Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
The Free Market, Financial Style. How the Scam Works
#1
[B]The Free Market, Financial Style [/B]

[B]How the Scam Works [/B]

By MICHAEL HUDSON
Newspaper reports seem surprised at how high banks are bidding for the junk mortgages that Treasury Secretary Geithner is now bidding for, having mobilized the FDIC and Fed to transfer yet more public funds to the banks. Bank stocks are soaring – thereby bidding up the Dow Jones Industrial Average, as if the “financial industry” really were part of the industrial economy.
Why are the very worst offenders – Bank of America (now owner of the Countrywide crooks) and Citibank the largest buyers? As the worst abusers and packagers of CDOs, shouldn’t they be in the best position to see how worthless their junk mortgages are?

That turns out to be the key! Obviously, the government has failed to protect itself – deliberately, intentionally failed to do so – in order to let the banks pull off the following scam.

Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on Alt-A “liars’ loan” mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.
The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other’s junk CDOs.) The government – that is, the hapless FDIC – puts up 85 per cent of $5 million to buy this – namely, $4,250,000. The bank only needs to put up 15 per cent – namely, $750,000.
Here’s the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.
The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books.
The free market at work, financial style.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached at mh@michael-hudson.com
"The philosophers have only interpreted the world, in various ways. The point, however, is to change it." Karl Marx

"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.

“I think it would be a good idea” Ghandi, when asked about Western Civilisation.
Reply


Possibly Related Threads…
Thread Author Replies Views Last Post
  Conjuring Financial Destruction Through Utter Elite Selfishness & Greed David Guyatt 0 5,219 11-09-2018, 02:01 PM
Last Post: David Guyatt
  Sarkozy Calls for Tax on Financial Transactions to Fund Global Development Ed Jewett 2 2,250 01-08-2012, 01:08 PM
Last Post: Magda Hassan
  Gordon Brown: financial crisis would be over in 6 months Jan Klimkowski 0 1,521 04-09-2011, 08:48 PM
Last Post: Jan Klimkowski
  Full-Blown Civil War Erupts On Wall Street: As Reality Finally Hits The Financial Elite, They Start Magda Hassan 1 1,735 04-09-2011, 06:02 AM
Last Post: Peter Lemkin
  In The Meantime, The German Stock Market Plummets Magda Hassan 0 1,810 25-08-2011, 03:43 PM
Last Post: Magda Hassan
  Market crash 'could hit within weeks', warn bankers Magda Hassan 0 1,448 25-08-2011, 03:33 PM
Last Post: Magda Hassan
  Analysis of Financial Terrorism in America( David DeGraw) Ed Jewett 0 1,825 11-08-2011, 03:53 AM
Last Post: Ed Jewett
  The Financial Oligarchy Reigns ... Ed Jewett 0 1,612 10-05-2010, 11:37 PM
Last Post: Ed Jewett
  "And Chicks for Free?" Ed Jewett 0 2,194 10-05-2010, 10:56 PM
Last Post: Ed Jewett
  Market Emergency [5/6/2010] Ed Jewett 0 1,613 06-05-2010, 11:06 PM
Last Post: Ed Jewett

Forum Jump:


Users browsing this thread: 1 Guest(s)