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View Diary: Our Economy: MASSIVE FRAUD By Mortgage Industry. (269 comments)

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  •  After the failure of Long Term Capitol Management (2+ / 0-)
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    Orj ozeppi, Taunger

    in 1999 or so, the limitations of this type of VAR model was apparent.

    It was just that anyone who tried to point out the dropping affordability index coupled with loan products with resets and balloons was a recipe for greatly increasing defaults got their jobs outsourced to someone who "understood the risk statistics better".

    In other words they did not want to hear it.

    The thing that makes me suspicious that there is not as much willful ignorance as intent is that there are 10 or 15 times as many side bets that the mortgages would fail (Credit Default Swaps) as there are underlying mortgage backed securities (Collateralized Debt Obligations). So if a CDO CDS package were bundled and rated as low risk because the CDS insured the CDO against risk, that would be a one to one ratio. The fact that there are 15 TIMES as many CDSs as CDOs means that an awful lot more money stood to the made by some counterparties if the loans default than if they are preforming for term.  
    That looks like perverse incentive to make variants of balloon loans which are known to have a high risk of default and possible big time conflict of interest to me.  

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