Sub Prime Rib – Straight From Adam

The nightly propaganda shows have covered the subprime mortgage crisis in some detail, yet none have come as close to a solid explanation as this interview in n+1 magazine.

“It’s kind of an interesting interaction in the sense that a lot of this mortgage project was almost created by the bid for the CDO (collateralized debt obligation) paper rather than the reverse. I mean, the traditional way to think about financing is “OK, I find an investment opportunity, that on its face, I think, is a good opportunity. I want to deploy capital on that opportunity. Now I go look for funding. So I think that making mortgage loans is a good investment, so I will make mortgage loans. Then I will seek to fund those, to fund that activity, by perhaps issuing CDO paper, issuing the triple-A, double-A, A, and down the chain.” But what happened is, you had the creation of so many vehicles designed to buy that paper, the triple-A, the double-A, all the CDO paper… that the dynamic flipped around. It was almost as if the demand for that paper created the mortgages.”

“…and the mortgage originator is the one who realizes that they lent half a million dollars on a house in Stockton, California, to… someone who makes 50,000 dollars a year. That’s where the specific knowledge about the risk resides, but the ultimate risk-taker is very very far away from that.”

“So what happened is this machine—let’s call it, it’s a big machine that wanted to gobble up, you know, rated paper—needed to be fed. So there were people who could make a lot of money feeding the machine, and they were like, you know, “We need to keep originating mortgages, and feeding them to the machine,” and if you have a robot bid, you tend to get a bubble. Someone is hungry for paper, paper will be created. ”

{n+1 – Interview With a Hedge Fund Manager}

{photo – cleveland visitors bureau}

{another stellar find from the New Shelton wet/dry}

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