- Banks packaged subprime mortgages into bonds and sold them to people.
- The bonds were bad and the people lost money.
What’s the something? There are two main theories. Theory 1 says that everyone knew at some lizard-brain level that it was a bad idea to give lots of money to poor unemployed people with low credit scores to buy overpriced houses, but figured it would work out fine if house prices kept going up. This worked until it didn’t; when house prices went down, badness ensued.
Theory 2 says that, while mortgage originators and securitizers knew that they were giving mortgages to people who had no chance of paying them back, the buyers of those mortgages had no idea: they thought that the originators were holding them to rigorous underwriting standards, where “rigorous” is read to mean “other than requiring a job, or an income, or assets, or a credit score.” When that turned out to be false, badness ensued.
Theory 1 has the benefit of probably being right.1 Theory 2 is superior on every other metric. For one thing, it fits well with deep cultural desires to find villains for the subprime crisis, and punish them. For another, it better fits the explicit facts. No subprime offering document actually said “these guys are all just terrible reprobates and the only way you’ll get your money back is if they can find a greater fool to buy their overpriced house when their rate resets.” But there’s no shortage of internal emails that say – well:
In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007-1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT”2 and a “shit breather.”
Thanks Eric Schneiderman! Read more »