
Banks are getting back into the business of building mortgage bonds - megacorp
https://www.wsj.com/articles/banks-warm-to-mortgage-bonds-that-burned-them-in-2008-11568626202?mod=rsswn
======
tialaramex
These bonds are fine if they're rated properly. On the other hand, if your
rating system is not functioning properly (as was true in 2008) then any
product that needs rating is suspect, only investments whose provenance you
can directly investigate yourself are safe in that case.

Maybe we can blind the rating system? If Standard & Poor can't tell whether
this instrument they're rating was created by HSBC or me in my basement, they
may take a few seconds more to consider whether the scent of shit is because
it is in fact just shit in a thin paper shell.

And if you blind them but they still don't give true ratings you can trivially
exploit that to fill the market with highly rated shit, destroying the market
but leaving the real economy largely untouched. Rinse and repeat until all the
dumb money is sucked into your pocket.

~~~
jandrewrogers
The rating system has been materially modified since 2008 to reduce the risk.
In 2008, the designated rating companies (NRSROs) had explicit _legal
immunity_ for the correctness of their ratings, which incentivized them to
sell their ability to produce ratings that optimize for goals other than
correct representation of risk. And they did.

The Dodd-Frank bill passed in 2010 removed this immunity, making them liable
for bad faith ratings that did not represent the real risk. As some people may
recall, this created a temporary problem in the market as many debt
instruments were suddenly re-rated to eliminate this legal liability. This is
also related to the downgrade of US Treasury debt from AAA status in 2011.

~~~
tialaramex
I'm doubtful that a liability for "bad faith ratings" is enough to get the job
done.

Remember Arthur Anderson. They're gone, but the US Supreme Court concluded
that they weren't guilty! They make O J Simpson look like the picture of
innocence, and yet somehow the Supreme Court felt the need to grant certiorari
and then decide actually people who do crimes aren't necessarily guilty of
those crimes if they're rich old white men...

~~~
La-ang
[http://www.business-superstar.com/words-of-wisdom/the-
truth-...](http://www.business-superstar.com/words-of-wisdom/the-truth-about-
the-death-of-arthur-andersen/)

~~~
tialaramex
Hilarious, one of the foxes (a partner at Arthur Anderson) writes an article
explaining that those chickens actually wanted to be eaten really and anyway
how can it be his fault when any responsible farmer would use stronger locks
to keep him out. I particularly enjoyed:

> They were indicted for shredding documents. These documents were drafts and
> other items that do not support the final product. All accounting firms
> establish policies for routinely shredding such documents.

See - all routine. Sure, your routine might not include being "reminded" to
arrange for piles of documents to be urgently shredded once you hear
investigators are coming but that's why you might some day be found guilty of
crimes, whereas Arthur Anderson were "not guilty" after all the evidence was
destroyed and their chums in the US Supreme Court reached in and overturned
verdicts against them for destroying the evidence.

Now, one of the nice things in overseeing the Web PKI is that I don't care
whether the auditors are incompetent or crooked, it's the same either way to
me. I don't expect even their own bosses to do as much as slap them on the
wrist for enabling fraud. If I'm relying on audit then I know I might as well
toss a coin, I'm always going to be digging deeper than that to understand
what was actually going on regardless of whether the auditors "forgot" or
deliberately chose not to look.

------
lefstathiou
Have any two financial crises happened for the same reasons ?

I’m in my early 30s and can recall the following in the US. All for different
reasons which would lead me to believe that government regulation post crisis
can be effective at avoiding the same crisis from repeating (while arguably
could cause a new one):

\- mortgage crisis 07 \- dot com 00 \- savings and loans late 80s \- oil
crisis late 70s

~~~
Torwald
> Have any two financial crises happened for the same reasons ?

Yes, all of them for the same reason: FIAT currency instead of real money.

~~~
Gpetrium
Fiat currency is one of the reasons society has had a lot more stability in
the value of money in comparison to any other time in the past. Currencies
tied to commodities such as gold, silver, etc have always been more volatile
due to supply oscillation, business cycles and periodic bursts of 'pocket'
recessions.

~~~
simula67
The problem with fiat currencies is that there is just a little too much
temptation to print a truckload when there are "emergencies". This often
causes hyperinflation or massive inequality leading to the rise of populism
and democratic backsliding.

~~~
Gpetrium
Printing a truckload of currency is often a byproduct of populism. Even
without fiat currencies, governments would simply use other methods to debase
the value of their coins [1]

[1]
[https://en.wikipedia.org/wiki/Methods_of_coin_debasement](https://en.wikipedia.org/wiki/Methods_of_coin_debasement)

------
appleflaxen
And why wouldn't they? they lost some money but mostly got bailed out at the
taxpayer's expense, and nobody went to jail.

If we haven't made the disincentives stronger (we haven't) and if they were
inadequate the first time (they were), why are we expecting bankers to make
different choices?

This is the expected outcome.

~~~
windexh8er
> And why wouldn't they? they lost some money but mostly got bailed out at the
> taxpayer's expense, and nobody went to jail.

Let's just clarify - American citizens lost $12.8Bn. [0] That money didn't
evaporate, it got funneled back into many of the banks and auto manufacturers
as a hand out. Some banks that took risk had little to no downside and we know
that there were a continuation of bonus payouts to executives by banks that
took bailout trailing the debacle. The US had a chance to wipe out some of the
hogs of the market but instead chose to feed them.

[0] [https://finance.yahoo.com/blogs/daily-
ticker/2008-financial-...](https://finance.yahoo.com/blogs/daily-
ticker/2008-financial-crisis-cost-americans-12-8-trillion-145432501.html)

~~~
mruts
While in principle I don’t ever believe in bailouts of any kind, not bailing
out the banks would have led to an apocalyptic situation probably worse than
the Great Depression. Sometimes those in power have a responsibility to the
people instead of some idealistic morality.

~~~
mywittyname
We could have bailed the companies out while tossing the executives who
facilitated this crisis into the gulags.

~~~
mschuster91
Not that I dislike the idea of putting bankers into gulags, but I believe
taking away all their wealth and seizing eveything they earn above poverty
level for life would be more of an effective punishment.

Also, the shareholders of such banks should be held accountable - the banks in
question should be dissolved and the assets distributed to the public/the
state. If shareholders do not have to fear total loss as a consequence of
managerial misconduct they will not have any incentive to put actual
controllers instead of yes-men to the boards.

------
KaiserPro
There is nothing inherently wrong with mortgage bonds.

The principle is simple and fine, chop up a bunch of mortgages from all over,
with the same risk profile and pool them together.

That way local environmental factors don't cause the whole investment to go
south. Basically raid for investment

What is a problem, and one that still hasn't fully been tackled is the
industrial scale fraud that sold delinquent, or knowingly under par mortgages
as high quality instruments.

Through all the use of fancy words, every seems to have got the impression
that commoditized mortgages investments are complex, using words like
"tranche", "proprietary instruments" and blended risk.

its really not, get a bunch of mortgages, shove them in a blender and make
mortgage sausage.

So long as there isn't widespread and systematic fraud, then everything will
be fine.

However considering that there haven't been large scale arrests, I don't hold
out much hope.

~~~
michaelt
_> There is nothing inherently wrong with mortgage bonds._

If Bank X is sloppy about qualifying customers for mortgages but keeps the
mortgages on their own books, the sloppy behaviour will bite them in the ass.
Thus, they are incentivised to be careful with no external oversight needed.

The moment it's possible to sell the mortgages on, that incentive is removed.

~~~
fbonetti
> The moment it's possible to sell the mortgages on, that incentive is
> removed.

It's not. Investors in the secondary market don't want to buy shitty subprime
loans. The only reason lenders originate these awful loans is because the
government incentivizes them to do so by guaranteeing to buy them via Fannie
and Freddie. Fannie and Freddie buy half of all US mortgages, and in doing so
dramatically distort interest rates and the amount of liquidity in the housing
market. They also guarantee these loans, something a lender would never do,
which is why mortgage-backed securities were considered "safe" leading up to
the crash in 2008.

If Fannie and Freddie didn't exist, subprime loans would either not exist or
would have dramatically higher interest rates in order to properly protect
against the risk of default.

~~~
adeelk93
Fannie and Freddie do not buy subprime loans, subprime stays in the private
market. If Fannie and Freddie didn't exist, prime rates would be closer to
subprime rates since it's effectively those prime rates that are being
subsidized.

~~~
fbonetti
> Fannie and Freddie do not buy subprime loans, subprime stays in the private
> market.

I'm not sure where you got that idea. Fannie and Freddie exist for the
explicit purpose of making mortgages more accessible to people who would
otherwise be considered too risky to lend to (low down payments, low income,
no assets, etc.). They do this by purchasing mortgages that are underwritten
to lower standards and at lower interest rates than would be acceptable to
private lenders, effectively shifting the risk from private lenders to the
taxpayers.

Fannie and Freddie bought a tremendous amount of subprime loans. From page 454
of the Financial Crisis Inquiry Commission report[1]:

> "...on June 30, 2008, immediately prior to the onset of the financial
> crisis, [Fannie and Freddie] held or had guaranteed 12 million subprime and
> Alt-A loans. This was 37 percent of their total mortgage exposure of 32
> million loans, which in turn was approximately 58 percent of the 55 million
> mortgages outstanding in the U.S. on that date. Fannie and Freddie,
> accordingly, were by far the dominant players in the U.S. mortgage market
> before the financial crisis and their underwriting standards largely set the
> standards for the rest of the mortgage financing industry."

[1] [https://fcic-static.law.stanford.edu/cdn_media/fcic-
reports/...](https://fcic-static.law.stanford.edu/cdn_media/fcic-
reports/fcic_final_report_wallison_dissent.pdf#page=14)

~~~
adeelk93
What I meant to say is, Fannie and Freddie no longer purchase subprime
mortgages (not since the crisis). You’re citing numbers from 11 years ago, and
the structure of the market has changed considerably since then. Subprime
specifically refers to low credit scores (below 620), which is purely in the
private market now since Fannie and Freddie no longer buy those.

Whether or not you agree with the risk assessment of lending to low income
borrowers, it is strictly not the same thing as subprime lending.

------
SamuelAdams
> Banks today are buying both mortgages that are eligible to be sold to Fannie
> and Freddie as well as ones that aren’t because they are too large or they
> are considered riskier—often because they use alternative documentation to
> approve the borrower.

I'm really curious what this "alternative documentation" is. This was part of
the problem leading up to 2008: banks did not verify people's information.
Some people received mortgages after putting their pet's name on the
paperwork.

We might not be there yet, but it's a slippery slope.

~~~
adeelk93
Alternative documentation tends to be for borrowers that don't have good
verification of income (like tax returns or paystubs). Often self-employed
borrowers, or borrowers with large amounts of assets but little income.

------
afpx
Of course they would. Lots of people made loads of money the last time, and no
one went to prison. Seems like an obvious thing to try if you're a smart and
low-empathy person.

------
ak39
Chasing yields wherever they can find any. I read this in a tweet recently:

"Buying stocks for yield, bonds for capital gains".

------
Jonnax
So what's the difference this time around?

I can't imagine they're going "remember that investment product that crashed?
Please buy it again. "

~~~
dagw
They're probably going "remember that investment product that made you a fuck-
ton of money right up until the crash? Please buy version 2.0"

~~~
chii
and get in early, and cash out while the goings' good, and let the late
suckers fall.

Even pyramid schemes are profitable at the beginning!

------
helpPeople
Would banks be responsible if the Fed wasn't a lender of last resort?

I wonder if thousands of years from now people will look back on our economics
like we did to the Romans- "how could they not understand inflation?"

------
sambull
These banks have been at it awhile. They've spun off 'rating' companies to
check these mortgage packages, private not their internal departments. They've
used those companies to run their custom models against fannie mae packages
(gs against fannie mae i'm 100% of was witness to), with out that other
knowing, and other banks. Whatever is going on, they've been prepping to make
sure it happens with high velocity.

------
onetimemanytime
This time is different.

------
magna7
Banks gotta make money somehow in a low interest world.

------
neffy
For the people who thing that there is nothing inherently wrong about MBS.
Unfortunately, that´s not the case.

When banks sell off their loans, which is what an MBS is, it fundamentally
changes the ratio of money:debt originating from the banking system. In a non-
MBS banking system, there is roughly the same amount of deposit money flowing
around as there are loans. In an MBS using banking system, there are
significantly more loans being created - unlike the initial creation of a loan
by a bank, the sale of the MBS does not create any additional money.

So the underlying economy may or may not need the extra debt, but creating it
this way is anything but side effect free. Granted neither is creating normal
bank debt given the money supply side effects.

The evidence of history suggests that an economy can get away with small
amounts of this, but at some point there is too big an imbalance of debt to
money, and this causes solvency issues in paying back the debt. And that´s
when everything all goes terribly wrong.

But it´s a $1 trillion a year industry in the USA, so perish the thought that
minor issues like systemic stability should be allowed to interfere with that.
On the plus side, China introduced them a few years ago as well, so it will be
very interesting to see what happens there as things play out.

For a deeply depressing paper, considering when(2000) and where (US Federal
Reserve) it was written, see:

[https://www.sciencedirect.com/science/article/pii/S037842669...](https://www.sciencedirect.com/science/article/pii/S0378426699000527)

~~~
rb808
> In a non-MBS banking system, there is roughly the same amount of deposit
> money flowing around as there are loans.

Because when you take out a mortgage it gets deposited immediately in someone
elses account. The mechanics are effectively the same as for non-intermediated
(MBS) debt.

~~~
neffy
The double entry book keeping operation when a bank issues a new loan, is
[debit loan, credit deposit account] creating deposit money.

When a loan is securitzed (sold) by the bank, the DBE operations are:

[credit loan, debit deposit account of purchaser]

and the purchaser now owns loan. At this point strictly money has been removed
from the banking system, but in practice the bank then recreates that money
with a new loan (as above) because they are now within their regulatory
lending requirements, and can issue a new loan. They can continue this
indefinitely until the market for securitized loans dries up, which is
effectively what happened in 2008.

