08, 09, and afterwards...You keep highlighting to those with a clue you don't have one- no matter how many times you screw - I know you are but what am I....of course I'm sure I'm breaking your "rules' again ,huh?
Goldman Sachs was bailed out by government. That's why they are still around. duh Not that that has anything to do with the cause of the crash. It's just more silly deflection by you.
That you deflect is business as usual for your silly posts. Nothing to do with buying bad loans as that is after the fact. But you wont address that. that would prove your point is incorrect and you'd be exposed as someone who doesn't understand cause and effect.
Address this statement and quit hiding. Quit deflecting and trying to make it about something else.
Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
I have an idea. Lets get the economy going by lowering standards and make loans that were RARELY made before because they were considered too risky.
Is that a good idea? Yes or no?
you literally don't even understand the points you make, its sad..my point was losing $$ doesn't equal going under...Wells, GS, and a few others didnt want TARP funds but were forced to accept so as not to poison the reputation of the banks that did....but again besides the point....Why was 08 different- there have been banks going belly up from bad loans forever- why was 08 different? Nobody is saying it's b/c they made too many good loans.....but why was this time different? Hmmn...
you literally don't even understand the points you make, its sad..my point was losing $$ doesn't equal going under...Wells, GS, and a few others didnt want TARP funds but were forced to accept so as not to poison the reputation of the banks that did....but again besides the point....Why was 08 different- there have been banks going belly up from bad loans forever- why was 08 different? Nobody is saying it's b/c they made too many good loans.....but why was this time different? Hmmn...
apparently you REFUSE to look at logic
1. subprime mortgages are not illegal, but would NOT have happened at the rate they did, if the government had not lowered the standards in 1995
2. the packaging of mortgages is not illegal, MBS (mortgage backed securities) in fact are a good thing for smaller companies to get rid of debts, the banks buy the packaged mortgages, and it adds assets as they now own not only the property but also the notes which are receivable assets... the problem was bad loans to idiots that could not pay those loans.... and this was considered a good thing, since historically housing didn't decrease, but always increased
An MBS can be bought and sold through a broker and the minimum investment varies between issuers. It is issued by either a federal government agency company, government-sponsored enterprise (GSE), or a federally sponsored/backed private financial company.
3. the bubble bursting in 06/07 was not due to any policies that came around in 04/05...they as most were the interest only or arms that had a 5 year on them...meaning those bad loans were made in 99/00 there is the reason why as you ask (you have been told repeatedly , yet you refuse to acknowledge it)
4. the whole point which you fail/refuse to admit, is that when HUD/FHA changed the rules in 1995, they opened up this can of worms
a) it was a '''nice''' thing to open up credit to the impoverished or those with less than stellar credit.. but it had its consequences
b) the packaging of loans (MBS (mortgage backed securities)) and (subprime MBSs issued by various structures, such as CMOs) started a long time ago.... as did most ABS (asset backed securities)
….1)Ginnie Mae guaranteed the first mortgage pass-through security of an approved lender in 1968
….2) In 1981, Fannie Mae issued its first mortgage pass-through, called a mortgage-backed security..
….3) In 1983, Freddie Mac issued the first collateralized mortgage obligation.
….4) in 1995 HUD/FHA eased the rules to Fannie Mae/ Freddie Mac for them to up their share of packaging of loans (MBS (mortgage backed securities)) and (subprime MBSs issued by various structures, such as CMOs)
Under the new rules, banks would have more flexibility in lending to people who already owe a considerable amount of money or who cannot afford a down payment equal to 20 percent of the price of a home, the people said. Tuesday Announcement
In addition to changing its guidelines, Fannie Mae plans a national educational campaign that will seek to teach recent immigrants and minorities how to obtain mortgages. The campaign will be aimed particularly at immigrants in a dozen "gateway" cities where the percentage of home ownership has been declining.
Mortgage experts have estimated that up to two million American households are excluded from buying homes now because of conservative mortgage lending standards. These include Americans with minor blemishes on their credit records, for such things as changing jobs repeatedly or failing to pay utility bills on time. Most mortgage experts assume that even people who fall behind on other bills will struggle to make mortgage payments lest they lose their homes.
Freddie Mac loosened its guidelines for low-income mortgages a few weeks ago. But Deepak Bhargava, the legislative director of the Association of Community Organizations for Reform Now, a New Orleans-based group of affordable housing advocates, said that Freddie Mac's guidelines remained more restrictive than Fannie Mae's.
Next week's changes in Fannie Mae's guidelines will probably widen the gap between the two institutions' policies, Mr. Bhargava said. Freddie Mac officials did not return phone calls made to their homes and office this evening.
In its proposal, the Fed staff said raising the threshold would increase the availability of credit and ease the regulatory burden on banks without endangering the safety and soundness of the banking industry.
-snip-
THAT has changed in the last few years, however, as secondary-market investors such as the Federal National Mortgage Association, better known as Fannie Mae -- which package blocks of loans and sell them to private investors -- have made it easier for mortgage lenders to market low-down-payment loans. In 1994, Fannie Mae introduced Fannie 97 -- a 3-percent-down-payment program for home buyers with good income and credit history who have been unable to save for a down payment. Under both programs, qualified buyers in the New York region who have total household incomes of $70,950 or less are eligible.
In 1995, seeking to save his department from elimination by the newly elected Republican-led Congress, Housing Secretary Henry G. Cisneros adopted a ''national homeownership strategy'' that eased requirements to qualify for Federal Housing Administration-insured loans and reduced closing costs by as much as $1,200 on those loans for first-time buyers.
------------------------------------------
.
125% Loan: Blessing Or Bane?
By JAY ROMANO
Published: July 13, 1997
RESPONDING to the seemingly insatiable demand by borrowers for ever more exotic forms of credit, some aggressive lenders have brought to market a rather unconventional mortgage product: the 125 percent loan.
With such a loan, homeowners -- even those with less-than-pristine credit -- can borrow up to 125 percent of the market value of their homes by pledging collateral that doesn't exist.
Lenders who make such loans say they are effective credit tools that can be used by homeowners to raise cash for unexpected expenditures, get out from under high-interest credit-card debt or pay for home improvements that will in turn increase the owner's equity.
''The underwriting criteria (from the government) are actually more flexible,'' Mr. Levy said. ''They allow more dinks on your credit and a more narrow spread between what you make and what you pay out.''
''This rule will greatly expand the supply of affordable housing across the country,'' said [b]Housing Secretary Andrew M. Cuomo.
The companies(fannie/freddie) buy mortgages for homes and apartment buildings from banks, savings and loans and other mortgage lenders, and package and sell the loans to investors. When Freddie Mac and Fannie Mae buy mortgages from lenders, they provide the lenders with cash to issue new mortgages.
Under the higher goals, the companies would buy an additional $488.3 billion in mortgages over the next 10 years for seven million more low- and moderate-income families. The new mortgages would be added to the $1.9 trillion in mortgages for about 21 million families that would have been helped by the current standards.
Mr. Cuomo said that Fannie Mae and Freddie Mac were directing federal regulators on this issue. The Housing Department said it was reviewing fair-lending practices at Fannie Mae. The two companies can do more, Mr. Cuomo said, and that led to the elevated goals.
. the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
see the words in bold....very telling
And that is just what concerns Mr. Bader of Skyscraper Mortgage, they don't like being directed to give out these questionable loans.
''The person who couldn't qualify for an ordinary home equity loan at 8 percent is now borrowing even more money at 14 percent,'' Mr. Bader said, adding that anyone thinking about taking out such a loan should contemplate the following:
''With the Federal Government directing it, we've created new products for people who have glitches, hairy credit,'' said Abe Eisner, executive vice president of GFI. ''No-doc means all we need is your name, address and Social Security number, depending on your credit history.''
GFI is a barometer for the industry; its subprime lending currently represents about 25 percent of the company's business. Two years ago, it was 10 percent.
--snip-....
One measure of the expanding subprime market is the number of loans that have been packaged and sold as asset-backed securities -- meaning that investors buy shares in those resold loans and then reap the returns as the mortgages are paid off.
--snip--
According to Jay Siegel, a vice president at Moody's Investor Service: ''Subprime loans have exploded from $7 billion in 1992 to $37 billion in 1996 as a sector of the entire securitized conventional loan market.'' That $37 billion, Mr. Siegel said, represents 11 percent of all the conventional loans that were securitized in 1996, up from 1.4 percent in 1992.
--snip--
--snip--
Even quasi-governmental agencies have primed the subprime pump. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have recently developed computerized underwriting systems that allow lenders to speedily and reliably evaluate an applicant's credit-worthiness. The loans rejected by the automated system are, by definition, subprime.
''In the past, if a loan was rejected by Fannie Mae or Freddie Mac, that was it,'' Mr. Hornblass said. ''They weren't touching that business.
''But now both agencies have set up arrangements with lending companies that buy those subprime loans coming through the automated systems. Freddie Mac and Fannie Mae take a fee, the loans get funneled to a lending company that's willing to buy them, package them and then sell the securities to investors.''
The agencies have also, for the first time, become guarantors of subprime loans. In fact, on May 21, Freddie Mac agreed to guarantee the securitization of $227.3 million in subprime loans originated by the First Union Home Equity Bank.
Several industry analysts point out that the trend toward subprime lending has been a boon to the nation's affordable housing movement. ''There are more subprime opportunities that dovetail well with C.R.A.-required lending,'' said Mr. Gumbinger
--snip--
C.R.A. is the Community Reinvestment Act, a law passed by Congress in 1977 to combat red-lining -- the systematic policy of banks to avoid making loans in poor communities. The law requires Federally regulated banks and savings and loans, but not mortgage banks, to ''help meet the credit needs of communities in which they are chartered.'' If one of those lenders applies to Federal regulatory agencies for a merger or a new charter, it must demonstrate that it has originated a sufficient number of loans in low- and moderate-income neighborhoods.
According to data provided by Douglas Duncan, a senior economist at the Mortgage Bankers Association of America, 19.2 percent of the nation's home loans in 1993 went to minority-group members. By 1995 the first year of the changes, that share had risen to 22.2 percent.
But it got greater impetus in late 1994 when Fannie Mae, the nation's largest purchaser of mortgages from banks and other home-mortgage originators, introduced pilot programs to stimulate the home sales market in New York and Boston. Fannie Mae packages these loans with other mortgages as securities for sale to investors. Creating a market to which mortgage originators can sell their loans encourages them to lend more
all links directly from the very liberal new York times...
all before GL repealed GS
.....all before bush,
all show the culpability of fannie/Freddie/HUD/FHA..which are executive branch
so just the bolded from above:
1994/5
[b]In addition to changing its guidelines, Fannie Mae plans a national educational campaign that will seek to teach recent immigrants and minorities how to obtain mortgages. The campaign will be aimed particularly at immigrants in a dozen "gateway" cities where the percentage of home ownership has been declining.
[b]Mortgage experts have estimated that up to two million American households are excluded from buying homes now because of conservative mortgage lending standards. These include Americans with minor blemishes on their credit records, for such things as changing jobs repeatedly or failing to pay utility bills on time.
1996:
THAT has changed in the last few years, however, as secondary-market investors such as the Federal National Mortgage Association, better known as Fannie Mae -- which package blocks of loans and sell them to private investors -- have made it easier for mortgage lenders to market low-down-payment loans.
1997: In 1995, seeking to save his department from elimination by the newly elected Republican-led Congress, Housing Secretary Henry G. Cisneros adopted a ''national homeownership strategy'' that eased requirements to qualify for Federal Housing Administration-insured loans
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
One measure of the expanding subprime market is the number of loans that have been packaged and sold as asset-backed securities -- meaning that investors buy shares in those resold loans and then reap the returns as the mortgages are paid off.
1999:
But it got greater impetus in late 1994 when Fannie Mae, the nation's largest purchaser of mortgages from banks and other home-mortgage originators, introduced pilot programs to stimulate the home sales market in New York and Boston. Fannie Mae packages these loans with other mortgages as securities for sale to investors. Creating a market to which mortgage originators can sell their loans encourages them to lend more
you say we deflect, yet we provide the evidence and you refuse to listen.... the recession (at least the housing bubble / bust (1995-2007)) was government caused, all in the name of home-ownership for those with bad credit
Again one more time in hopes you get it and don't deflect from the truth. What you have said is after the fact. One can make a very good arguement that this made matters worse but in no way is the cause of the collpase.
Address this statement and quit hiding. Quit deflecting and trying to make it about something else.
Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
But you won't. It's laughable that you keep running away from this point.
They were lowered, but they didn't make the private sector not check income or credit status. The government didn't tell the rating agencies to rate bad loans as good loans..... the government didn't make the private financial sector to then package those improperly rated loans then sell them....
You seem to not understand what made a housing bust into a global financial crisis.
Ny god you really do deflect and ignore ths issue.
You made this up. One more time for everyone to see. Any deregulations or regulations after the fact didn't cause the S and L collapse. None of that had to do with the S and Ls being 120 BILLION in debt with 85% losing money in 1980. Nothing. Quit deflecting from that fact.
You never addressed what I said, you deflected the entire time AND STILL HAVEN'T PROVEN ME WRONG
No I haven't and you no proof. none whatsoever. I've addressed the gibberish you spouted while you've not addressed what I've said. Instead you deflected and made things up.
Grownups don't deflect, Grownups are adult enough to discuss the actual issue instead of running away. You don't get to make the rules for me because you are ignorant on the cause and don't want your inability to identify the cause, exposed. That's on you.
Again Standards were lowered and bad loans were made under government threat. That's it. Anything else is after the fact. Don't bypass the free market in housing and there is no boom and bust.
You wont address this since that would espose your entire thought process as defective.
It's not a discussion when you refuse to comment on what I've said. Address what I've said.
Your assertion that the free market wouldn't create a boom and bust is belied by the historical facts of what occurred.
Here are excerpts for the FCIC report explaining how it happened.
In the first decade of the 21st century, a previously obscure financial product called the
collateralized debt obligation, or CDO, transformed the mortgage market by creating a
new source of demand for the lower-rated tranches of mortgage-backed securities.
...
Still, it was not obvious that a pool of mortgage-backed securities rated BBB could be transformed into a new security that is mostly rated triple-A. But math made it so.
The securities firms argued—and the rating agencies agreed—that if they pooled
many BBB-rated mortgage-backed securities, they would create additional diversifi-
cation benefits. The rating agencies believed that those diversification benefits were
significant—that if one security went bad, the second had only a very small chance of
going bad at the same time.
...
Relying on that logic, the CDO machinegobbled up the BBB and other lower-rated
tranches of mortgage-backed securities, growing from a bit player to a multi-hundred-
billion-dollar industry. Between 2003 and 2007, as house prices rose 27% nationally
and $4 trillion in mortgage-backed securities were created, Wall Street issued nearly
$700 billion in CDOs that included mortgage-backed securities as collateral.
With ready buyers for their own product, mortgage securitizers continued to demand loans
for their pools, and hundreds of billions of dollars flooded the mortgage world. In ef-
fect, the CDO became the engine that powered the mortgage supply chain.“There is a
machine going,” Scott Eichel, a senior managing director at Bear Stearns, told a finan-
cial journalist in May 2005. “There is a lot of brain power to keep this going.”
...
In the end, CDOs turned out to be some of the most ill-fated assets in the financial crisis.
The greatest losses would be experienced by big CDO arrangers such as Citigroup, Merrill Lynch,
and UBS, and by financial guarantors such as AIG, Ambac, and MBIA. These players
had believed their own models and retained exposure to what were understood to be
the least risky tranches of the CDOs: those rated triple-A or even “super-senior,”
which were assumed to be safer than triple-A-rated tranches.
“The whole concept of ABS CDOs had been an abomination,” Patrick Parkinson,
currently the head of banking supervision and regulation at the Federal Reserve
Board, told the FCIC.
... So the CDO industry turned to nonprime mortgage–backed securities, which
CDO managers believed they understood, which seemed to have a record of good
performance, and which paid relatively high returns for what was considered a safe
investment. “Everyone looked at the sector and said, the CDO construct works, but
we just need to find more stable collateral,” said Wing Chau, who ran two firms,
Maxim Group and Harding Advisory, that managed CDOs mostly underwritten by
Merrill Lynch. “And the industry looked at residential mortgage–backed securities,
Alt-A, subprime, and non-agency mortgages, and saw the relative stability.” CDOs quickly became ubiquitous in the mortgage business.
Investors liked the combination of apparent safety and strong returns, and investment
bankers liked having a new source of demand for the lower tranches of mortgage-backed securities and other asset-backed securities that they created. “We told you these [BBB-rated securities] were a great deal, and priced at great spreads, but nobody stepped up,” the
Credit Suisse banker Joe Donovan told a Phoenix conference of securitization
bankers in February 2002. “So we created the investor.”
By 2004, creators of CDOs were the dominant buyers of the BBB-rated tranches
of mortgage-backed securities, and their bids significantly influenced prices in the
market for these securities. By 2005, they were buying “virtually all” of the BBB
tranches. Just as mortgage-backed securities provided the cash to originate mort-
gages, now CDOs would provide the cash to fund mortgage-backed securities. Also
by 2004, mortgage-backed securities accounted for more than half of the collateral in
CDOs, up from 35% in 2002. Sales of these CDOs more than doubled every year,
jumping from $30 billion in 2003 to $225 billion in 2006. Filling this pipeline would require hundreds of billions of dollars of subprime and Alt-A mortgages.
There is the free market at work. They developed an investment vehicle that required billions of dollars of subprime loans. By mid decade the demand for subprime loans was coming from the top. Feel free to read the complete report to fill in the gaps.
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