Thursday, August 27, 2009

This is what happens when regulatory reform is not immediately passed

Submitted by Robert Oak on Mon, 08/24/2009 - 11:29

This is what happens when regulatory reform on credit ratings, collateralized debt obligations, derivatives and innovative financial products is put on hold.

Wall Street thinks it's all fine and dandy to do the same damn thing all over again.

Big h/t to MTGM.

Wall Street repackages toxic debt:

In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

These are holdovers from the housing bubble, when home prices soared, banks bought risky mortgages, bundled them with solid mortgages and sold them all as top-rated bonds. With investors eager to buy these bonds, lenders came up with increasingly risky mortgages, sometimes for people who could not afford them. It didn't matter because, in the end, the bonds would all get AAA ratings.

When the housing market tanked, figuring out how much those bonds were worth became nearly impossible. The banks and insurance companies that owned them knew there were still some good mortgages, so they didn't want to sell everything at fire-sale prices. But buyers knew there were many worthless loans, too, so they didn't want to pay full price for the remnants of a real estate bubble.

In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

What was that definition of insanity? Doing the same thing and expecting different results?

Financial gurus call it a "resecuritization of real estate mortgage investment conduits." On Wall Street, it goes by the acronym Re-Remic (it rhymes with epidemic)

I need to know more but this sounds identical to the creation of CDOs with ABS (asset backed securities).

Lest we not see these new toxic time bombs real target:

That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments.

Tim over at MTGM mentions this will blow up if housing prices continue to decline...

So, let's point to this one for starters, NAR Q2 Home Sales & Prices, where Calculated Risk is predicting further decline in home evaluations.

I don't think we have even gotten to the CRE (Commercial Real Estate) yet...which is just starting it's downward spiral.


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