Saturday, October 03, 2009

Mortgages: The Good and The Bad

You have to agree that Wall Street has imagination. They have figured out a way to unload some of their downgraded mortgage investment packages and make money doing so. And, as with so many of their scandalous schemes, Wall Street has a weird name for the transaction - re-remic, which stands for resecuritization of real-estate mortgage investment conduits.

They've been able to sell billions of this crap by waving a magic wand and dividing these downgraded bonds into two pieces - the good (which a rating agency will rate as AAA or close to it) and the bad (which will get a junk rating). How they're able to make such a division escapes me, but they claim to know people who can do this and, naturally, they pay these people well. And, of course, the new packages need a rating from the firm's friends at Moody's etal, who extract their fee.

Why does the firm want to do this? They need to put up less capital as backing for the original crap. Somehow, the wand has reduced the firm's risk although the assets after the waving are the same as those before the waving.

And these guys don't need more regulation? What planet do our leaders live on?

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