Originally posted by djtek
Originally posted by Vitchilo
The game was to move money under a scheme of deceit and fraud. First sell the bonds and collect the money into a pool. Second take your fees,
third take what’s left and get it committed into “loans” (which were in actuality securities) sold to homeowners under the same false pretenses
as the bonds were sold to investors. By controlling the flow of funds and documentation, the middlemen were able to sell, pledge and otherwise trade
off the flow of receivables several times over — a necessary complexity not only for the profit it generated, but to make it far more difficult for
anyone to track the footprints in the sand.
I have just started about a month ago getting into this economic disaster and fraud situation so I'm not familiar with all the terms yet. Can someone
explain to me what this paragraph means in layman's terms? Please don't just write that they traded money that didnt exist etc.. im looking for a
good explanation, thanks
Let me try
Basically the large investment banks (Goldman Sachs, JP Morgan etc.) got the idea for selling bonds backed by mortgages. In order to be able to do
this however they needed a way to transfer mortgages quickly and cheaply in a universal way across state boundaries. This led to the Idea of MERS
(Mortgage Electronic Registration system). It became a universal electronic way to transfer title - well not really but thats what it claimed.
Really what it was was an agreement that everyone will start using it and bypass the existing systems for title transfer - and even though it is
illegal by state law no one will stop us if we all do it. MERS let people become their "employee" by buying a kit from them. HINT you are not an
employee if you don't get a salary. These "Employees" then proceeded to claim they were bank vice presidents for multiple organizations and
transferred titles willy nilly and basically became the only way titles for residential property got transferred after 1999. There are several
problems with this - number 1 it basically violates most states laws, 2. The "employees" were not actually vice-presidents so they had no legal
right to transfer title - so it is quite possible all loans transferred through MERS will become unsecured since the title was never legally
transferred. This of course has led to the banks filing false paperwork to claim they have actual title and just lost it in order to foreclose.
Any way so the banks bought up most of the mortgages from 2003 on or so and began to sell Bonds that were secured by the mortgages. The idea being
the bonds were safe because they were backed by people paying for houses or the proceeds from foreclosure on the few nonperforming loans. So this
sounded like a pretty safe investment to insurance companies, pensions, hedge funds - basically anybody that had a lot of money that wanted to earn a
relatively safe return without having the hassle of having to buy up the loans or collect the money themselves. The investment banks got to take fees
for packaging up the loans into neat little packages.
Demand for the Mortgage backed bonds (MBS) was huge as they paid better interest than government bonds and most figured they were just as safe.
People thought this because - 1 Historically people default on their home loan at a very low rate (less than 5%) 2. The Bonds all had written
guarantees that if the loans weren't the quality described the buyers of the bonds could demand repurchase at 100% of the original cost. 3. Ratings
agencies (Moodies, Standard & Poor etc. supposedly looked at a sample of the mortgages in each bond package and verified the borrowers were of a
certain quality - (verified the paperwork debt to equity , appraisal etc - which they received a fee for. 4. The Investment banks bought insurance
with others - such as AIG that supposedly guaranteed payment.
These securities were so popular and the investment banks wanted more and more mortgages. Well slowly but surely this lead to more and more lenient
lending practices because the lenders didn't really care because the investment banks continued to buy the loans. The investment banks didn't care
cause people were buying the trash without ever looking at it. The ratings agency's didn't care cause they got fees for rating everything AAA, AA,
or BBB regardless of the real quality. Everything would be fine as long as house prices kept going up because people would not stop paying on an
appreciating asset. The lenient lending practices allowed more mortgages to get created, and kept prices going higher as supply was lessened.
Still it wasn't enough for the insanely greedy bankers, they came up with a scheme to sell Derivatives(bets) on the loan packages paying out or
defaulting. Supposedly they always got bets on both sides before selling, but either way they got a fee for essentially becoming a bookie on bets on
whether people would pay on a bunch of loans.
All was going great - Record bonuses for everyone, government paid off, and home buyers ecstatic that their home doubled in value in 5 years or less,
all of these factors let them continue the fraud.
Pretty soon most of the new mortgages were garbage as lenders were signing up anybody with a heartbeat - this is probably what lead the banks to start
pledging the same mortgages - the ones from good buyers multiple times. (This is just my theory)
So anyway end of 2008 comes and the inevitable happens everything starts to collapse. The fed gov immediately gives AIG whatever money they need -
because they could start dominoes of trillions of dollars worth of derivative failures and the end of the economy as we know it.
So now in just the last few months, people have become aware the banks cannot produce valid title for many of the foreclosures they are attempting,
and some of the buyer of MBS are attempting to force the banks to buy back the bonds at 100% of the price they paid - as the contract says they have
the right to if they can prove the loans did not meet the standards they were sold at - and there is already a ton of evidence that tons do not.
Now lawyers are starting to smell blood, and are trying to get at the books of the banks - which no doubt will prove fraud like crazy. The fed has
literally bought more than a trillion dollars of this MBS trash because they know it is toxic - and they want to buy more to keep this fraud from
becoming known to everyone - That is the true reason for QE2 in my opinion.
Problem is I think it is now to late - many lawyers now know there are huge problems, and pension funds are required to sue to get back the 100% they
are owed by contract if the MBS do not perform. Many are working on lawsuits right now. So not only are the banks facing buy backs of 100's of
billions of dollars - they also face paying off on derivatives on the same garbage - often multiples of value higher than the real cost.
There is not enough money in the world to bail the banks out if the derivatives start blowing up.