Mirabile Dictu! Finally, Someone (Amar Bhide) Questions Benefits of Mortgage Securitization

A major intellectual blind spot in academia and among policy makers is the belief that making markets more liquid is always and ever a good thing. That bias may come from Arrow-Debreu, in that too many economists seem to think that “completing markets” (as in moving towards the unattainable A-D fantasy of having markets in everything, including whether you will be late to your doctor’s appointment three weeks from Tuesday) is desirable.* Or it may come from the fact that financial economists would have little to do if, say, the only actively traded markets were commodities futures, currencies, government bonds, and money market instruments.

Amar Bhide, now a professor at the Fletcher School and a former McKinsey consultant and later proprietary trader, questions the policy bias towards more liquidity in financial markets. Officials (and of course intermediaries) favor it because they lower funding costs. Isn’t cheaper money always better? Bhide argues that it can come with hidden costs, and those costs are sometime substantial.

He first took up the argument in a 1993 Harvard Business Review article, “Efficient Markets, Deficient Governance.” Its assessment was pretty much ignored because it was too far from orthodox thinking. He started with some straightforward observations:

US rules protecting investors are the most comprehensive and well enforced in the world….Prior to the 1930s, the traditional response to panics had been to let investors bear the consequences……The new legislation was based on a different premise: the acts [the Securities Act of 1933 and the Securities and Exchange Act of 1934] sought to protect investors before they incurred losses.

He then explained at some length that extensive regulations are needed to trade a promise as ambiguous as an equity on an arm’s length, anonymous basis. Historically, equity investors had had venture-capital-like relationships with the owner/managers: they knew them personally (and thus could assess their character), were kept informed of how the businesses was doing. At a minimum, they were privy to its strategy and plans; they might play a more active role in helping the business succeed.

By contrast, investors in equities that are traded impersonally can’t know all that much. A company can’t share competitively sensitive information with transient owners. Stocks are also more liquid if ownership is diffuse, which makes it harder for any investor or even group of investors to discipline underperforming managers. It’s much easier for them to sell their stock and move on rather than force changes. And an incompetent leadership group can still ignore the message of a low stock price, not just because they are rarely replaced, but also because they can rationalize the price as not reflecting the true state of the company compared to its competitors, which is simply not available to the public.

Bhide’s concern is hardly theoretical. The short term orientation of the executives of public companies, their ability to pay themselves egregious amounts of money, too often independent of actual performance, their underinvestment in their businesses and relentless emphasis on labor cost reduction and headcount cutting are the direct result of anonymous, impersonal equity markets. Many small businessmen and serial entrepreneurs hold the opposite attitude of that favored by the executives of public companies: they do their best to hang on to workers and will preserve their pay even if it hurts their own pay. Stagnant worker wages and underemployment are a direct result of companies’ refusal to share productiivty gains with workers, and that dates to trying to improve the governance problems Bhide discussed by linking executive pay to stock market performance. That did not fix the governance weaknesses and created new problems of its own.

It may be that the halo effect of America’s successful equity markets facilitated the sale of dodgy debt instruments. Bhide turns to the problems with mortgage securitization in his current paper. His core argument is that it imposes too much standardization on a market that requires customization and benefits from decentralized decision-making:

I argue that the liquefaction of small loans (of whatever opacity or complexity) has features beyond just the greater use of IT that impose significant hidden costs. Buyers of traditional corporate bonds expect underwriters to carefully analyze the creditworthiness of each borrower. But the mass liquefaction of small loans limits comprehensive scrutiny of individual borrowers. Instead explicit statistical discrimination (Phelps 1972) is used to select and price credits. Centralized data bases and computers do reduce the costs of statistical discrimination but this is not the central differentiating feature of the underwriting process.

Similarly, liquefaction of small loans encourages standardization of loan terms (i.e. mechanistic instead of case‐by‐case contracting). Liquefaction also requires a wide dispersion of creditor interests. And dispersion encourages a mechanistic response to delinquencies instead of case‐by‐case renegotiations or restructurings.

Securitization therefore has a downside beyond the “weakening of incentives to perform due diligence,” namely that mechanistic underwriting, contracting and responses to defaults ignores borrower specific facts and circumstances. Credit‐screening is thus routinely impaired and loan contracts aren’t well matched to the specific circumstances of borrowers. And, just as mechanistic underwriting can lead to the unwarranted extension or denial of credit at the outset, mechanistic foreclosure can lead to the unwarranted continuance or termination of loan contracts.

This mirrors one of my pet peeves: that originate-to-distribute lending results in information loss. In the old days of banking, it was understood that the local branch had knowledge about the community that it would use in credit decisions. Is the town’s economy vibrant? Is the guy who runs the local hardware store a good businessman? If so, someone who works for him might be a good credit risk. But that ability to assess job stability has been seriously degraded in centralized, score-based lending approaches.

Bhide also invokes Hayek to diss securitization, arguing it embodies the sort of centralized, low information decision-making that Hayek associated with central planners.

I strongly urge you to read his paper in full. Bhide will be submitting it to a journal, so NC readers are very much encouraged to help him debug his argument! You can also download it from SSRN.

The Hidden Costs of Debt Market Liquidity by Amar Bhide by

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*In ECONNED, we discussed the Lipsey-Lancaster theorem at some length. It show that moving closer to an idealized state does not always produce better outcomes and often can lead to worse ones.

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39 comments

  1. Conscience of a Conservative

    Properly done securitization brings benefits to our economy. The issue is we don’t have full transparency on pricing(The SEC dropped the ball on TRACE), the trustee is not properly incentivized to work on behalf of the bondholders , the rating agencies don’t audit the loans and there could be better reporting on the loans at origination and ongoing(the loan reporting issue is getting better). In short the problem isn’t securitization but how it’s handled. We forget that in the old model banks had huge duration risks(banks borrow short and lend long).

    1. Yves Smith Post author

      1. You ignore Bhide’s argument, which is the standardization is a huge cost, both on the origination side and even worse on the servicing side. Did you miss the Bank of America horrorshow I’ve been writing about at length? That is the DIRECT result of trying to service in a standardized, low cost manner. It does not work with delinquent mortgages.

      2. You also miss that the policy lack of interest in standardizing loans to other small heterogenous borrowers like small businesses means we have a large scale economic distortion, that funds are artificially cheap for housing and not cheap for small business loans, meaning we have too much capital going to housing (unproductive to the overall economy) and away from the biggest generators of jobs in America. You are seriously telling me that is good?

      3. Duration risk has not gone away. It has been transferred from banks to Fannie and Freddie. You are going to tell me THAT is good too? Fannie and Freddie engage in massive interest rate hedging. It is hugely pro-cyclical, to the point that Alan Greenspan was worried about it in 2002-2003 and was delighted that the accounting scandals at the GSEs meant they had their portfolio sizes capped.

      If you don’t like duration risk, you should not like the 30 year fixed rate mortgage with an unrestricted prepay option. That is the source of the problem. You don’t get rid of it by getting someone else to eat it.

      1. vlade

        Yves, I buy most of his arguments – on equity entirely (I’ve been arguing for years that there should be no publicly listed equity. Debt, ok, but not equity).
        I haven’t read the paper (heading for airport), will tomorrow, but does he address what would happen if securitization went away? It is, after all, a two way street, and even if we don’t see it, lots of people 401s are in RMBSes (or similar). Is killing the whole funding stuff really an option? If not, what are the alternatives?

        Is it to have two classes of loans – cheap and standardised (which will be securitised privately, with full caveat emptor to the asset manager), and full information that the bank will retain (but is more expensive since tailored)?

        Part of the problem is not just the origination side, the supply, but the demand – and everyone’s idea of making a buck. It’s the whole ecosystem that needs changing, not just a single part.

        I’d say local crowdsourcing might be the way (with emphasis on local), but again, any of this requires some involvement from people. And if there’s one thing I’d say – people, on average, are lazy and want to do minimum required (in areas of no immediate interest).

        Or, if you want a more PC way of putting it, people have priorities. For most of them, this is not anywhere close to the top (if it was, they wouldn’t be willing to pay silly money to asset managers).To do it well, it has to be constant top 5 priority though.

    2. jake chase

      I think you better read the paper, because you don’t seem to understand the post. You are living in fantasy land if you think securitization changes anything except the identity of the parties holding the bad loans, and the fact that they become ten (or maybe one hundred) times the number they should be.

      Just wait and see what is coming soon for credit card loans, auto loans, student loans. How soon? Nobody knows. That’s the beauty of securitization. Nobody knows the half life of this dreck.

      1. nonclassical

        ..Jake,

        have seen it mentioned that 80% or so of toxic “mortgage BACKED securities”
        will be “processed” by 2015-2016 (as bushbama FED buys back=QE3 at full paper debt “value”…”coincidentally”, this corresponds to FED’s low interest rate
        maintenance projections…

        ..it is apparent to me that bushbama’s buy-back program is a system to slowly
        eliminate toxic “securities” at full paper debt “value”, by stringing it out over time..not unlike bushit kick the can down the road=Iraq “surge”…

        1. jake chase

          I understand the Fed allows the banks the full value of the toxic MBS, either by purchase or discount (and I am not certain it matters which way the value is allowed). Once upon a time the Fed owned government securities. Now it owns a mountain of trash. Does it matter what the Fed owns? I confess I don’t know. Banks still need reserves to support their loan books.

          The only actual people getting royally screwed are elderly savers who now earn nothing on the real money they have managed to save. And I never read anything about them, except occasional references to ‘rentiers’.

    3. sgt_doom

      This is a point which may be too abstract for some, but correct nonetheless: securitization is the principal cost driver.

      Just look at all areas of the economy, it lets loose those dogs of pure corruption, destroying any semblance of an economic system, beginning with Samual L. Straus’ first foray into it around 1907, and when it really took off, leading to the Great Crash (it was securitization based upon stocks and mortgages then, whereas today it is primarily bonds, etc.). (It ended officially with the passage of the 1933 Securities Act, etc.)

      Geither and Fink and Summers et al., would have us believe securitization is relatively recent financial construct (as they have so written, back in the 1990s, and late 1980s) but that is a falsehood.

    4. different clue

      I am just a layman, but this analogy I am about to suggest seems useful.

      If you have a million healthy cows and one mad cow, and you grind them all up into one big mass of cowburger, the whole mass is tainted with enough prions to be mad cow burger.
      If you take a million healthy cow mortgages and one mad cow mortgage and grind them all up into mortgage burger, you have a huge mass of mad cow mortgage burger. And that’s what we have. And the whole purpose of securitization, the ONLY purpose of securitization as far as I am concerned, was to create as many mad cow mortgages as possible and sell them at healthy cow prices and hide the mad cow mortgage meat in among all the healthy cow mortgage meat.
      Mortgage securitization should be banned. Selling a loan after origination should be outlawed and punished.

      1. Glenn Condell

        The cow thing works for me dc.

        ‘If you take a million healthy cow mortgages and one mad cow mortgage and grind them all up into mortgage burger, you have a huge mass of mad cow mortgage burger.’

        Especially if there are actually more like 400 thousand or even 600 thousand crazy cows in that million.

        ‘the ONLY purpose of securitization as far as I am concerned, was to create as many mad cow mortgages as possible and sell them at healthy cow prices and hide the mad cow mortgage meat in among all the healthy cow mortgage meat’

        Yes; the failure is a feature not a bug. Presently, the grifters are rewarded for their cynical cunning and the gullible punished for their naivety. In any halfway decent or sensible system of course such an evil plan would mean utter ruin for the cowherds as well as the cows, but safe in the knowledge that (a) TBTF means endless taxpayer bailouts (b) the ratings agencies were bought off (c) the politicians were bought off, and (d) the media were on-side – the race to the bottom of Gresham’s dynamic was on (didn’t one of the cowherds joke about some of his products being structured by cows?)

        ‘Mortgage securitization should be banned. Selling a loan after origination should be outlawed and punished.’

        I am not informed enough to be clear about that. If good reasons for keeping it were advanced and accepted it could stay, provided there was – taxpayer backstop for underwater mortgagees but not for TBTF; private ratings agencies were replaced by government entities responsible to Congress and the Fairness Doctrine for media was reinstated. Of course this still leaves the corruption of Congress itself, but we can’t have everything!

        There are a few other mere bagatelles that would be required before we could licence securitisation (what a wonderfully Orwellian word that is):

        all documentation of all loans from origination thru bundling and tranching lodged by law in a publicly accessible government-supervised online database so that ‘paper trails’ are both necessary and foolproof (no more MERS)

        all trading was by law to be administered through a government-supervised trading desk; potential leadership to be examined on knowledge of risk Taleb-style rather than say Glassman and Hassett

        all financial bankruptcies via securitisation pay out mortgagees first, playas later (if anything remains)

        any securitising entity (or bank that is the terminus for securitised mortgages) requiring govt assistance to survive pays management public servant wages without bonuses

        and so on. Not bloody likely, eh?

        You might be right, ban it altogether. We got along OK without it in the olden days.

        Mr Shaxson below quotes Keynes’s observation that ‘remoteness between ownership and operation is an evil’ which strikes me as the merest common sense, but it is difficult to get a whole industry to understand something when its salary depends upon its not understanding it.

        This is a variant on the Tainter ‘diminishing returns on complexity’ theory too – of course returns actually magnified for the cowherds and their farm managers as they disappeared for the poor cows but more important from a systemic point of view is the greater fragility a ‘efficient’ centrally pooled and planned mortgage industry engenders. If the nodes stand alone, or at least further apart then a shock to one or even a group of them still leaves enough of them standing to effect a recovery. Not any more.

    1. Ms G

      The Keynes quote: a gem.

      Regulated to functional obscurity because it might have cast doubt on the visions and grand schemes of Milton Friedman, Robert Rubin and Blythe Masters.

      1. Ms G

        Ack “Relegated” (not “regulated”), although there might be an intentional pun in there somewhere :)

    2. nonclassical

      O.K.,

      I’m blown away to see one of my economics heroes commenting here-Nicholas Shaxson, though Yves did do review of his incredible expose’, “Treasure Islands”…

      and, as aside, thanks for pointing in direction of Naylor’s, “Hot Money”, in “Treasure Islands”….

  2. Gerard Pierce

    Without reading the entire paper, I would make the quibble: originate-to-distribute lending results in RESPONSIBILITY loss.

    When there were strict repurchase agreements, backed up by a fund, the originaters of the loan always had skln in the game. And people who made a career at one bank were a lot less able to play the IBG/YBG game when making decisions.

    1. Yves Smith Post author

      You are really missing his point.

      Read the paper. I hate to take it out on you, but I’m getting annoyed at having readers repeat their existing prejudices rather than engaging his argument. If you already think you know it all, you won’t learn anything new.

      He is saying mortgage securitzations are a problem even if you have skin in the game.

      1. Gerard Pierce

        You have a valid point – I don’t understand.

        To me it seem to be a matter of logic: the loss of information is definitely true, but it still seems reasonable that the cause of that loss of information is a lack of responsibility. If you don’t have to pay the price for a mistake, you don’t worry about the infomation that would prevent the mistake.

        I will read the article in detail to see what I am missing.

        1. liberal

          To me it seem to be a matter of logic: the loss of information is definitely true, but it still seems reasonable that the cause of that loss of information is a lack of responsibility.

          Agree.

          1. Glenn Condell

            +1 but you could argue the vice is versa, ie that a lack of information is the cause of a lack of responsibility. Vicious circle, chicken and egg.

            Ultimately though, it is the loss of accountability that matters, at all levels above the borrower, and securitised diffusion must surely be prime suspect.

  3. Glen

    “The short term orientation of the executives of public companies, their ability to pay themselves egregious amounts of money, too often independent of actual performance, their underinvestment in their businesses and relentless emphasis on labor cost reduction and headcount cutting are the direct result of anonymous, impersonal equity markets. Many small businessmen and serial entrepreneurs hold the opposite attitude of that favored by the executives of public companies: they do their best to hang on to workers and will preserve their pay even if it hurts their own pay.”

    Excellent, excellent, excellent! I see this dynamic in play all the time where I work since my company is slipping into the first catagory (C suite pay is detached from actual company performance, retention of core skills necessary to maintain competitive, state of the art product performance is secondary to the ability to show quarterly profits, R&D is a tax write off rather than a necessity.) and I deal directly with many smaller suppliers which fit into the second catagory (realization that core skills of employess are absolutley necessary to keep company competitive and in business.)

    It could possibly be that securitization in a “perfect world” can show benefits, but actually performance in the world we live in is ample evidence that we are unable to attain the required “perfection”. The strong bias towards unregulation/deregulation (free market is not an correct description, black market is the start of a better description) ignores the fact that we are all human and will cheat, lie, and steal if given the opportunity. To believe that unregulated markets are “perfectly function” is to also believe that police, laws, courts, nations, armies, and the United Nations are all unnecessary. To still maintain that deregulation is the way to go after experiencing the economic crisis which we are still living in is either a delusion (possible for those suckers still out there) or just simply a matter of talking your book because corruption and fraud in the financial sector has been very profitable for you.

  4. ArkansasAngie

    And … then … of course … you have liar loans — the person requesting the loan and/or they person approving the loan.

    The cost of fraud? It’s more than the money made on … how many loans?

    Expanding … the whole purpose of MERS was to reduce the transaction costs. Did the reduction in transaction cost exceed the damage done by not enforcing the law? It really simply moved money from the local tasked with doing things the right way into the pockets of squids.

    Ignoring costs does not make them go away.
    Ignoring incompetance doesn’t make it compentant
    Ignoring criminality only encouraging more criminality (hey Lanny?)

  5. deus-dj

    Plenty of people have written about securitization and its evils, if you’re saying, Yves, that you prefer a critique that comes in the fashion an orthodox economist would use then that’s your personal preference. But doing so will not convince the Believers any more than the critiques that come from “conventional” or non econo-speak language.

    1. Yves Smith Post author

      Aargh, you really don’t get it.

      First, Bhide is not orthodox. He doesn’t even have a normal appointment. Read the paper. Not one formula in it.

      Two, if you bothered understanding Bhide’s argument, and apparently you can’t be (because it is novel, despite your uninformed claims otherwise), it’s important because it says that securitization of consumer mortgages is INTRINSICALLY a bad idea.

      The conventional argument is that the problem is lack of skin in the game, lack of transparency, etc. and those could be fixed. If you believe Bhide, you CAN”T fix the real problem, that to have securitizations, you need standard products on the front end and standard servicing practices, and those are a bad idea.

      1. nonclassical

        ..folks,

        As Yves, et al are attempting (I think) to point out, the entire premise behind “securitization” is to use “assets” to LEVERAGE..borrow against..to drive speculation…let alone “mortgage BACKED securities”…

      2. vlade

        Now this is somehting I don’t entirely buy. Standardised products are fairly common even if you dont’ securitise. I doubt that the bank would let you negotiate EVERY paragraph of your mortgage loan agreement separately – the costs of doing so, and monitoring it etc. would be prohibitive. So you standardise but allow for some moving parts.

        Where standardisation is bad is a) underwriting b) servicing, since local information is too important to be ignored in either of these. I believe that securitization could work even with local servicing (would be more expensive of course, but even such a slight thing as making servicers pari-pasu with bond holders would work wonders), but there are too many incentives to defraud on underwriting to even pretend it can work w/o the investor in effect re-doing it themselves.

        OTOH, you can view a bank as in fact a one large ABS Master Trust issuing some fixed (debt) and some floating (equity) ABSes. Even if you do away with equity, banks will need to fund themselves with more than just deposits (especially if deposits are not interest bearing), so the “securitization” aspects of banks asset remains.

        That moves you from a bank fraud being a special case into the world of fraud in general – i.e. any company where the managers are not substantial owners will always be suspectible to fraud.

        Or, even more general, any asset with dispersed ownership is ripe for fraud (since it takes one focused person to defraud it vs number of not-focused-at-all people who would have to focus to prevent it. The gains/losses of any single of those people are also relatively small vs. gain of the potential fraudster). BTW, liquidity (in sense I see fraud, so I’ll exit the asset while I can because it’s easy) in my experience plays little role there, see some of the housing commitees.

        Wonder, would making the top management personally liable for fraud, with the onus of proving no fraud was happening on them too, help?

        1. jake chase

          You’re looking through the wrong end of the microscope. The problem is bank size. If you limit banks to one location the bank has no real choice but to serve a community. It takes deposits and makes loans and if it makes bad loans it vaporizes capital and is easily resolved into another bank. This is the only way in which banking makes any sense.

          Walter Wriston convinced those who should have known better that giant banks were necessary to recycle the petrodollars our fatuous government allowed Arab sheiks to extort beginning in the early Seventies, when a platoon or two of Marines could have lowered the price of oil in 24 hours. Banking has been a giant scam ever since. It is dishonest from top to bottom and you can’t reform it except by returning it to a sensible structure.

      3. Deus-DJ

        OK, fair point re orthodoxy.

        but I’m still not sure why this discussion is still relevant post financial crisis, not sure why we can’t just label the economist quacks what they are: quacks.

  6. fresno dan

    I would say he doesn’t take his arguement to its logical conclusion – that modern markets themselves, irrespective of greater liquidity, are a problem.
    When I took econ 101, there was this concept called “dollar votes.”
    So our “vote” market gave us the choice of Obama or Romney – thanks Mr. Market!!! (sure, I voted for someone else, but thanks to anchoring and crowd following biases, I have to put up with the majoraties’ pick). Do a thought experiment and replace “company” with “government”, bussiness with politician, campaign funds for profits in the above article. Markets and rationality do not stand a chance against advertizing (i.e., propaganda and the offshoots of bought academic and political shills). Was it Twain or Licoln who said a lie traverses the world while the truth is still putting on its shoes…

    And of course, we have built a system in which when the Titanic sinks, we must bail out the Titanic’s captain, cause he is the only one who knows how to steer the ship (seriously, what was the rationale for keeping AIG employees and paying outrageous bonuses to people who FAILED??? who demonstratably did not know the risk of what they were doing – if thats not their job, than what is???)

    1. monday1929

      I read neither the Paper or the full post, so I am fully qualified to comment:)

      Just wanted to add that in AIG’s case, they paid RETENTION bonuses to people who had LEFT THE COMPANY.

    2. Yves Smith Post author

      He has said that. He’s said equities should not be publicly traded and he says consumer mortgages should not be securitized.

      The paper sets forth some notions of the sort of assets that are suitable for securitization, and not that many fit the bill.

  7. Tom

    To securitize salable debt instruments requires proper granularity in the risk assessment. Its easier to model things that have less granules to begin with. More granules, more interaction between granules, interactions become granules and pretty soon the whole mess is beyond computational power…thus the cost to assign risk becomes to high to produce salable securities.
    Models are created to mimic what is seen at a point or multiple points in time, what is seen is relative to the model maker and the lens he is looking through. Postulations and theories are used to interpret what is not seen but, that produce effects on the model that without further work, can not be accounted for in the current model.
    For the securities salesman, he does not care if the model he is working from is correct, he cares only that it generates a ton of money (our model is: if it produces money it is the free market and, the free market is good)
    Securitization works well with corporations because a corporation is a granule, a model developed by man, regulated by man under man’s law – it also produces wealth. Wealth creation is the only way to produce a profit. Securities should only be sold upon the wealth production and consumption activities – the creating of something.
    Man did not create the planet- (it was here before us). Man uses stuff from the earth and applies labor to create wealth – not bad if it comports with living in peace upon this place. Land becomes valuable when someone needs a place to stand upon it or a bunch of people want to live in an area. Its why land becomes worthless if people don’t want to live or need to extract something from it to create wealth.
    Land should not be liquidated because we will drown in the liquid and lose solid ground – pun intended -. If land value is allowed to go up and up and, goes up faster than productive (wealth creating) activities – then everyone and every brick and mortar will have pay more to stay on this earth which leaves less devoted for creating wealth.

    Got off base there – anyway, the author really does get to a point that should be considered. I do not think he intended to defend the looters and control frauds in the market but, if he did, I would say he is still tinkering in the model world and not the real world

  8. Susan the other

    My contribution to the annoying commentary is this: It was too much Bhide for me but it is still interesting… I read the first 2 pages, scanned the next 10, and went straight for the last. I heard Bhide say many conventional things about prudent business practices. What I really didn’t hear was an acknowledgement of fate. Because fate can’t be rationally analyzed. Sorry for this cop out. But the system did collapse. Why is still a question, best answered by admitting we are all in denial. The factors run the gamut from a poisoned planet to demographics to frantic banksters. And this on-the-ground reality coincided with our melting pot-vending machine credit industry. Blah Blah Blah. So I’d like to make this observation: Unless a borrower’s fate can be insured and standardized, no small loans can be combined and securitized. If we really want to spread the wealth of capitalism we need a much better safety net. Not just better adherence to prudent principles of doing business.

    And I thought it was interesting to learn that this wave of securitization started in 1987. The year of the crash of the nasdaq and other terrifying things resulting in the first “jobless recovery.”

    1. Mark P.

      ‘The factors run the gamut from a poisoned planet to demographics to frantic banksters. And this on-the-ground reality coincided with our melting pot-vending machine credit industry. Blah Blah Blah.’

      Unnecessarily elaborate, indeed. The truth can be put simply.

      It’s the looting, stupid.

      Securitization permits all manner of looting — and rounds upon rounds of it when a credit bubble can be blown — that would be impossible otherwise.

    2. nonclassical

      Susan,

      …you’re better than this…reading Geisst’s, “Wall $treet-A History”, we see the same scams since late 1800’s….does everyone here not comprehend Goldman-Sachs was driving “markets” (including financial speculation), just as JP Morgan and others did historically, bringing others “with them” specifically to sell back and forth to one another to drive “prices-values”…then, in the end those “driving” see the opportunity in reversing the market, eliminating competition, and making $$$$ before everyone else understands…while “insuring” their own losses, which they cause for others, with “derivatives”…win-win-win…

  9. JustAnObserver

    Related this is a question I’ve had for a while: Have there been *any* from-scratch private label RMBS securitisations consisting entirely of residential mortgages

    o From 2008 or later.

    o Not guaranteed (implicitly or explicitly) by Fannie, Freddy, VA, FHA, etc. etc.

    ??

    i.e. just how dead is the private RMBS market ?

  10. Gibby the Fifth

    I used to follow Asian equity markets, and one of the key items we tracked was bank lending growth eg Thailand 1990-2000. Can someone please explain to me how central bankers can monitor credit growth in the presence of securitisation? If not, the CB is driving blind the wrong way up a one-way street.

    The answer probably is that they don’t care anyway what the credit growth is.

  11. Bridget

    It’s sort of like pooling large numbers of single family residences and renting them. Just because you have a whole bunch of them doesn’t mean you can standardize them.

    1. nonclassical

      b.s….Wall $treet banks knew the “value” of underlying “securities” from the beginning-passed them quickly off..holding this “value” on separate books..they
      knew enough well to fence off as much toxic sludge to fanni-freddi, and rest of world..

      what they may not have known is what bushbama would do in response, upon taking office…my question is who steered bushbama….this was no “accident” either…that meeting he called with Wall $treet profiteers couldn’t have gone better for THEM…

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