Speculative Onslaught. Crisis of the world financial system - Part III By F. William Engdahl a summarization by Clive G.
Smale in 895 words
Securitization is a complex diffusion of risk and a simultaneous concentration of systemic risk. It is a process whereby assets, comprised of many thousands of personal home
mortgages, were used to create an investment device called Special Investment Vehicles (SIV’s). These were bundled into pools of mortgage investments, the income being from the actual mortgage payment, and assumed the form of a bond – an Asset Backed Security (ABS).
Securitization was an edifice built on hope. Most of the mortgages were obtained by couch potatoes with knife-edge or wishful-thinking finances who told lies to get their mortgages – and called Liar-Loans to NINA’s – No Income No Assets – as long as you could fog a mirror you got your money. Fine for the first couple of years on extra-low interest rates but after two years the higher rate, Adjustable Rate Mortgage (ARM) kicked-in and the heart attacks multiplied as people realized they couldn’t afford their home any longer. By 2006 62percent of mortgages were of the LIAR variety.
Securitization, usually applied to real estate , and also to leased property pools, home equity loans, student loans, credit card debt, car loans and other personal debt. It was the steady, regular cash flow of payments that enabled securitization to work. The banks created the pools and moved them ‘off their books’ into the SIV’s and managed to circumvented the safety net of the Basle II capital rules designed to prevent the creation such pools.
By the time the ABS came into being it was impossible to determine who held the actual title to any one mortgage and each title is now legally questionable.
Securitization was a method of converting fixed, illiquid assets into mobile, liquid assets by selling ownership of the mortgage, and loan-debt payment streams, as Mortgage Backed Securities (MBS’s), one form of ABS’s.
To sell on the international investor and pension market an incentive was needed to sucker them in; a deception device, to tell them they were getting gold and not iron pyrites. A Triple A rating was just the thing, and a mandatory requirement, to turn garbage junk bonds into golden investment vehicles.
The ratings agencies cartel in the shape of Moody’s, Standard & Poor’s & Fitch Ratings operated to establish credit ratings for securitized assets – for huge fees – and gave credibility to these bonds. The under-the–table dealings now proved their worth as these ratings agencies were paid by the very firms that packaged and sold the bonds the agencies were rating. In other words the ratings agencies were controlled to give the highest ratings, which they did by extrapolating dubious financial data, or they would not be paid.
With Triple A ratings these bonds sold at face value like hot cakes on a frosty night to investment houses and pension funds across the world, with no provenance investigation, on a multi-billion dollar investment scam joy ride. Default on these low-risk, high yield bonds was seen as infinitesimal to non-existent.
To balloon the number of bond investors Monoline insurance furthered the scam appeal by insuring the bonds against defaults, an insurance guarantee, which lowered their cost. However, by 2008, 20 percent of the deals of 2006 started to default and the monoline insurance companies were forced into the ring. The payment streams for the new investment bonds slowed
Being leveraged at 100 – 150 percent time’s capital did not bode well for the coming storm of defaults. One insurer held just one percent capital against its eye-popping $550Billion in ‘guarantees
With just $34Billion cash in hand the Monoline agencies were evaporating against $3.4 Trillion of ABS’s and an estimation that the possible payout risk by early 2008 could exceed $200Billion - they could do with Bernanke’s printing press – and more pain is to come.
To tighten up this briefing into a nutshell:
- The Securitization Revolution enabled banks to acquire and offload assets (mortgages) from their books into derivatives by selling mortgages at a discount.
- the buyers in turn sold the mortgages to their own creations, the SIV’s, which are now ‘off-books’ and not connected to the main bank operations and accounting. The SIV’s contain thousands of mortgages
- these SIV’s were bundled into newly conceived Collateralized Mortgage Obligations (CMO’s) and Collateralized Debt Obligations (CDO’s), Monoline insured for market credibility and they had a product fit for any sucker. They roped them in by the millions. Here are significant milestones because none of this horrible mess would have been possible without : securitization full backing of Greeenspan’s Fed.
repeal of the Glass-Steagal Act of Congress 1933.
monoline insurance.
collusion of the major ratings agencies selling-on the mortgage risk to SIV’s the underwriters who bundled them, rated and insured them as Triple A securitized investments.
Greenspans New Finance lead to the fraud in every level of the mortgage business and was left to be ‘self regulated’ The fox was in the hen house, free to regulate his own behaviour. Greed prevailed over proper oversight. We fully know, now, why the Glass-Steagal Act was laid down after the Crash of 1929. We are witness to the greatest financial bubble ever created in human history – the asset securitization bubble of 2002 – 2007 and the most complex financial fraud ever perpetrated.