Largest Scam in Human History
The subprime mortgage ‘crisis’ is going to go down in history as the largest scam that humans have ever perpetrated on their fellow man. The techniques used should get their own name, like Mr. Ponzi and his pyramid.
In ‘The End of Wall Street’s Boom’, Michael Lewis (author of Liar’s Poker) tells the tale of a notorious Wall Street short seller, Steve Eisman, as he slowly uncovers the massive fraud as it unfolds: watching as sub prime loan brokers sell off their toxic loans to investment banks which alchemically transmute them to the gold securities that pension funds, city treasuries, and mutual funds buy up to take advantage of the spectacular interest they paid.
Eisman sits Lewis down to explain things:
“You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
So Eisman proceeds to short sell the companies involved in this process. Only he finds out that the con artists at that time has already run out of people to take their subprime loans, and so were eagerly buying up Eisman’s short sells.
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. […]
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?”
I’m only beginning to grasp the structure and scale of this evil genius plan, but this is the first time I am getting a glimmer of the sheer mendacity and greed of those involved. Readers of the conspiracy theory blog Cryptogon will have gotten a glimpse of the bottom of the pyramid, in the offices of a financial institution selling sub prime loans. But this view at the top reveals the genius insanity of the whole thing.
The amazing thing is this: The investment banks take a short sell against their position and transmute it into fools gold that they can turn around and profit from. In any sane markt, a short sell is like lead to the value of anyone holding onto the shorted security - in this case the CDOs held by the banks. It was like one those monsters whos power only grows the more you try to kill it.
I haven’t finished the article yet, but I just had to get in here and tell you about it. Aren’t you glad you read this blog?
