It is usually heard that brokers at origination point that misled borrowers into very risky loans, or that lenders funded these loans (knowing that they weren't putting the capital)... and we've heard about realtors, and rating agencies, and investment banks...and in summary, there was such a complex system to originate and sell mortgages that the simple eye would simply recognize early on that this would not have a happy ending...
but, as I have established in the past - the golden rule regulates markets and if there had been no "takers" for these loans, there would have been no borrowers either. For example, volume in these loans dried up significantly this year and it is not because borrowers suddently decided they had enough of brokers or unscrupulous lenders, it is simply because there weren't any more buyers for this paper. The market signals I get point lead me to believe that if there were liquidity for these loans right now, there would still be borrowers.
Because of this, we need to ask ourselves how that liquidity entered the system and if there were schemes that were created to amplify the liquidity.
Here is one example from Narvik, Norway (city of 18,000 people north of the Arctic Circle):
"Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters." "Above all, the residents want to know how their close-knit community of 18,000 could have mortgaged its future — built on the revenue from a hydroelectric plant on a nearby fjord — by dabbling in what many view as the black arts of investment bankers in distant places." "They allege that they were duped by Terra’s brokers, who did not warn them that these types of securities were risky and subject to being cashed out, at a loss, if their market price fell below a certain level." "The chief investigator of Norway’s financial regulator, Eystein Kleven, said Terra Securities’ Norwegian-language prospectus did not mention such payments, or other risk factors. Citigroup’s term sheet did provide information on risks, but Narvik got a copy only after it had signed the agreement."
The financial alchemy that started it all - the concept that risky collateral could be transformed into safe investments by packaging it creatively - went around the world looking for every single pocket of liquidity that existed - first it was smart liquidity (that probably pretty quickly figured the game) and then it used intermediaries to sell on dumb liquidity. Of course, the more complex the structuring got, and the more parties that were involved in a security (security enhancements, et al), the easier it was to sell (even to smart liquidity) - who could've know what was going on in the first place? it was almost impossible.
I come back over and over to the same point - market intermediares (smart), paid on a commission basis (no skin in the game), line up the necessary elements to connect the dots to generate those commissions... and there are usually (not so smart) dots in the map (although not necessarily in direct contact with those intermediaries).
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