May 18, 2016


This is Obama's biggest failure (Ryan Cooper, May 18, 2016, The Week)

Here's the basic story. Back in the go-go bubble days, originators would issue new mortgages, then quickly sell them to banks, who would package them into mortgage-backed securities. Those securities would often be sliced and diced into new securities (the infamous collateralized debt obligations), and sometimes those would be repackaged again, and so on.

Details aside, the point of securitization was to create lots of new financial products that could be sold to investors. But as the bubble progressed, it was increasingly used to obscure the fact that the securities were full of toxic waste -- horrible high-interest loans given to people who could never hope to repay them. (Others were specifically created to implode so that banks like Goldman Sachs could make bets against them.)

A mortgage is a legal document governed by strict laws -- not least because it deals with the ownership of land, one of our society's foundation stones. Hence, it is legally required that transfer of ownership be accompanied by meticulous paperwork establishing clearly who owns what.

That may sound obvious -- of course one has to have one's mortgage paperwork in order, right? But because of the securities' obscurantist function, and because the mortgage originators were stamping out loans at warp speed, and because banks were rapidly bundling and shuffling the mortgages around, getting the paperwork right would have been a terrific pain in the neck -- indeed, a threat to their whole business model.

So Wall Street simply didn't.

When Ben Bernanke artificially cranked rates to prove his inflation hawk bona fides into the teeth of deflation it just made what were supposed to be marginal loans (thus the name sub-prime) fail at faster rates than they would have, exposing the risk that Wall Street had hidden from investors. 
Posted by at May 18, 2016 1:34 PM