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  • Blue_Mountain1 Blue_Mountain1 Dec 29, 2010 10:47 AM Flag

    Thought for today webbie

    The documentary Inside Job explains it all.

    >> Historically, banks that loaned money to home buyers kept those loans, and bore the risk of default. Thus, banks had an incentive to make sure borrowers repaid them. This is one reason why banks required a down payment. It also is why they charged subprime borrowers higher rates.

    Over time, banks began bundling mortgage loans together into pools known as residential mortgage backed securities (RMBS). Large institutional investors, such as pension funds, bought these RMBS. Because the RMBS included a diverse pool of mortgage loans, they were deemed to be safe investments. The credit rating agencies gave these RMBS their highest ratings of “AAA.” Now, investors – not the lending banks – bore the risk of default.

    Next, banks began bundling these RMBS together in a second kind of pool known as collateralized debt obligations (CDO). The banks and rating agencies used complex computer models to determine what portion of a CDO could be labeled AAA. The rating agencies then gave AAA ratings to large portions of CDOs, even though the mortgage loans backing the CDOs were subprime. Subprime-backed CDOs were popular, because they had high credit ratings and paid high returns.

    Finally, as the number of CDOs grew, it became harder to find enough new subprime loans to back new CDOs. The credit default swap (CDS) was a tool to enable banks and investors to bet on subprime RMBS and CDOs, without actually owning anything. Instead, CDSs were side bets on whether home borrowers would default. CDSs are one of a type of financial instrument known as derivatives, because their value is “derived” from the value of the underlying asset (in this case, home mortgage loans). Financial institutions used CDSs to place trillions of dollars of bets. <<

    After watching this movie you will ask yourself why these people are not in jail, or even worse – hung. But they also explain that most all these people are intertwined with the political elite that cross party lines and still to this day are involved and influence current policy. It’s crazy, they’ve done more damage to our country than Al Qaeda! If there is a Hell, these guys will all be there someday.

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