(9 am. – promoted by ek hornbeck)
I have been asked some interesting questions in my series A Diary A Day. Like is it possible a single home mortgage is represented in multiple bundles, or has trigger multiple insurance payments.
Let explore the possibilities below the fold.
Historically banks used Commercial Paper (CP) to cover short falls and keep the credit market moving. CP has rules, probably not enough but there are rules. One is the maturity, CP can run no more than 270 days, nine months and they carry the same rating as the issuing bank and the interest is very low, usually tied to the LIBOR average. Because of these basic rules CP can be issued without further regulations and need not be registered with the SEC. CP is most often purchase by money market mutual funds because even with low interest they are safe. But it isn’t just banks who use CP, it is also big businesses like GM and Ford. Now they are all having problems getting anyone to buy their CP, this is part of what the Treasury is trying to address because more 2 trillion dollars in CP is going begging with no buyers in sight.
Those rules were too much, after all with CP the issuing bank not only pays interest on the note, but it is essentially a loan, they are expected to pay it back on the due date no more than 270 days in the future. In February of 2005 with the housing market booming and sub prime just finding it’s legs, five high powered Wall Street investment banks met and sold you and the global economy down the river.
Known as the “group of five. The host was Greg Lippmann, then 36, a fast-talking Deutsche Bank AG trader who aspired to make mortgage securities as big a cash cow for Wall Street as the $12 trillion corporate credit market.
His allies included 34-year-old Rajiv Kamilla, a trader at Goldman Sachs Group Inc. with a background in nuclear physics, and 32-year-old Todd Kushman, who led a contingent from Bear Stearns Cos. Representatives from Citigroup Inc. and JPMorgan Chase & Co. were also invited. Almost 50 traders and lawyers showed up for the first meeting at Deutsche Bank’s Wall Street office to help set the trading rules and design the new product.
The new standardized contracts they created would allow firms to protect themselves from the risks of subprime mortgages, enable speculators to bet against the U.S.housing market, and help meet demand from institutional investors for the high yields of loans to homeowners with poor credit.
Now with the new synthetic securitization credit default swap it was possible to transfer the risk associated with the assets to the investor but not transfer the assets themselves. Remember synthetic means the issuer of the bond doesn’t even have to own the asset they are insuring nor do they have to suffer a real loss to collect.
They created their own index to track these bonds, the ABX.HE Index. The new contract also allowed them to bundle good loans and bad loans into one bond. To take these derivatives unbundle and recombine in new and lucrative ways. They then colluded with the Wall Street credit rating agencies to give these bonds a AAA rating. But with every new iteration and sale the risk was pushed further down the line of investors, many unsuspecting who believed the AAA ratings. Is it possible in this frenzy of greed a single mortgage has triggered multiple insurance payments, probably. It is just as possible the wrong people have been paid as well. People with absolutely no tangible stake in the asset beyond paying and insurance premium.
Consider the case of no deed no foreclosure. It happens, in fact happened recently to Deutsche Bank AG who were trying to foreclose on 14 homes in Ohio and were not allowed to seize the property because they couldn’t prove they had a security interest in any of them. Many times investors aren’t matched up with specific mortgages until AFTER default. Because of this it is increasingly difficult for the investor to prove they were in anyway injured by a default.
Here is a partial list of who is responsible.
Greg Lippmann Deutsche Bank AG
Rajiv Kamilla Goldman Sachs Group Inc.
Todd Kushman Bear Stearns Cos.
JPMorgan Chase & Co.
Brian Clarkson Moody’s Investors Service
Add Congress, the Treasury and the Federal Reserve for not taking decisive action when the handwriting was on the wall and for in some cases still believing this mess represents a realistic framework for the future without substantial regulation.