Yo! Subprime II
Wow, fantastic article by Michael Lewis (author of Liar’s Poker) that made everything click for me. In essence, the subprime market wasn’t simply built from tiny crap loans that Mexican strawberry pickers used to buy estates and default, they were built from these crap loans that were ROLLED repeatedly by Wall Street vixens so the original loan was suddenly collateralizing handfuls of exchanges on the loan: the original loan was a mud hut on top of which 10 stories were built, and then it started raining…
(from the article:) “… when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. ‘”
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?page=0