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Originally Posted by Adder
To which they would (and did) respond: if that's true, why were the lowest tranches most likely to still be on the banks' books?
Sure, agency problems with the people doing the deals getting their's regardless of what happens down the road were a factor. But far from the only factor. "They all knew" is revisionist bullshit. People actually are dumb.
A lot of it was to make synthetic CDOs, no? Oh, yeah, right, the fact that there were lots of buyers for ever more complex crap also belies the "everybody knew" story you're selling.
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The shit tranche was always smallest. The risk there could be offset by the fees charged for servicing/packaging.
The lower tiers of the middle, which I believe caused the biggest problem, were actually shit tranches repackaged as middle tranches. So when the banks have cried, "We kept all the really bad risk," it's because they designed the tranches to minimize the shit risk and funnel the best of the shit risk into the middle tranche.
I can't prove this, but I'd guess this was because nobody wanted to buy the shit, and the banks could appear to have some skin in the game if they held onto a thin slice of it while repackaging the majority of it as middle tier risk. '
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"They all knew" is not revisionist horseshit. Everybody knew. Everybody in the country knew the housing market was a bubble. The economy was anemic. The job market sucked, and it was still recovering from the dot com bust fallout. Sure, people could keep making house payments as long as they kept refinancing and prices kept rising insanely. But what happened when the market plateaued? What happened when suddenly all the people who didn't have jobs other than flipping houses had to pay their mortgages from source other than refinancing?
Uh oh.
I bought a house in a fancy suburb in 2004. I recall the frenzy of sales and refis in the neighborhood, and being a fucking skeptic about everything, and representing a subprime lender, I started doing some reading about market fundamentals. It fucking scared me silly, so I bought conservatively and made a few bucks when I sold a few years later.
I am no fucking genius. If this shit was apparent to me, it was apparent to everybody. And it was certainly apparent to the shmucks in underwriting and sales at those banks. Bill Gross spotted it in 2005!
Nobody wanted to listen. They didn't want to hear about How It Will End because that was a sad story. Like Chuck Prince said, "when the music plays, you have to dance."
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Regarding buyers of complex crap, that's just downstream replication of the same shit that took place in the creation and packaging of the mortgages. Think of the run up to 2008 fractally. The homebuyer either took on stupid risk or lied, or was bullshitted, the mortgage broker/originator did the same, the people securitizing the stuff did the same, and then the people selling complex products based on it did the same. The transactions all share the same common features. Everybody knew or should have known they were participants in a giant bubble, based significantly on fraud and bullshit. Those who timed it and got out made fortunes. Those who didn't? Well...
The only people you can call entirely criminal in the whole thing are the rating agencies. How those degenerates got a pass I still cannot understand.
