Mortgage Meltdown

[natedogg]

The internal politicking of your company is irrelevant to the line of business. Many companies in many industries have cultures like the one you describe.

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It seems that most media outlets and government officials fain ignorance about the real underlying cause of the problem. There is a tendency to blame the borrower...

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Who else would you blame for borrowing an amount of money that one cannot afford to pay back?

natedogg

[Poofler]

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The only real criminals here are the fund managers that were retarded enough to buy these mortgages. The reason people at your company were willing to underwrite all this bad debt is because they could sell package it and sell it to idiotic fund managers who don't even bother to research the assets they are buying. If some idiot was willing to pay me $1 for something worth 25 cents I would sell as much as I possibly could.

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This honestly isn't practical. You expect fund managers to research thousands of CMOs like their job is to be the loan officer? Do inestors ask for access to all the CFO's files before buying a stock? The fraud, for the most part, was perpetrated by the lenders who reduced credit standards, while keeping overt credit guidelines relatively unchanged, and inflating the face value of assets.

[lehighguy]

Buyer beware. These fund managers shouldn't contract out research to other parties if they have reason to doubt its validity.

Stories of loan officers giving loans to questionable characters under questionable standards was available years ago. If fund managers are too lazy to look into this themselves and simply trust what they are told by the people selling it to them, they got what was comming to them.

[HoldingFolding]

I'm sure the fund managers haven't suffered too badly..

[Poofler]

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Buyer beware. These fund managers shouldn't contract out research to other parties if they have reason to doubt its validity.

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They have some culpability, for sure, just on the basis that many banks had a feeling something fishy was going on but continued to consume financial products. At the same time, lenders are making legal certifications about the securitized loans. You want to live in a society where false certifications are just clever selling techniques, rather than fraud? I just don't understand why you aren't holding the lenders accountable for their role in this.

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Stories of loan officers giving loans to questionable characters under questionable standards was available years ago. If fund managers are too lazy to look into this themselves and simply trust what they are told by the people selling it to them, they got what was comming to them.

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It's not just that risky loans were being made. Hell, that's the definition of subprime. That's simple business risk for all parties. It's a bet, but a transparent bet. What I'm getting on about is the transparency. Lenders often misrepresented the backing assets in case of default and they often didn't verify income claims.

[lehighguy]

In the case of fraud there is some guilt on the party committing the fraud, but even then one should always be wary of fraud. I was tought a few simple lessons when I worked in IB:

1) Everyone is a player
2) Everyone wants to steal every cent you have if they can get away with it
3) People lie and cheat as much as possible to achieve 2
4) Don't believe what someone tells you when they are trying to sell you something, verify.

#4 is especially important. Someone else summarized the mortgage mess pretty well:

"Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable."

An analogy: I have a box in my house. It's a cardboard box. I think you should buy it for $500, because there is some really great stuff in there. You hold it and see that it has some stuff in there, but you don't know what it is.

Are you giving to give me $500 because I tell you the box's contents are worth $500? Improbable. If I had a PhD in Math whip up a formula that proves the box is worth $500, are you going to pay it? Well, if you are, I've got a garage filled with boxes, and my Math guy is on the way.

[Poofler]

Haha, yeah those do sound like tenets of IB. Everyone had a part in this.

-Borrowers inflated income
-Lenders helped borrowers inflate income, didn't verify claims of income, and duped borrowers who couldn't afford loans into taking them
-Wall street had hints that credit standards were declining, even if written guidelines weren't moving much
-Hedge funds made huge, oversized bets on something that is notoriously hard to value (and verify given the sheer numbers of loans being aggregated)

Your analogy is ok, but at least we know what's in the box. It's more like you tell me you have a bunch of mint baseball cards in the box. I suspect they aren't mint, since they've been lugged around all your father's life. I can't actually review each baseball card to see if they are mint. But I'm reselling your boxes, unopened to someone else, so whatever, here's your $500.

Oh [censored], they aren't mint. There's blame everywhere, but I think it's obvious the lenders (the guy saying he has mint cards) were largely the perpetrators, and Wall Street just ate it up because they aren't ones to question profit. And verficiation here by the banks is basically impossible. They can't go individually appraise the properties and perform credit checks on borrowers for big messes of loans to be securitized. It's either smell a rat and go away, or keep buying and hope you aren't a liar.