Thursday, December 24, 2015

The Big Short

I'm reading the book before I see the movie. So far the book though it seems the Wall Street banks that created collaterzied debt obligations (CDOs) didn't realize the housing market would fail. It's almost like the 'outsiders' were the only ones that saw the crash coming. My impression from Taibbi though is that Wall Street also not only bet on the failure but purposely engineered it.

Wall Street made money on fees selling both credit default swaps (CDS) long and short on these bad mortgages. And they intentionally sold via vendors mortagages to those they were positive could not pay for them. When the demand for the CDSs became so great on both sides, and there wasn't enough low-income customers to buy any more mortgages to keep up with the demand, they created CDOs to act like those mortgages, bundling many of the bad CDSs with a few good ones so as to fool the rating agencies into giving them triple A ratings.* Meanwhile the execs that created these financial instruments of destruction also bet short and made fortunes, knowing it would not only cause ruin to their companies but to the entire economy. And knowing their companies would be not only bailed out but consolidated into even fewer, bigger institutions given they'd stacked the deck in government (thank you Obama) to further rig the game. And everyone knew they were immune from individual prosecution given said governmental corruption.

* Though this made it seem like the rating agencies were merely duped. Many though knew damned well they were junk but also knew they'd be rewarded with not just monetary payoffs but lucrative jobs in said Wall Street banks for their complicity.

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