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Was Abacus the Business Model for the Entire Mortgage Industry?
As I've repeatedly pointed out, the big banks intentionally signed up
as many borrowers as possible, even if there was no way they could
repay their loans.
For example, I recently wrote:
[Professor William] Black explained that fraud by a financial company usually involves the company:
1) Growing like crazy
2)
Making loans to people who are uncreditworthy, because they’ll agree
to pay you more, and that’s how you grow rapidly. You can grow really
fast if you loan to people who can’t you pay you backand
3) Using extreme leverage.
This combination guarantees stratospheric initial profits during the expansion phase of the bubble.
But it guarantees a catastrophic subsequent failure when the bubble loses steam.
And
collectively - if a lot of companies are playing this game - it
produces extraordinary losses (more than all other forms of property
crime combined), and a crash.In other words, the companies
intentionally make loans to people who will not be able to repay them,
because - during an expanding bubble phase - they'll make huge sums of
money. The top executives of these companies will make massive
salaries and bonuses during the bubble (enough to live like kings even
even if the companies go belly up after the bubble phase).[Simon] Johnson confirmed that a high housing default rate was part of the banks' models.
The financial giants knew they would make huge sums during the boom,
and then transfer their losses to the American people during the
bust.
But there might have been another reason that loaning to borrower who couldn't repay was the prevalent business model.
As foreclosure expert Neil Garfield notes, mortgages are worth a lot more if they default than if they perform.
Specifically, a mortgage worth $300,000 if the homeowner repays in full might be worth $9 million to the various owners of synthetic cdos and credit default swaps if the owner defaults.
We know - as alleged by the SEC:
Paulson
& Co. effectively shorted the RMBS portfolio it helped select by
entering into credit default swaps (CDS) with Goldman Sachs to buy
protection on specific layers of the ABACUS capital structure.
Paulson
also advised Los Angeles apartment mogul Jeff Greene to do something
similar. Greene was heavily involved in the subprime market, and he
bought the worst of the mortgage backed securities, and then bet against the bonds using CDS.
But Garfield says that it is broader than just a couple of investors
like Paulson and Greene. He believes that was basically the business
model for the entire mortgage industry.
He said that the big banks that packaged mortgage backed securities had an incentive
to suck in really bad mortgages. If a certain percentage of the
mortgages default, the cdo and cds side bets pay many times more than
the actual mortgage could possibly pay.
The state attorneys general, Sigtarp,
and other federal and state authorities investigating foreclosure fraud
should determine the extent to which these incentives motivated the mbs
packagers to include mortgages which did not meet underwriting
standards and then hide the bad loans.
They should also investigate the extent to which these incentives motivated mortgage originators to create "liar's loans", "ninja loans", "neutron loans", and "toxic waste".
See this
on how credit default swaps can be used like buying fire insurance on
someone else's house and then burning down the house, and this explanation by Ellen Brown (starting about half way into video).
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And how about the defense that the financial institutions also bought some of this toxic crap themselves to make it look that they "had no idea " that what they had cooked up could be used as fertilizer? I think there was a commentator on CNBC who was kicked off by Burnette a while back when he stated with "permission to be blunt" that, sure, Goldman lost "millions" on acquiring some of these instruments.... so that they could make BILLIONS.
George - You are a very talented guy - look forward to seeing you on the Best Seller list soon - keep up the great work!
The corruption in the financial system from bankers to regulators is so extensive, pernicious and systemic that the only way to deal with it is by Financial Neuremberg trials. Where bank Bank Executives, Regulators and the occassional Senator are tried, and if found guilty immediately marched to the gallows.
Corruption in the US is worse than Thainland and Indonesia it seems.
The corruption in US financial industry much more "sophisticated" and "technologically" advanced, thus capable of far more damage. Kind of like bows and arrows versus Trident nuclear submarines.
Remember though, it's not corruption if the bankers do it. It is God's work.
Black's 3 point identifiers remind me of most of the high yield and mortgage chaps' business models (oxymoron) that I've encountered.
Madoff . whats in a name? made off with the money and now made off with the media spotlight.
There is no such thing as accidentally bad sausage.
And he is only doing time because he confessed! He'd probably still be free otherwise.
Actually I firmly believe that Ole Bernie has a pretty plush jail and that Ken Lay is alive and kicking in some Luxury hideout.
The one's at the top never really do time. Ever, it's just a stage managed hoax. SadMan Hussain comes to mind also.
Anyways, you get my drift.
ORI
http://aadivaahan.wordpress.com
He confessed to protect not only those below him, but above him. He was the fall guy. In return, his family will be taken care of and those above him will allow him to live out the rest of his life passing on stock tips to his fellow inmates.
I see all the time articles or comments about how he built this huge fraud. Right, tell me another one. I suggest we all take a close look at the list of his "victims/clients" because when we do, simple Google searches can bring interesting results.
Yes. Duh. Why are we still discussing this? Trust me. Lawyers are retained. Shit storm on.