Via Balloon Juice, I just came across a post by the inimitable Kevin Drum at Mother Jones. Apparently, the hubris of Wall St. is such that less than a year after the entire free market system nearly crashed due to bundled mortgages and bets made against them, Wall St. is back to bundling mortgages. Again.
As you probably know by now (you have been paying attention, haven't you?), banks are required to retain a certain amount of capital on their books. The capital is there to keep them solvent even if their assets lose value, so the amount they're required to have depends on how risky their assets are...
This was one of the reasons behind the CDO frenzy of the past few years. If you slice and dice a bundle of securities so that most of them are AAA-rated, then you can reduce the capital you need to back them up, which frees up that capital for other uses.
But then everything came crashing down, the ratings on those bundles tumbled, and suddenly banks had to pony up more capital to back them up. What to do? Answer: slice 'em and dice 'em all over again.
And how do we know this? The Wall Street Journal spills the goods in an article whose title alone should make anyone queasy:
Wall Street Wizardry Reworks Mortgages
A new wave of financial alchemy is emerging on Wall Street as banks and insurers seek to make soured securities look better. Regulators are pushing back, saying the transactions don't have enough substance and stand to benefit bankers and ratings firms.
The deals come as Wall Street firms, buoyed by surging markets, are seeking to profit from the unwinding of the complicated securities that helped fuel the credit crisis. Regulators, meanwhile, are struggling to prevent a recurrence of the crisis.
The popular deals are known as "re-remic," which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.
The net result is financial firms' books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.
Resecuritization. So let's get something straight here. The financial crisis was caused by banks securitizing loans into big packages, supposedly divided into good stuff, mediocre stuff and bad stuff. The ratings agencies gave banks excellent ratings on most of the packages. $70 trillion of insurance bets were made against those packages in the form of CDOs. When those securitized packages turned out to be worth way less than most of the Wall St. wizards thought, the whole thing went kablooie, as there wasn't enough money in the world to cover the bets.
And Wall Street's answer to all this is...to do it all over again. Not, as we all feared, in a different bubble like precious metals or treasuries, while earnestly ensuring the last bubble didn't repeat. No. The same bubble. Securitized mortgages. Again. You've gotta be fucking kidding.
And this isn't even a new development. This has been going on strong for a while now, apparently totally under the radar:
Wall Street analysts said activity in re-remics has ramped up this year, from a trickle in January to several billion dollars from March to June, with a big increase in volume in July, partly thanks to reviving credit markets.
Estimates of volume this year range from $30 billion to more than $90 billion. The transactions are typically done as private placements and aren't disclosed publicly...
"There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced." emphasis added
Yeah...so...there are a bunch of these mortgage bundles out there that don't look so hot now. Nobody will touch 'em because of their rating. Hey, I've got an idea! Let's repackage them with other loans to give them good ratings! Nobody's ever tried that before! And when it all comes crashing down again, whaddaya gonna do? Let the economy crash and die?
President Obama & Democrats in Congress, hear this loud and clear: Wall St. is completely, dangerously out of control, like a small hyperactive child playing with a blowtorch in an explosives factory. They've already sent our economy up in towering flames once, not even one year ago. And they're still playing with the same toys.
We can enact healthcare reform, cap and trade, Employee Free Choice, Don't Ask Don't Tell repeal, and anything and everything else. And that's great. But the economic crisis cost me half my income, and forced me to make layoffs at my research business. A couple hundred, even a couple thousand dollars on healthcare is pocket change by comparison.
Unless we take control of this situation, enact serious regulation and prevent Wall St. from going on a kamikaze death run for short-term profits again, none of it will matter. Please put the straitjacket on these criminally insane clowns before they hurt us all again. America can't withstand a second such economic blow.