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View Diary: How Occupy has defined the election (290 comments)

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  •  But I haven't. (0+ / 0-)

    I haven't completely ignored "the issue of the big Wall Street banks creating a ravenous demand for mortgages that they could package up and pass off as AAA rated."   Ravenous demand is a function of a market, which doesn't scare me.  It's the second part that did.  It was indeed the lack of serious ratings and serious compliance and serious insurance that led to 80% of this crisis--which had little to do with ravenous demand (there is ravenous demand somewhere in the market every second).

    But the banks didn't do that--big commercial banks didn't decimate compliance--the Greenspan regulatory climate, the auditors, and the insurance companies did.

    You also ask "Why do you think they were issuing mortgages like crazy?  Where were those mortgages going?"  I think they [the big four] were not issuing obviously bad mortgages and liar loans anywhere near the degree CountyWide, IndyMac and WaMu were.  I think what they [investment banks and big four banks] were rather doing were taking bundles of mortgages that were issued by these liar-loan banks and using them as collateral on newly constructed bonds they could buy or sell.

    An investment bank a bunch of junk mortgages coming in and says, "oh boy, here comes another boatload of mortgages that are all guaranteed by US government at the institutional level in case of failure.  So let's get someone to insure this as a bond or a derivative, and sell that bond/derivative."  The only problem was, the insurers weren't doing the math necessary to offer real insurance.  There were no actuarial tables on any of these products, no real insurance being offered at all.  So compliance was a total joke.  Yes, people were being compliant--but compliance meant absolute nothing especially after 9/11, when there was real pressure to keep money flowing, and it got even worse through the decade.

    One day, a banker I knew was trying to put together a new (and really innocuous) product.  He came to me and I said, "compliance will need you to get that product insured, do you have backing yet?" He didn't. But he came back two days later and XXX had insured it for $250 million.  I said, "How is that possible in two days?"  He said, with a completely straight face, "Oh, XXX just figures that if we can't cover a failure [within our own bank] ourselves, then it's all melted down anyway."  Naturally, it was a real estate banker.  And naturally, I said, "But that's not insurance."  And it wasn't.  Yet it was "compliance."  And he could have easily done it the right way.  But that's what compliance was in the Bush era: 'insurance" that had no actuarial basis, backing products that were indeed compliant simply because an insurance company was willing to make them so.  And I hate to say it, but it started under Clinton.  But it just got completely bananas under Bush.  And it was driven by the auditing companies, the insurance companies, and as soon as Bush got the wheel, the regulators themselves.

    "Hibernate between 45 and 65 if you can."--VS Pritchett

    by joseph on Sun Aug 12, 2012 at 12:19:38 PM PDT

    [ Parent ]

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