Is this really what Wall Street did to America?

[upstatecajun]

Let me see if I understand this correctly. I am going to attempt to explain, in very simple terms, what Wall Street did to our country. I am probably mistaken on a few, or perhaps several key points, so I would greatly appreciate reader feedback correcting me when necessary.

Mortgage companies subsidized (sold) high-risk loans to other companies that put them in a collective account, called a hedge fund. These loans were insured by AIG, in much the same fashion experienced sports gamblers hedge their bets.

http://progressivetoo.com/2011/03/26/is-this-really-what-wall-street-did-to-america/

[snot]

1. Actually, there's something impt. I think you've got backwards.

It wasn't AIG that bet against the housing market; it was the counterparties/speculators that purchased credit derivatives from AIG -- counterparties like Goldman Sachs. AIG was essentially the insurance company/chump that sold insurance policies to Goldman et al., who knew the house would burn down and didn't care because they didn't own it, they just wanted the insurance proceeds when it burned down. By bailing AIG out, we basically caused it to pay off on these policies. If we had let AIG go bankrupt, as it should have, Goldman would have lost its insurance premium -- a relatively small hit, and deserved. Instead, we bailed AIG out so it could pay proceeds on all those derivatives/insurance policies.

Gotta understand derivatives to sort it out properly, but it's not as hard as it may seem. See http://c-cyte.blogspot.com/2009/05/credit-derivatives-for-dummies.html and http://c-cyte.blogspot.com/2009/05/more-derivatives-for-dummies.html , or listen to the This American Life podcasts on the meltdown.

[Aerows]

2. Not to mention...

...we didn't even negotiate the payout to AIG, which typically happens under these types of liquidations. Goldman Sachs would have gotten pennies on the dollar had an independent creditor negotiated the settlement. Our government didn't even TRY to negotiate - they paid them 100% on the dollar.

It was outright theft. We encourage this type of thing to occur, because we privatize profits - profits that the company should retain to deal with mistakes and disasters, then the public rescues them when there are problems instead of letting companies "pull themselves up by their bootstraps".

Our nation is run by multi-national corporations and Wall Street. If our politicians don't go along with them, they either don't get elected or get tossed out of office. Whistle blowers are no longer protected. I don't know what is going to become of us - I think it is going to have to get so bad that the vast majority of us are literally fighting for survival, and frankly, we don't have that far to go until we get to that point.

[snot]

5. +1 -- agreed!

[PA Democrat]

3. The problem with the whole financial crisis is that it is very complex

and most Americans need simple explanations. The truth is that many people on Wall Street who were getting paid HUGE amounts of income didn't even understand or see the risk. Others knew the risk, but as long as they could make big bucks they didn't care what the longer-term implications were to the entire economy.

Here is my attempt at an explanation:

Mortgage lenders make loans. Thousands of loans are grouped together into a mortgage backed security (MBS), which is sold to investors including many large pension funds. Because of the cozy relationship between the banks selling the MBSs and the rating agencies, credit ratings did not accurately assess the risk of the loans within those MBSs.

Then some people started to look at the quality of those loans within those MBSs and saw a HUGE opportunity to make money by betting that a large percentage of the loans would go bad. They convinced people on Wall Street to to sell them credit default swaps on specific MBSs even though they themselves did not OWN those MBSs. For a relatively small amount of money (because the ratings on the MBSs were wrong) these investors were able to buy what is more or less an insurance policy against losses on those MBSs.

Think of it as being able to buy an insurance policy on your neighbor's house when you know that their kid is a pyromaniac who will more than likely burn down the house in the near future. Some of your other neighbors seeing the opportunity do the same thing. Then the house burns down and the insurance company is expected to pay out to multiple policy holders on the same house.

Some people on Wall Street were too stupid and/ or too lazy to see the risk. Some people saw the risk and cared only about making as much money as they possibly could while the getting was good. And then when it all blew up, Wall Street KNEW the government would bail them out because they were too big to fail.

I highly recommend The Big Short: Inside the Doomsday Machine by Michael Lewis for anyone interested in a great inside look at the whole mess.

[snot]

6. Also agreed. But they've also done all they could to make it seem more complicated than it is.

[Celebration]

8. yeah, people like AIG were writing

"INSURANCE" without even any reserves to back it.........preposterous. And then our treasury backs AIG policies one hundred percent. It would have been much cheaper just to pay off everyone's mortgages.

[notesdev]

4. Not quite

It would literally take days to list every dirty trick pulled from Wall St., but with regards to the mortgage scam, this is the basic summary:

1) They lobbied for, and got, removal of leverage limits (Graham-Leach-Bliley)
2) They used the additional leverage to increase the number of loans they made.
3) In order to find people to take these loans they first lowered standards, then moved to the practice of outright mortgage fraud
4) The foregoing resulted in millions of poor-quality loans that the banks knew at the time the loans were made could not be made good.
5) The banks took groups of these bad loans and bundled them into mortgage backed securities, which they then peddled to investors as AAA-grade, near-Treasury quality investments
6) They then took short positions via CDOs, CDS, etc. against the very loans they promised were top quality, in order to profit when the bottom fell out.

At each step they increased their profits and risks; finally when it all fell apart they offloaded as many of the losses as possible to the public, while putting the bubble profits in personal pockets through outrageous compensation and bonuses.

This is the extremely brief summary. There's a lot of detail and a lot more that went on (I didn't even touch MERS, for example, which is an epic scam all on its own).

You want to learn all the gory details go to places like Zero Hedge, The Market Ticker, Mish's Global Economic Analysis. (You definitely ain't going to see it in any major media until the statute of limitations has expired on all those crimes.)

[Mnemosyne]

7. Watch 'Inside Job', several times. Mind blowing and I am still livid. n/t

[Shagbark Hickory]

9. It can't really be summed up in one sentence.