Danny Schechter - ColdType

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a little piece of the layer of a security, underneath which somewhere
there was a bunch of homebuyers, and they would take
it and they would borrow 30 times the amount of money that
it represented.”
Wait a minute. They seemed to be creating money out of
the air even as homeowners started defaulting on their loans. I
asked her about the deception in many of these transactions
Didn’t they misrepresent the value of what they were selling –
you know it was rated Triple A (AAA) and they sold it overseas as
if it had assets behind.
She looked at me as if I was totally naïve and then patiently
explained: “The thing is that you take a bunch of assets that
are mediocre and you say you assume that 10% of those mediocre
assets will default, will disappear. That means you can
say to an investor 90% of them are going to do completely fine.
And so those 90% – but you don’t know which 90% they are
– but again this is all generalities in the pitch to the investor
and stamped with a AAA marked by the rating agency who’s
involved as well – and it’s a perfectly valid thing to understand.
You don’t assume 100% of these loans are going to default. So
as long as you don’t assume that as an investor you believe the
reasoning that 90% of them will do okay and for some reason
you believed your 90% will do okay and they are effectively
perfect and AAA …”
But that was an illusion, wasn’t it from many of the banks that
bought these securities?
“It became a complete illusion because what wasn’t taken
into account was first of all defaults became higher than they
were because the people who were being lent to weren’t the
only people involved in the whole pyramid of debt. Things
were packaged and repackaged – there were CDOs [Collateralized
Debt Obligations] on Wall Street that referred to themselves
four layers down, 20 pages down in their documentation.
They’re completely circular so if anything goes wrong at any