The Foreclosure Crisis: Punchline to a Michael Lewis Joke from 2008?

The foreclosure crisis is being written and spoken of as though it were exclusively a paperwork crisis. For example, an October 18, 2010 Associated Press  wire described the scandal as one concerning “questions on the accuracy of documents used in the foreclosure process” and “faulty paperwork”. The narrative is that banks got behind in their processing, hired robo-signers, bluffed folk out of homes, etc.

That all sounds true and unsurprising. However, there may be another element that is being missed.

In late 2008 Michael Lewis wrote a Portfolio article (“The End“) weaving together a story line concerning a then-recent  lunch  between himself and John Guttfreund of Salomon Brothers and Liar’s Poker fame (thus, arguably, nemeses), and another concerning Steve Eisman, a money manager who bet heavily against the MBS market.   The climax of the Eisman story runs as follows:

“That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?'”

Investors who bought mortgage-backed securities believed that if interest payments stopped coming through the piping they would be able to recapture some value via the foreclosure process.  If Michael Lewis was right, sometimes there were actually no underlying homes on which to foreclose.

Note that mortgage-backed securities backed by phantom mortgages are actually “mortgage”-backed securities. Such instruments are in reality derivatives that in calm markets would track the  performance of securities that are really mortgage-backed. In calm markets one security may track another security (or basket thereof), but when a market reaches its shear strength nothing tracks anything. In fact, “shear strength” actually means “the point at which parallel internal surfaces in a material slide past one another” (a strangely beautiful discussion of which can be found on this engineering site). That’s a good way to think about what happens in markets under sufficient stress: surfaces which had previously stayed parallel begin sliding past each other.

If Michael Lewis was right, banks packaging up mortgages did not just do sloppy packaging. They were also selling the packages several times over. Buyers of the “fake” packages were kept unaware of the situation because they continuously received the “interest payments” they were due, those payments being funded out of the money Goldman charged investors like Eisman to keep their bearish positions in place.

Which, to readers of, may sound familiar.

If this is really what happened down below, how would things appear on the surface? Like this: A bunch of lawyers representing the interests of owners of these “mortgage”-backed securities would be going into court trying to foreclose on homes, but not be able to establish clear chain of title. Which is precisely what is happening. That’s not the same as saying it is why it is happening. However, if Lewis’ story about Steve Eisman is correct, then eventually this would have to happen.

Whatever the cause (or amalgam of causes) of this foreclosure crisis, its effects could ripple into our financial system in a way that some say will become catastrophic (e.g., “The Real Danger from the Foreclosure Crisis“, George Washington, Zerohedge).  Banks which believe that millions of people owe them money suddenly realize that no specific people owe them money while millions of borrowers suddenly realize they don’t owe money to any specific bank; banks suspend foreclosures, but people thrown out of their homes by banks who lacked chain of title form classes to recover what is rightfully theirs; title insurance becomes impossible on a non-negligible fraction of homes. Etc.

Yet the foreclosure crisis may become an opportunity for the United States.  DeepCapture has, I think, adequately documented that one of the great problems within American society is that Wall Street’s megabanks have Washington, D.C. under their thumb. Two years ago this country drew a firebreak around those Wall Street megabanks and said, “We won’t let them burn.” The better answer would have been to draw the firebreak around them and say, “Let them burn first.”

Next time around, let’s do it.

At least it will take care of the thumb.

  1. Patrick,

    Very well written story. You and the heros at always write in a way that is so easy to understand that even the working class can understand what is happening to our financial system.
    This is one reason that the financial media can’t stand you. As a part time journalist you can do what CNBC’s of the World can’t. Tell people what is “really” happening to the financial system in America.

  2. Eisman asked the wrong question – “Is this allowed?”. He should have asked, “The tax payer backstops this?” You see, Wall Street should be allowed to do whatever they want (within the law) and if their bets pay off they keep the profits and the economy benefits. If their bets go south, they feel the pain. The way it is now, tax payers backstop Wall Streets losses in the name of “Too big to fail”, so any rational entity will make lots of crazy “products” reaping billions in fees with no downside risk.

  3. Accurately summed up. This is chance for the states to go after the documentation AND help their pension funds recoup some of the looted funds.

  4. Patrick, you are the CEO with the biggest huevos and I think it’s more like 7/8 years. Thank God for you. You are a true American hero. Byrne 4 Pes 2012

  5. “Banks which believe that millions of people owe them money suddenly realizing that no specific people owe them money”.

    Similarly, the purchasers of securities in our markets know that they are owed delivery of their securities but there are no specific sellers of those sold securities called on the carpet to make delivery. Why? It’s because in our tainted clearance and settlement system the delivery obligations are “pooled” at the clearing firm level. The delivery failure of the specific seller of nonexistent shares gets his failed delivery obligation “cured” when his clearing firm or the NSCC gets successful delivery of shares in that specific security from a totally different trade executed perhaps a month after the original trade.

    The obvious “loophole” being accessed is this “pooling” at the clearing firm level phenomenon. Abusive short selling MMs and the hedge funds directing them order flow know this. This sets up what amounts to be a Madoff-like Ponzi scheme in regards to delivery requirements. In Madoff’s case new money coming in would be delivered to those demanding their money back. That “fire” involving the demand for money gets extinguished. In abusive short selling cases, the “fire” represented by a delivery failure approaching 13 days of age and about to be subject to a buy-in can be extinguished by the delivery of shares associated with a totally different trade or from shares borrowed from the NSCC’s self-replenishing lending pool at their “stock borrow program”. A clearance and settlement system with integrity would obviously “marry” a specific delivery failure to a specific seller of securities to avoid this “kiting” opportunity.

    One needs to keep in mind that an “open delivery failure” in a system utilizing “pooling” is one that has not been “cured” yet by either a delivery or a “borrow”. The opacity provided by “pooling” especially “anonymous pooling” provides the foundation for a variety of frauds. Note the similarity to the crime known as “kiting” which involves “the abuse of a float period”.

    In the case of abusive naked short selling the “float period” being abused by those selling nonexistent shares under the guise of “providing beneficent liquidity” for a living is represented by the time period in which delivery was due (T+3) and the date on which that specific seller of perhaps nonexistent shares made delivery if in fact he ever did. This is despite the fact that Congress mandated in Section 17 A of the ’34 Exchange Act that the DTCC effect “the prompt and accurate clearance and settlement of all securities transactions”.

    The “prompt settlement” of a securities transaction necessitates the prompt “good form delivery” of that which the purchaser was led to believe he was buying. This has nothing to do with waiting for the EVENTUAL delivery of shares from an unrelated transaction to “cure” your delivery failure involving the intentional sale of nonexistent securities done with the sole intent of routing the funds of “long” investors into your wallet or that of the hedge funds providing you with order flow.

    It’s hard not to note the eerie similarity between the mortgage backed securities backed by phantom mortgages i.e. “derivatives” of mortgages as described by Dr. Byrne and the mere “security entitlements” resting in our brokerage accounts with no paper-backed stock certificate in existence to justify its existence i.e. “derivatives” of legitimate “shares”. The clear winners in these little “kite-a-thons” are the “securities intermediaries” and the “mortgage intermediaries”.

    It’s important to note the enabling role of the self-regulatory organizations involved, the DTCC in the case of the securities frauds, which refuse to keep track of the number of “derivatives” in the system at any given time. Recall that it is the SROs like the NSCC and FINRA that the SEC refers to as “the first line of defense against market abuses”. Note also that it is the “participants” of the NSCC and the “members” of FINRA that are the financial beneficiaries of these kiting crimes. Gee, do you think it’s about time to start keeping track of these pesky “derivatives” known as “security entitlements” that exist above and beyond the number of shares a corporation has “outstanding”? The question that arises is when are we ever going to “foreclose” on the failed delivery obligations that are driving the share prices of corporations under attack into the ground.

  6. When Warren Buffet and many other came out and said we had to save our banks, I said, let them go down and start over. If they go down, so what?

    The money of the US would still be there, as would the FED and the banking system. Only these institutions would be gone.

    We should entrust our money and the financial system the boring yet ethical bankers who ran a tight ship and did not run wild with speculation or endanger their institutions.

    Yet those seem to be the minority and smaller banks. Let the market sort it out by letting the foolish bankers and institutions meet their fate.

    I remember when Washington was saying it was mandatory to save AIG or the world would stop. Next time, no bail out, no favors – nothing. They must be allowed to fall on their own sword, if it comes to that.

  7. I am very upset to say the least because I was in the process of buying a house apparently owned by this bank that has caused many problems for everybody. I am praying that I can still buy this home in Portales, NM.
    Thank you

  8. I’m not so sure this argument is sound.
    If I understand it, it’s roughly:
    1) A bond identical in every respect but one to the original is a
    “mortgage”-based security. There was no actual homeowner or buyer.
    2) Investors who bought failed mortgage-based securities believed they would be able to recapture some value via the foreclosure process.
    3) Owners of these “mortgage”-backed securities would be going into court trying to foreclose on homes.
    4) But they can’t establish clear title to homes.

    This equivocates between mortgage-based and “mortgage”-based,
    which requires more argument. If an investor knows they bought a “mortgage”-based security, then they know there is no actual homeowner or buyer, so what would give them standing to go into court trying to foreclose? Are you saying that banks committed the fraud of selling “mortgage”-based securities pretending they were mortgage-based securities? Or that investors were too stupid to be able to detect the difference?

  9. It seems like trying to foreclose on a home mortgage that has been “naked shorted” is like trying to pull a certificate.

    If more than one person owns the same share or mortgage, the system is going to claim the dog ate the paperwork.

    Shouldn’t these crooked billionaires be going to jail? It’s fraud, pure and simple.

    Whether you invest in a mortgage backed bond, or a share, or an ounce of gold, you can’t trust the real asset is actually in your account, just because your statement says it is.

  10. Look at the wealth of a Paulson. He’s smarter then me, maybe you. But, is he that much smarter?

    He took the ABACUS CDO, 38,000,000 dollars, had GS select the loans he knew would fail, and shorted it while GS sold it to pension funds and the like. That wasn’t good enough. They put that CDO in Indices – they synthesized it. And just like screwing up music, they leveraged that 38,000,000 into some 240,000,000, if my memory serves me correctly. So, when those loans tanked, they were supercharged. So were the returns on short positions.

    Now, while it takes some innate intelligence to dream up such sophisticated nonsense, it takes a the moral equivalent of reptiles to actually have the cojones to do it. It’s there, I can, so I’ll eat it.

    1. “Look at the wealth of a Paulson. He’s smarter then me, maybe you. But, is he that much smarter?”

      An MBA from Harvard Business School is useless against an Explosively Formed Projectile. My $0.02.

  11. BTW. It’ is overstocks busiest time of year, yet Dr. Byrne takes the time to comment in the best interest of the rest of us. Think about that as you go through your daily routine. You may be suffering, as we all are. But there is one guy who is always in your corner.

    All throughout history, heroes suffered the slings and arrows of contemporaries. Many did not get the praise due until many years later, in many cases, years after their passing. I hope this time it’s different. I’m in a position to know better than most. I called hundreds of people – literally. One listened, and ran with the ball. And he’s still carrying it for us.

    And there are some people who I consider heroes who can’t come forward,and they feel as I do about Dr. Byrne. It will all come out. And I’m ready. Boy, I’m ready.

    Keep your lives together. Love your families. This probably gets worse first. But it will end. You might find that you are a better person for all this. While we certainly wouldn’t choose this particular crucible, it ‘s upon us. And reach out. Many are hurting on the inside, as well as the wallet. Some kindness goes a long way, even if it is just some heartfelt words.

  12. Interesting piece.

    Investors who bought bonds that were derivatives of MBS’s might not have standing to sue since these bonds are not directly tied to mortgages, and are not sold as if they were.

    The fraud/negligence here would be on the part of the originators, as well as the regulators, ratings agencies, and anyone else who had a legal or fiduciary responsibility to evaluate the instruments.

    Retail brokers of bonds would probably claim they were misled.

    Class action lawsuits by bond investors against the originators of the bonds and against the regulators/rating agencies might be the way to go.

    Lila Rajiva

  13. Clarification:

    My first line is incorrect. I meant that investors might not have the standing to intervene in the foreclosure process, since they have no claim on the title.

  14. What happens to people that buy a home out of foreclosure, only to find out the bank didn’t have the right to the title. Could the original owner get their home back at the expense of the buyer?

    What a mess.

    1. Dear Anonymous,

      Just an FYI to you and the rest of the readers of this site. There was a recent Landmark decision that the State Supreme Court ruled on in Mass.

      This was the in part the issue. The improper right of title. Therefore the Banks had no right to foreclose.

      In both cases the Justics said the Banks are out of luck. It maybe that the onetime owners are now going to have their homes back in their possesions free and clear.

      So maybe there is hope for some Americans after all

  15. So who am I paying MY morgage payment to? How do I know my payment is getting to the legal owner of my debt.

    And….If I pay off my morgage how do I know I will recieve a REAL title, that is actually for my property?

    What about all the properties that have been bought, and paid cash for in the last ten years or so? Do any have a legal and real title?

  16. So who am I paying MY morgage payment to? How do I know my payment is getting to the legal owner of my debt.

    And….If I pay off my morgage how do I know I will recieve a REAL title, that is actually for my property?

    What about all the properties that have been bought, and paid cash for in the last ten years or so? Do any have a legal and real title?

    Will this lead to everyone now, still paying their morgage payments, to cease until they know for sure they will ever get proper, legal ownership, even if they do pay off their morgages?

    Think this might be the spark of a great fire?

  17. Bobaboo asks, “Are you saying that banks committed the fraud of selling ‘mortgage”’-based securities pretending they were mortgage-based securities?”

    Well, that is what the quote from Michael Lewis indicates. He generally gets his facts straight.

    1. Patrick, the fundamental problem is the whole system is based on fraud. At one time, people accepted Kings and Queens and they worked until their death to be loyal serfs because God gave the Kings and Queens God blood and their eugenics was better than everyone else’s (intended).

      Then people re-figured out Greek Democracy. Yeah!

      The problem is, fixed elections and privately printed currencies took off and the royalty were able to keep their seat of power in secret with a veneer of democracy.

      People like Lincoln or Kennedy that thought the people should print the currency were assassinated.

      I had an Egyptian cabby in Manhatten tell me that because they don’t believe in usary, the average house in Egypt sells for two year’s salary versus 20 year’s salary, including interest, here.

      No wonder the banksters want to war in the middle east.

      Because we believe in usary, we work in indentured servitude as slaves for 25 years, just to have the right to live in a box the banksters tell us that we are allowed to live in. If we lose our job, because the banksters reduced the money supply, forcing a fraction of the population to be without, like a game of musical chairs, then they come after our other assets.

      Meanwhile, they take solid assets such as government bonds, gold, food, minerals, shares, etc. and naked short them, so for every real asset there are multiple owners and the value in this scam is transferred from people that work for a living to the low IQ thieves that think they are in charge.

      The thieves control the media, the schools, the military and these parasites need to be removed from our system.

      It is so bloody ridiculous. It’s like a cancer. The parasites say “trust me” and I’ll hold your shares, gold, grain, Rupees, etc. and my receipt will trade like the real thing, then they rip you off, and take their profit and use it to fix elections and control the mainstream media and the school system.

      In the age of the internet, it will not last and I predict there will be a day where the guillotines are set up in the streets for the Bernie Madoffs (founder of Nasdaq and friend of the SEC who set up the Madoff exemption) of the world who haven’t been arrested yet.

      The whole system is unraveling. I do a lot of business around the world and from Indians, to Russians to Chinese, to Japanse, to Europeans – the whole world loves America and wants it to succeed to their Hollywood ideal of the country.

      They just need us to wake up and arrest or kill the assholes that run the banks, the government, the media and the SEC, that are ripping everyone off.

      Put 200 David Rockefeller type assholes in jail and enjoy world piece and a hot buzzing global economy.

    2. In that case there would be two very different circumstances that might lead to trouble, and they should be distinguished. A mortgage might have been pledged as collateral to two different mortgage-based securities, which ought not to have ever been permitted. Someone would have to find a legal formula for splitting funds recovered in foreclosure between those securities.

      Or a mortgage might have been associated with a “mortgage”-based security on paper. The “mortgage”-based security could track that mortgage but couldn’t legally or morally participate in any foreclosure proceeds, because it’s only a synthetic copy.

      Have I got the moral remedies about right?

  18. “Hey American dealers, where are all those stock certificates (street form) that T.K. sold to you in the “death spiral financing” deals? It must have left a gaping whole in your accounting records. Who is going to deliver them to you or who are you going to sue? (eh?) Are you covered by the Canadian Investor Protection Fund? Will you sue The IDA? After all, you were a CLIENT (just ask Ernst & Young) on the books of TK and regulated by NASD Regulation. $18.1 Million paid out by CIPF must look like chicken feed in comparison. CIPF can’t be too pleased with the IDA either.”

  19. Do you get it yet? The entire US financial system are criminals! Bernie Madoff-with-the-loot, the founder of NASDAQ who then screwed his investors for $65 billion, was NOT an exception! I know you do not want to believe the bankers are crooks any more than you wanted to believe that priests were abusing the little kiddies, but now is the time to stop living in a fantasy world and come back to reality.

    Beliefs are chains that hold free minds slaves.

    Time for freedom.

  20. In the middle ages, the king issued gold coins with his face on them and that was money. It was inconvenient, so people stored the coins in warehouses known as “banks” and the banks issued “bank notes” as receipts. Soon, the more convenient banknotes traded as money and as the king borrowed the banknotes to finance his wars at interest, the shrewd bankers realized they could issue more receipts than gold coins they had in the vault.

    The got away with this fraud because it was the middle ages and that’s where our current fiat money supply came from.

    Folks, it’s not the g’ damn middle ages.

    It’s 2010 and we’re supposed to live in a democracy governed by law.

    We have contracts with custodians to hold our shares, bonds, gold, grain, etc. safe and if the receipt says it’s there and it isn’t, then those b’stards should go to jail for a long time. Who cares if they have so much money that their friends are the judges, politicans, media and regulators.

    We should arrest their friends, too.

    There’s more of us than them and they’re only the barnacles sucking the life out of the productive class. The police and military are in the productive class with the rest of us.

    They sell more than one person the same share or they sell more than one person a bond backed by the exact same mortgage? It’s pathetically criminal and people should be in the streets with torches and pitchforks.

    These parasitic activities need to be eradicated to keep our economy from getting any sicker.

    This is 2010 and the criminal class needs to understand they aren’t going to run this country for much longer.

    In France, they are calling for a run on the banks for Dec. 07th.

    I have a similar call. Stop trading on Fridays. You’ll still be able to buy and sell shares and your short and long investments will be the same size and to top it off, your transaction costs will be reduced by 20%.

    That 20% will come right out of the parasitic LIQUIDITY that’s sucking the life out of main street.

    If that doesn’t work, you can reduce your trading to the first 1.5 hours and the last 1.5 hours, which would cut their commissions in half again.

    The people that work for a living have always had the power.

  21. The last time I wrote to you was to congratulate you over a glass of chamapange as Naked Short Selling had entered the mainstream. Now, however I must warn you that they have captured your deep capture refrain when the head of a new agency tells the world they are beyond capture.

    “Elizabeth Warren Says Technology Can Prevent `Capture’ of Consumer Agency
    By Carter Dougherty – Oct 28, 2010 8:00 PM PT Tweet (4)LinkedIn Share
    Business ExchangeBuzz up!DiggPrint Email .Elizabeth Warren, the special adviser assigned to help set up the Consumer Financial Protection Bureau, said she is planning to use technology to prevent “capture” of the new agency by the industry it’s being created to oversee”

    Oh, how they work there magic for all to see.

  22. @scaredpantyless

    I believe I commented to that effect in 2009 to the owners of this blog.

    I said – they’ll take your research, including some resonant phrases, turn the whole thing on its head, cut any mention of you, their source (or even discredit you), and then rework the whole thing to support their own agenda.

    It’s called co-option.

  23. It’s a medieval, parasitic banking, brokerage and commodities system that needs to be replaced by a new system for the realities of 2010 global commerce.


    Do you guys think that the restriction of the naked-sponsored access provided by the brokers will prevent most of the abusive naked-short from occurring? Or will most of the trading just shift to dark pools or other unregulated spots in the US market? Even though the rule was passed because of the concern stemming from flash-trading, I am more curious about how this might impede scrupulous hedge funds from orchestrating NS schemes…

    1. overstock and deepcapture should forward all they have (if they haven’t already) to Jesse Ventura @ Conspiracy Theory On truTV cuz that independent tells it like it is!

      Conspiracy Theory Jesse Ventura S02E03 Wall Street 1/3

      Conspiracy Theory Jesse Ventura S02E03 Wall Street 2/3

      Conspiracy Theory Jesse Ventura S02E03 Wall Street 3/3

      Conspiracy Theory On truTV

      Matt Taibbi: Courts Helping Banks Screw Over Homeowners

    2. wouldn’t it be a hoot if jesse questioned “floyd the one of many” and his band of yellow journalists? they promoted him as a mortgage banker/broker year after year even though it would seem he was simply a registered mortgage solicitor and apparently no longer is!

  25. Mike Taibi Sp? writes a book and is interviewed by Don Imus who applauds the book. Yet Mike misses a point as to how all this came about. How come a majority could vote in health care. A certain leader was able to make certain they had the votes for that as well as the stimulous but they were NOT ABLE to do so in SEPT 08 for the first vote for the tarp that was no and two weeks later say good bye to WM/WB and eventually led to GE borrowing money from Buffet. It’s called cause an effect. Why doesn’t someone write a book or do a movie showing the masses how their supposed reps were part and parcel of the collapse. Or better said. What fool doesn’t put OIL in their engine when the idot light comes on or the oil pressure indicator says to do so. HMMM oh that’s the person with a seized engine. So the fools nearly seized this financial system with the no vote and NOW they pretend it wasn’t their fault but anothers yet they will fix it. TWO years and COUNTING.

    So here we are with the mortage problem and yup…there are many who bought things that the docs are not correct and there are many who have been removed when they shouldn’t have been. HOW will they resolve it? Unfortunately with a stroke of a pen or some side deal as we have been witnessing for the last two years. So what to do. Understand the game. Don’t excuse it. Don’t deny it.But don’t expect any GROUP of complicit individuals to fix it. Just my humble street wise opinion. And nice to see you back posting Patrick. Kudos

  26. The theory is that naked short selling is part of a bigger dollarization plan, where deficits no longer matter.


    2) Corrupt dealing with every crook on the planet (Manuel Noriega, Ferdinand Marcos, Saddam Hussein and the Colombian drug barons, etc)
    3) Fraud involving high US government officials like former U.S. Defense Secretary Clark Clifford.
    4) More spycraft than any James Bond movie (the CIA, the Mafia, a covert “black network”, covert operations, etc…).
    5) A connection to Iran-Contra.
    6) Millions in bribes to politicians around the world, especially in Washington.
    7) A massive, clear-as-day, government cover-up.
    8) Torture, murder, spying, drug trafficking, money-laundering, and every type of crime imaginable.
    9) Etc…

  27. Media blackouts don’t just cover government frauds. The basic background/historical knowledge necessary to understand the frauds is also blacked out, as is any knowledge which might undermine the dollar by suggesting future inflation (ie: how China’s dollar peg works). As a result, the average American is amazingly uninformed about how the world really works. I am talking about the real mechanics behind the scenes (ie: how our monetary system works, how clearing in equity market works, who is in charge of defending the dollar (it isn’t the fed), etc). This general lack of understanding makes it frustratingly difficult to have any serious discussion about government fraud (how do explain murder to someone who doesn’t understand the concept of death?).

  28. The mortgage problems ties in directly with short selling.

    Short selling and the Federal Reserve create trillions of dollars of easy money that pushes itself into the economy in ways that have a negative effect for socity at large.

    Many of the hedge fund formulas put the money from short sales into government bonds and mortgage backed securities … increasing the demand for these products which eventually become problematic for society at large.

  29. Foreclosure-gate, yet another violation of our rights. Add it to the list of gov’t violations of our right:
    They violate the 1st Amendment by placing protesters in cages, banning books like “America Deceived II” and censoring the internet.
    They violate the 2nd Amendment by confiscating guns.
    They violate the 4th and 5th Amendment by molesting airline passengers.
    They violate the entire Constitution by starting undeclared wars for foreign countries.
    Impeach Obama and sweep out the Congress, except Ron Paul.
    (Last link of Banned Book):

  30. I remember that Portfolio piece.
    And I remember the deja vu I experienced when I started reading “The Big Short,” where Lewis opened the book with basically the same text, before going on to tell a larger story.

    One of the things I learned from Lewis (and others, including from reporting on the John Paulson/Goldman Abacus deal) was that banks marketed Synthetic bond products.

    The way I understand it, since there was so much demand from investors to buy into CDOs, and there weren’t enough mortgages to go around to back enough MBS to fill the portfolios of all the CDOs, Wall Street created the Synthetic CDO. These were backed (as you say) not by mortgage interest payments, but by the premiums paid on CDSes held by Eisman, Paulson&Co, and others.

    My question, as an industry outsider, is:
    How were these sCDO products marketed?
    It sounds to me like CDOs and sCDOs were distinct products: one is full of MBS, the other is full of the long side of CDS contracts, taking in monthly premiums paid by CDS contract buyers.
    The way to answer the question is to get hold of a pile of CDO and sCDO prospectuses, circa 2006-7, and see if the differences are discernible.
    If they’re not, and if they were marketed as identical…then that probably constitutes fraud.

    That sounds like a straightforward, if painfully tedious, exercise.

    But, when we’re talking about building CDOs, we’re already one level removed from securitization of the actual mortgages. Prior questions remain, regarding the bad paperwork that failed to legitimately transfer ownership of thousands of mortgages into their intended bond trusts. The intentional (and bogus) recycling of mortgages, across multiple bonds is an interesting allegation. But that one will take some legwork to support.

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