Hawk, all of the investment banks realized that there was a degredation both the quality of the mortgages written and also the emergance of elements of vastly inflated income numbers and net worth metrics for applicants as well as outright fradulent activity. This also occurred with other types of debt,such as credit card debt that was securitized.
The Investment banks understood that this degredation of applicant quality was occurring. That investor suitability; in regards to the ability to pay once the teaser and 2-28's reset higher was being stretched and also that home valuations and price appreciation were sustainable.
However, since they were securitizing and selling and then actively participating into the further slicing and dicing of these tranches of debt that they were not going to take the loses on these inferior credit practices when housing prices topped out and the defaults increased.
15 or 20 years ago loans were held to a vastly greater extent by the financial institutions that made the loan. As the securitization process has matured, there was a complete collapse of the prudent stewardship of capital and INTEGRITY in many of these august financial institutions.
If you read the Ron Chernow's biography of Junius Pierpont Morgan or a biography of James Stillman, these men would not allow this level of avaristic gluttony to occur. (in my opinion.)
Risk assessment, management and risk mitigation was completely passed off to other financial entities with the complicity of the rating agencies who developed a somewhat incestuous relationship with the investment clients that were paying vast fees to the rating agencies for credit quality ratings that were in number of cases knowingly overstated.
So my initiative imposes punative penalties on this coterie
of investment bankers and agency rating firms that did more than their fair share to inflate and perpetuate the bubble. And then to insure that they all had chairs when the music stopped playing.
and to speak to this point....
So here the banks will buy them back, right? But they will be buying them back at a discount to the value they originally sold them at, correct?
I would have them buying them back in a set of ranges say 85 to 93 % of the price that they were originated at. Thus the investments would be buying them over current market prices. Now that range is a gross simplification of a much more sophisticated system of what types of filters would be used to generate the repurchase figures.
I outlined some of it here:( and I have had to clean up some of the methodology and wording I used previously.)
They will be called back on a mandatory participation basis on a discounted basis that will have an element of LIFO last created first recalled at the larger discount and also a counter percentage approach where a FIFO, first created first called in that will create a percentage discount that is proportional to the percentage premium the securities were sold in inflated prices and lower interest yield due to the higher credit rating that was inapproriately placed on the CDO or in a more egregious case the CPDO (Continous Proportioned Debt Securities) due to rating agencies awarding the securities, credit quality ratings that were too high.
I reiterate that the banks, valuation entities, and the rating agencies colluded to generate maximum financial profits for themselves. Thus I would have them participate in a structured repurchase and write down of these securitization instruments.
In closing I will point out that The Treasury, the Fed, the executive branch and the financial community has in fact started to takea few steps to ameliorate this mess, which was what I was calling for. And one last thing, with the sophistication of central banking coupled with fiat currencies... so long as you give the authorities a little time they will liquify and inflate the way out of just about any type of financial deliemma due to the absolute lack of political will for sustained deflationary events to occur.
John |
