Laws concerning fraud, I can understand. That's a criminal act. .
Fraud is exactly what occurred here. I have posted this time and again in this thread. I'm going to do it one more time with the hope that you will be more inclined to comprehend what happened in the sub prime mess. In the past, each and every one one of you were quick to respond that what I posted was utter nonsense. Recent events make that point mute.
Secondary Marketing
To understand what occured requires a quick primer in secondary marketing. When a bank closes a mortgage they do it with their own funds. However, bank 'pockets' are no longer deep pockets. In fact there simply isn't enough money in deposits to fund the mortgage industry. People don't save any longer. Those that can afford to, put their money into the stock market or money market funds for higher returns. The vast majority don't have enough income to save. These are undisputable facts, and leave the banking industry with a hole large enough to drive a country through it. The answer to the problem was secondary marketing. The bank closes the loan and sells it immediately. They make a profit on the transaction and get their money back to lend again. Fannie Mae, Freddie Mac, FHA and Ginnie Mae are examples of the new system. If anyone doesn't understand securitization, ask me. Time contraints prevent me from explaining this here this afternoon.
New Products
Where the train came off the tracks was when Wall Street became involved, this occurred when they spotted a hole in the system they could exploit. The problem was they couldn't do it under current law. So, they changed the law. Enter Phil Gramm's bill. When they were exempted from regulatory oversight they got busy and introduced new mortgage products to the marketplace. You know those programs as Sub Prime Mortgages. Merril Lynch, Lehman Bros, and Bear Stearns created new company divsions to handle these products and actively marketed them to regional and local banks. I had countless meetings with their sales people as they pounded on our door to sign us up as part of their wholesale distribution chain. Now as to the hole in the system?
Fraud
Now ask yourself a question. Just who was going to buy anything from these investment banks that was based on extending credit to those who have already demonstrated they can't or won't pay the loan back? The answer was no one. However, there was a hole in the system spotted early on that made all of this possible. The three bond rating houses responsible for assigning risks had plenty of history with mortgage bond ratings. Overall they were a good investment and this was the key to selling the new products. These rating companies were hired, by the investment banks, to rate the new bond offerings based on sub prime mortgages. The rating companies had absolutely no history on rating these bonds as there were no such thing as sub prime mortgages. By default they had to assign them the rating they had for mortgage products they did have plenty of history about.. conventional mortgages. They rated these bonds AAA. This was the key and in fact was the fraud perpetuated into the system. When the great investment houses entered the marketplace with the brand new bond offerings with a AAA rating and paying 8%-11%, every investment advisor on the planet put their customers into them immediately. You see the AAA rating was the same grade that US Treasuries have or most Muni Bonds. AAA can not default. They are completely safe. There is no risk..
This was the greatest fraud in the financial system since the Great Depression and the key to what happened to us today, because sub prime mortgage can default.... and they did default. When this started, the investment houses burried this information internally and just kept on selling them. When the rumors began at Bear Sterns lat year, it started a run as investors rushed to get their money out of these 'risk free' investments and that run triggered the fall of the whole house of cards.
To see how they thought they would scam the system, and avoided the inevitable losses please google CDO's and dirivitives (google AIG collapse). And of course they had plan "B". These investments grew to more than $1.5 trillion of main street America's (and Europe and China, etc..)retirement accounts. Just who was going to let that fail? Plan "B" stood for bailout.
That doesn't prove fraud. It's only fraud if it can be proven that the bonds were rated with the intent to defraud. I don't deny, from your post, that the system was manipulated, but that doesn't prove fraud.
__________________
John
Ontario 32 - Aria
Free, is the heart, that lives not, in fear.
Full, is the spirit, that thinks not, of falling.
True, is the soul, that hesitates not, to give.
Alive, is the one, that believes, in love. JCP
Rick...that summary would suggest that some individuals in the banks and the bond rating houses KNOWINGLY rated the bonds at higher confidence levels than justified and committed criminal fraud. So...perhaps the missing piece of this bailout is that some people need to go to jail and have their assets seized. Is there anything going on on that front?
cam - that's not the way I read it. In particular this quote from his post .....
"The rating companies had absolutely no history on rating these bonds as there were no such thing as sub prime mortgages. By default they had to assign them the rating they had for mortgage products they did have plenty of history about.. conventional mortgages. They rated these bonds AAA."
What I read, is they manipulated the system, but I don't see how there would be any provable intent of fraud, as the rating people where only influenced by their lack of knowledge.
__________________
John
Ontario 32 - Aria
Free, is the heart, that lives not, in fear.
Full, is the spirit, that thinks not, of falling.
True, is the soul, that hesitates not, to give.
Alive, is the one, that believes, in love. JCP
Rick...that summary would suggest that some individuals in the banks and the bond rating houses KNOWINGLY rated the bonds at higher confidence levels than justified and committed criminal fraud. So...perhaps the missing piece of this bailout is that some people need to go to jail and have their assets seized. Is there anything going on on that front?
Cam is singing my song.
How about the brokers who peddled the no-doc loans? That's a clear case of well-documented fraud. Seize their assets and put their entire estate toward the $700 billion bailout. They racked up a lot of money by perpetrating this fraud, and they should the first ones to start paying the damages caused by it.
I just don't think you can prove criminal intent, not in a court of law. I agree, they should lose their personal assets, but I think it will have to be done as part and parcel of the business assets.
__________________
John
Ontario 32 - Aria
Free, is the heart, that lives not, in fear.
Full, is the spirit, that thinks not, of falling.
True, is the soul, that hesitates not, to give.
Alive, is the one, that believes, in love. JCP
And just in case anything thinks otherwise, I'm not in anyway trying to justify what happened. I'm only pointing out the practical aspects of trying to make it a criminal offense. Without knowing beforehand how the rating service would act, I just don't see how you can prove criminal intent to defraud.
__________________
John
Ontario 32 - Aria
Free, is the heart, that lives not, in fear.
Full, is the spirit, that thinks not, of falling.
True, is the soul, that hesitates not, to give.
Alive, is the one, that believes, in love. JCP
Rick...that summary would suggest that some individuals in the banks and the bond rating houses KNOWINGLY rated the bonds at higher confidence levels than justified and committed criminal fraud. So...perhaps the missing piece of this bailout is that some people need to go to jail and have their assets seized. Is there anything going on on that front?
Actually you and John are both correct. The New York Attorney General was the first to take the time to figure all of this out. In the last 8 months they've called everyone into their offices to hear their side of things. As of today, no charges have been brought, to my knowledge.
Here's the $64.00 question. If you and I had an investment broker call us and offer these bonds to us paying 11% with a poor bond rating (ie...junk) or no rating at all, would any of us take the risk.
I think not. So does the attorney General of New York. But who exactly is guilty?
The answer is the government. If regulatory agencies were left in place, this could not have happened. So, the government is now bailing everyone out.
Now, if they were just able to use someone elses money to do it....(sigh)
How about the brokers who peddled the no-doc loans? That's a clear case of well-documented fraud. Seize their assets and put their entire estate toward the $700 billion bailout. They racked up a lot of money by perpetrating this fraud, and they should the first ones to start paying the damages caused by it.
No
The brokers were peddling the programs I sold to them. I was peddling the programs that Wall Street sold to us. All of it was perfectly legal. Most of the mechanisim to facilitate the whole mess was hidden. I didn't figure it out until the end of 2004. I made strong recomendations internally to immediately discontinue the product offerings. I was told in no uncertain terms this would not be the case.
