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News Banks Bundled Bad Debt, Bet Against It and Won

  1. Dec 24, 2009 #1


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    This probably fits under "What is wrong with the US Economy", but . . . .


    A lot of questionable (read that high risk) debt was rated as AAA, when in fact it warranted 'junk bond' status or equivalent. It would appear some investment bank groups knew this, sold the high risk securities and then bet against their clients who bought that debt! And in some cases, it seems to go beyond risk given that some of the debt seems to have been guarateed to lose based on the rising defaults, foreclosures and bankruptcies, and asset depreciation.
  2. jcsd
  3. Dec 24, 2009 #2


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    caveat emptor - presumably the billion$ pension funds and investment houses buying these securities had highly paid professionals working for them as well?
  4. Dec 24, 2009 #3
    It would appear some investment bank groups knew this, sold the high risk securities and then bet against their clients who bought that debt!

    Seems like a direct hedge. IMHO, it's a good strategy.
  5. Jan 1, 2010 #4
    This is not a hedge.

    It all depends what they told the clients who bought. If they said this is dangerous bad quality **** then they are guiltless. If they said this is safe good quality stuff and they knew at the time it was bad then they are guilty of fraud. If at the time they thought it was good and only later thought it was bad, well .... do you cash in first or warn the clients first? Not sure their is under the current liberal regulations a requirement to do so???
  6. Jan 2, 2010 #5
    What if they knew it was inherently bad, but artificially good because of artificial demand created by Fannie Mae and Freddie Mac? After all, these government institutions were creating demand (for political purposes) for loans that banks would never make otherwise.

    Should the banks consider the loans "bad" that government purposely wanted to be created? Of course the banks knew they would be toxic if Fannie/Freddie went under, but should they have anticipated that? And if they did, should they have told people they thought Fannie/Freddie would go under because of a government imposed mandate to lose money?

    Some banks, including mine, refused to issue these loans despite losing out on being able to sell to Fannie/Freddie, and despite being labeled as "don't care about poor people" by power hungry politicians. Those banks did just fine, and are still doing just fine.
  7. Jan 2, 2010 #6
    I guess it comes down to what the regulations say. If they say you must tell your customer the whole truth that you are aware of then I would say the seller must explain the artificial nature of the current demand and the risk that the bubble will eventually burst. If the regulation does not require full honest disclosure then you may "legally" withhold some of your knowledge and get the customer to buy things that are dangerous and in the long run worthless (some (like me) might call this fraud).

    Maybe there should be a legal division between companies that sell securities and companies that invest in securities? I think this was called the second Glass-Steagall Act of 1933.
  8. Jan 2, 2010 #7


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    Do other industries do this?
    "Boeing today announce the first flight of it's 797 aircraft with it's revolutionary glass and rusty nail construction - In other news Boeing announced a $Bn investment in the makers of airport crash tenders, trauma room suppliers and funeral homes"
  9. Jan 2, 2010 #8
    I agree with that in principle, but since it was a political issue, the truth depended on who you ask.

    It's not like the politicians who push the policy of encouraging banks to make bad loans were out telling everyone that. They were out telling everyone how great the policy was for making it easier for poor and lower middle class families to buy homes (that they couldn't afford). Then trying to blame someone else when they were foreclosed on for the same reason. And later trying to blame others when Fannie/Freddie went under from losing money for too long.

    The funny thing about most political issues is that for the most part, the truth is completely irrelevant. Politicians don't care about the minority of people that know enough to know they're lying, they only care about the power they get by convincing enough of the rest of them to get elected.
  10. Jan 2, 2010 #9
    The real question is, if government were bribing them to switch to "glass and rusty nails" purposely for some claimed benefit, would Boeing take the bribe, make the switch, all the while claiming it's a bad policy while trying to sell it?

    Any business that goes along with a government plan for profit isn't going to bad talk the plan at the same time. Wouldn't be prudent.
  11. Jan 2, 2010 #10


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    It was more selling a client a product that you knew was so bad for it that you immediately then bet against that client's business.
  12. Jan 2, 2010 #11
    Yes, exactly.
  13. Jan 2, 2010 #12
    There must be two types of customers
    1) those you think are too stupid to remain in existence -- and so will not be valuable customers in the future
    2) those you think are smart enough to survive -- and so will be valuable customers in the future

    A business is free to "blow-up" (work against) the first group of customer. It is no lose to the business nor to the second group of customers. There is a time evolution to who is a valued customer and who is chum.
  14. Jan 2, 2010 #13


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    Or as they put it in Astro's article:

    What a ridiculously wonderful (and legal!) method of stealing.
  15. Jan 3, 2010 #14


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    And their bonuses. Jeez Louise....

    $23,000,000,000.00 for 30,000 employees.

    Let's see, we loaned them $10,000,000,000.00, which they paid back with interest, thank you very much. Then we basically gave them $13,000,000,000.00 through an AIG kind of fix it thingy. Then we gave them a low interest loan of $52,000,000,000.00. (http://www.dailyfinance.com/story/g...or-charity-23-billion-for-banker-bo/19193897")

    Hmmm.... I've invested $1,300.00 in the stock market since December 08 at $100 per month and am ahead by about 25%. Hmmmm... If I'd had $75,000,000,000.00 instead of $1,300.00, I'd be ahead by, um, $19,000,000,000.00.

    Pretty damn close. And I don't know nothin about the stock market. I'm going to have to be much more proactive the next time they're giving handouts. I could really put a big fat jabba the hut sized bonus to good use.

    And I shouldn't let my hours worth of snooping at the SEC go to waist:
    I'd say the act of shorting their own clients definitely implies all three.

    Time to get out the pitchforks again. :devil:
    Last edited by a moderator: Apr 24, 2017
  16. Jan 3, 2010 #15


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    With regard to Fannie Mae and Freddie Mac, the CRA, and the recent financial crisis -

    There are some critics who fault Fannie and Freddie and the CRA:
    The Government Did It (Yaron Brook 07.18.08)

    While it is true the Fannie Mae and Freddie Mac have amassed $5 trillion in liabilities, the rest of the statement is simply untrue - and dishonest. Yaron Brook is managing director of BH Equity Research and executive director of the Ayn Rand Institute.

    Fannie and Freddie did encourage CRA-related mortgages, but it was low volume.

    Fannie Mae's Targeted Community Reinvestment Act Loan Volume Passes $10 Billion Mark; Expanded Purchasing Efforts Help Lenders Meet Both Market Needs and CRA Goals

    However -

    Private sector loans, not Fannie or Freddie, triggered crisis
    http://www.mcclatchydc.com/251/story/53802.html [Broken]
    Notice in 2008 which investment banks and mortgage companies are still issuing subprime mortgages - despite the fact that the subprime market had been collapsing during 2007. And actually defaults and foreclosures had been accelerating since 2005.

    Goldman's offshore deals deepened global financial crisis
    http://www.mcclatchydc.com/227/story/81465.html [Broken]

    Community Reinvestment Act had nothing to do with subprime crisis
    Posted by: Aaron Pressman on September 29
    http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html [Broken]

    Traiger & Hinckley Study


    The vast majority of sub-prime mortgages and all the derivatives based on sub-prime mortgages (sometimes bundled with high risk consumer credit card debt and auto loans) were NOT subject to government regulation, but instead were subject to the vagaries of the 'free market'.

    It now turns out that there was a lot of deception and fraud involved in addition to conflict of interest. Investment banks even went to the effort to move activities off-shore in order to avoid any possibility of regulation by the US government. Of course, the SEC under Cox decided not to bother performing their regualory duties vis-a-vis Bernard Madoff (~$60 billion Ponzi scheme) or regulation of Bear Stearns, Lehman, et al.

    One can find more details in Andrew Ross Sorkin's "Too Big to Fail" and Charles Gasparino's "The Sellout".

    In short, the government did not force any bank to make bad loans, but rather it was the decision of banks and mortgage companies (which are not banks) to make bad, in many cases fraudulent, loans.
    Last edited by a moderator: May 4, 2017
  17. Jan 13, 2010 #16
    In a "Free Market", there should be consequences.
  18. Jan 13, 2010 #17


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    The Caymans deals were little more than fraud.

    http://www.mcclatchydc.com/227/story/81465.html [Broken]
    Last edited by a moderator: May 4, 2017
  19. Jan 14, 2010 #18
    There's too much in this post to respond to all of it, but a few things stand out:

    Of course the government didn't force banks to issue "toxic" loans, they just effectively bribed them to do it. And many banks took the bait because they wanted the extra profit. Many banks, like mine, refused to go along and did just fine.

    But claiming that private banks caused the problem, not Fannie and Freddie, because banks issued the loans is just wrong. Of course banks are to blame, but that doesn't relieve government of its share of the blame. And importantly, government, not the banks, was acting as our agent.

    As far as the Community Re-investment Act of 1977, the relevant laws that amended that Act and greatly expanded it were passed by congress much later. Saying it's irrelevant because the original version was passed in 1977 is just fraudulent.

    The idea that this was the result of a free market is absurd. There was no free market demand for toxic mortgages. There was artificial demand for them created by government. The fact that the demand was met by private entities doesn't make it a free market. That's like saying that government has nothing to do with F-16's existing because they're manufactured by private companies. "Free market at work", right?

    Bottom line is that this problem was created by government. The fact that private entities participated in the problem doesn't relieve government of its responsibility.
  20. Jan 18, 2010 #19


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    Cool. Let's collect on the money we gave and loaned them since they didn't need it in the first place.

    That's $13 billion for AIG. Plus market profit, which I've shown takes no skill whatsoever, which totals, oh crap, math, $60/share vs $160/share: $35 billion dollars.

    Then there are the low interest loans, which I am hard pressed to get an actual number for.
    It appears to run somewhere between $22 and $52 billion dollars, depending on the source of information.

    Let's give them the benefit of the doubt and say it's $22 billion.

    Cha-Ching, Cha-Ching! From the above formula, 160/60, yields, $59 billion.

    So I think they owe us 59 + 35 = $94 billion.

    Hmmm..... GS market cap = $84.93 billion. (http://finance.yahoo.com/echarts?s=...on;ohlcvalues=0;logscale=on;source=undefined")

    hmm.... this is odd

    Why is a company with $167 billion in cash valued at only $84 billion?

    I must say, as I have in the past, that I do not understand Wall Street. Are they still sitting on trillions of dollars in debt? And if they are, why are they getting $20 billion in bonuses?

    http://english.aljazeera.net/news/americas/2010/01/201011513753308571.html" [Broken]

    Right Lloyd, that's the same thing I said the last time I was in Vegas.

    And, woo hoo! Look who's on your http://www.convictionbuylist.com/index.htm" [Broken]: Dollar Tree Inc.

    Real innovative there Lloyd. Real innovative.

    (multiple expletives preemptively deleted.......)
    Last edited by a moderator: May 4, 2017
  21. Nov 6, 2010 #20


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    Post mortem on the collapse of the housing, mortgage and credit markets

    UPDATE:Investors Sue BofA, Citi, Wells Over Mortgage-Backed Securities
    http://online.wsj.com/article/BT-CO-20101105-715311.html [Broken]
    Last edited by a moderator: May 5, 2017
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