The Engine of Doom (or: How to Fleece a Generation)

by Alex Stenback on November 12, 2008

If you thought that Mezzanine CDO's and other "structured finance" vehicles behind the Wall Street/mortgage mess involved some sort of sophisticated financial geometry conceived in the minds of rare genius incubated in places like MIT, and beyond the grasp of those with state university credentials, forget about it.

It was all just a con game, and not even a very sophisticated one at that.

From Michael Lewis' most recent, most excellent piece on the subprime mortgage securitization debacle:

“This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities.

Got that? Send a stack of mortgage bonds to a rating agency, and no matter how crappy and likely to fail they were, they'd be graded on a curve, the best of the worst would become AAA.

All of this. ALL OF IT, of course was built upon individual borrowers naive enough to fill out a loan application and sign the papers for a sub-prime loan that they had no hope of understanding or affording, the sketchball lenders who pushed this trash upon their customers, and the investors that bought what Wall Street was selling without the first clue of what they were buying.

And those of us who did not participate?  Those that bought a home they could afford, or never trucked in sub-prime garbage? 

We are the suckers at the table in a game we never knew we were playing. A game that was rigged from the beginning to do nothing other than suction money directly to Wall Street at the highest posible rate of flow, at all costs.

And now, they step aside, and we pick up the mess.  Welcome to the bailout folks.

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