In Twiddle Dumb and Twiddle Dumber - Part One I talked about reading Michael Lewis's book The Big Short and some of my opinions about the Stock Market and Big Corporations.
In Twiddle Dumb and Twiddle Dumber - Part Two I start looking at what went on in the Bond Market. I do not claim an expert knowledge and I am really looking for your feedback and understanding too. This post picks up where #2 left off and they really should be read together.
- So where were the Rating Agencies that gave all these slices of the Bonds the good ratings. Well if the news is accurate they were reading porn (or at least looking at the pictures). But they really did not know or understand the issues and just trusted what they were told by the Wall Streeters putting the bonds together.
These guys may be the Twiddle Dumbest!
- So how did they sell all those bottom tiers - the worst pieces of the pie that had a good chance of failing?
HOLD ON! Because if this was not such a tragedy you would laugh your ass off!
They took all the bottom Tiers - The Crappiest of the Crap and repackaged them as new bonds - Cut them into new Tiers - Sold all the top Tiers as top rated bonds!
Why were the top tiers of the Crappiest of the Crap rated so well? - Because they were on the top of course! And the Rating Agencies gave it their blessing!
But what about those new Bottom Tiers - The Crappiest of The Crappiest of the Crap? You got it! We wrap them into a new bond and start over again!!! And on and on the cycle goes!
- Now how does this keep going? Well Wall Street is making tons of money and they need more loans to package - So the lending market has plenty of room to sell more crap.
- Not only that many of the early bonds are being paid off and making good money for people! Why? Because the early crappy loans are refinancing into even crappier stuff! In the mean time every one from the lenders, to wall street, to the borrowers are living the good life. The borrows get cash when the refi or they get a nice home they could not otherwise afford - EVERYONE WAS IN ON IT AT ONE LEVEL OR ANOTHER!
- So this crap is feeding the high prices in the housing market that is keeping the loan market alive. It is one big Ponzi Scheme; but it can only go on so long.
Eventually the housing market flattens out and starts down. But the loan failure is still 2 or 3 years out on many of these things. Like a run away train on down slope it starts slow but picks up speed fast until it hits bottom.
Next time I am going to explain how Some Wall Streeters sill managed to make money on this - and talk about if it was even legal!