All the devils are here notes - All the devils are here...

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All the devils are here notes Chapter 1: The Three Amigos Roots of the crisis began 30+ years ago when MBS’s were created by three men Fink developed Tranching, a process where a bundle of mortgages could be carved into pieces based on their level of risk Fannie Mae and Freddie Mac were actually the first ones to issue securitized mortgages David Maxwell was brought in to turn around Fannie Mae, and he was successful Investors loved MBS from Fannie because they were assumed to be insured by the government Lew Ranieri wanted the roles of the GSE to be radically reduced A bill (SMMEA) was passed that made Wall Street’s attempts to sell MSE’s much easier REMIC was passed, it allowed the tranches of MBS’s to avoid double taxation Fannie Mae went from losing a million a month to earning a billion a year The private sector began to look for something else that they could get involved in, something where Fannie/Freddie wouldn’t have an advantage Chapter 2: “Ground Zero, Baby” Mortgage Originators found they could start to sell mortgages to poor people, that were subprime Wall Street could securitize this mortgages without Fannie/Freddie, who didn’t get involved in risky subprime loans Countrywide Financial was the leading non-bank mortgage originator, lending up to $40 billion a year at one point They founded the tactic of using third party brokers to find mortgages for them, and although the quality of the mortgages they found were dubious, it became common practice At the same time, Roland Arnall was running Long Beach Mortgages He was not nearly as high profile as Mozilo was, but he was making more money, and had a net worth of $3 billion
The early 1980’s saw laws passed to deregulate mortgages, allowing more “creative” mortgages to be made, and removing the distinction between a loan for a house, and a loan backed by a house The subprime lenders believed that even if/when the homeowner defaulted, they could take their house and resell it in the forever rising housing market Wall Street was able to convince investors that they should buy these subprime MBS’s even though the GSE’s wouldn’t touch them They did this through “credit enchancement”, techniques that made a tranch look better than it was and obtain an investment-grade rating, such as AA or AAA This practice started when it was used by government owned Resolution Trust

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