"Goldman Sachs Group Inc. (GS) and American International Group Inc. (AIG) have also emerged as buyers this year as trading more than doubled for non-agency mortgage notes." (Bloomberg)
Why aren't Fab Tourre, Greg Smith, and thousands of other investment bankers, brokers, and analysts that worked during the mortgage bubble period leading a multi-trillion dollar investment banking revolution? If online infrastructure like SecondMarket (revise the accredited investor rule), Prosper and Covestor, combined with these investment bankers, analysts, and transparent real-time credit data, it would create Wall Street banks that have incentives to fuel non-fraudulent credit growth and manage systemic risk, and would be held accountable in real-time.
It seems like these bailed out too-big-too-fail Wall Street banks only exist to mis-allocate billions of capital for fees, create illiquid, opaque weapons of mass destruction derivative products that fuel systemic risk, which hedge fund clients used to fuel the mortgage bubble AND bet against it at the same time (ahah), and screw over clients. These banks bought and packaged toxic debt, and then cooked up OTC (over-the-counter) derivatives (credit default swaps) in a crack lab that allowed hedge fund clients, or own credit trading desks, to bet against the toxic garbage (subprime mortgage-backed securities or CDOs) they were securitizing in the first place! "Sophisticated" CDO managers, too-big-to-fail investment banks, and AIG kept fueling levered long exposure (and counterparty exposure) to toxic mortgage securities until they completely destroyed the financial system. Some heavily shorted CDOs, with structures heavily influenced by hedge funds, were found in retirement fixed income mutual funds at Morgan Keegan. Are CDO managers, banks, and these fund managers that lost billions, honestly considered "accredited investors", and still have licenses to sell these products?!
"Small pieces of Squared, as well as Magnetar's CDO Norma, also ended up in mutual funds run by Morgan Keegan, a regional investment bank based in Memphis, Tenn." (ProPublica)
I don't understand why the U.S. doesn't use the "Danish fix for the U.S. mortgage system", as George Soros mentioned on 8/11/2008. Right now covered mortgage bonds trade on the NASDAQ OMX Nordic with charts and quotes available on its website, and there are also Danish Mortgage Bond Futures. Why isn't this being adopted in the U.S.?
In my opinion, if there were "retail" credit default swap products available (via futures), maybe money would have flowed out of the housing market and into ABX Index ETNs (subprime mortgage credit default swap index ETNs) or something in 2006 to capitalize on the rising trend of mortgage delinquencies. The Gold ETF was nice in 2005, but I'm pretty sure retail products betting against the mortgage market along side hedge funds would have put a natural break on the toxic mortgage origination/securitization assembly line even without regulation. Instead risk was hidden from public view, and as you can see below, the mortgage bubble was engineered by shorts to keep inflating. Regardless if everything that happened was legal or not, look what the Federal Reserve and government BAILED OUT!
- The ‘Subsidy’: How a Handful of Merrill Lynch Bankers Helped Blow Up Their Own Firm (ProPublica)
- Banks’ Self-Dealing Super-Charged Financial Crisis (ProPublica)
- On Goldman’s (and Now Morgan Stanley’s) Deceptive Synthetic CDO Practices (aka Screwing Their Customers) (Naked Capitalism)
- *Wall Street Wizardry Amplified Credit Crisis: A CDO Called Norma Left 'Hairball of Risk'; Tailored by Merrill Lynch (WSJ, 12/2007)
- The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (ProPublica)
- New Documents Show Hedge Fund Magnetar Influenced Deal, Despite Denials (ProPublica)
- Magnetar Strikes Again: JP Morgan Negotiating Settlement with SEC on Toxic CDO (Naked Capitalism)
- Deutsche Bank's Greg Lippmann said Magnetar "buying the CDO equity and shorting the single names were devious (SEC)
- SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages (to hedge fund Paulson & Co.) (SEC vs. Goldman Sachs pdf)
- SEC Investigating Deal Between JPMorgan and Hedge Fund Magnetar (ProPublica)
- Deconstructing ABACUS (Interfluidity)
- Sen. Levin Grills Goldman Sachs Exec On "Shitty Deal" E-mail (Timberwolf CDO)
- Forget Greg Smith. For Goldman expose, read Hudson CDO ruling (Reuters Legal)
- E-mails Suggest Bear Stearns Cheated Clients Out of Billions (TheAtlantic)
- UBS wins reversal of fraud finding in NY CDS case
- Wall Street and The Financial Crisis: Anatomy of a Financial Collapse (U.S. Senate Investigations report)
- Wall Street and the Financial Crisis: The Role of Investment Banks (U.S. Senate Investigations Exhibits)
- Wall Street and the Financial Crisis: The Role Of High Risk Home Loans (U.S. Senate Investigation Exhibits)
- Wall Street and the Financial Crisis: The Role of Credit Rating Agencies (U.S. Senate Investigation Exhibits)
Below are quotes from the Dallas Fed's report:
Sludge on the Crankshaft
"A fine-tuned financial system requires well-capitalized banks, with the resources to cover losses from bad loans and investments. In essence, bank capital is a key lubricant in the economic engine (see Exhibit 6). Insufficient capital creates a grinding friction that weakens the entire financial system. Bank capital is an issue of regulatory policy, not monetary policy. But monetary policy cannot be effective when a major portion of the banking system is undercapitalized."
"The TBTF survivors of the financial crisis look a lot like they did in 2008. They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power. They remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation. Just as important, their significant presence in dozens of states confers enormous political clout in their quest to refocus banking statutes and regulatory enforcement to their advantage."
"The only viable solution to TBTF lies in reducing concentration in the banking system, thus increasing competition and transparency. The road to prosperity requires recapitalizing the financial system as quickly as possible. The safer the individual banks, the safer the financial system. The ultimate destination—an economy relatively free from financial crises—won’t be reached until we have the fortitude to break up the giant banks."
Read the report here.
Here's a related post I did a while back: Accredited Investor Rule is Nonsense (Exposed in 2008), Knock Down Existing Financial Infrastructure