Thursday, December 06, 2007

Making Out Like Bandits

Well color us shocked. NYTimes (12.06.07):
"As the subprime loan crisis deepens, Wall Street firms are increasingly coming under scrutiny for their role in selling risky mortgage-related securities to investors.

Many of the home loans tied to these investments quickly defaulted, resulting in billions of dollars of losses for investors. At the same time, many of the companies that sold these securities, concerned about a looming meltdown in the housing market, protected themselves from losses.

Wary of Risk, Bankers Sold Shaky Mortgage Debt

"One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year.

How stinky were these things? Pretty stinky. "Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent."

Not all the Big Boys were as sharp, however. "Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives."

The bankers argument? That the "buyers of such securities — institutional investors like pension funds, banks and hedge funds — [were] sophisticated and [understood] the risks."

Otherwise known as the "Too Bad; So Sad" defense.

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