I thought this was quite interesting, albeit exaggerated and overly polemic. It’s an example of what can happen when securities buyers threaten to rebel against a high level of background fraud (which is otherwise just priced into average values). And here is Jim Surowiecki’s column on the subprime crisis, which I liked very much.
Elsewhere on Mark Thoma’s site, I learn that Jim Glassman has a new job.
Addendum: Here is Felix Salmon on the topic.
Jim Surowecki’s column is very nice. Thanks for bringing the New Yorker back to mind as a source of financial wisdom.
As UBS and Citgroup have demonstrated, the people with ample capital available to rescue the Western banking system from its follies are the sovreign wealth funds and the governments behind them behind them. I for one had not seen that, as holders of a lot of mortgage-backed securities, they have even more legal as well as economic leverage to enable them to buy at rock-bottom prices
Exaggerated and overly polemic is right. Fraud would have to be proven with
particularity in every single mortgage involved. Class actions would not be
available and it would have to be proven that in every instance any misrepresentation
was first, material, and second, relied on (i.e., but for the alleged
misrepresentation, the borrower would never have entered into the arrangement).
Its a very high burden of proof, and one can rest assured that lawyers
representing the lending institution inserted lots of disclaimers etc. to insulate
the banks from this very scenario). The sky is not falling.
The trouble with sub-prime mortgages is that they all fail together, so there’s no benefit of diversification. You’re basically buying the risk of a single mortgage where you might think you’re averaging out the returns on lots of them.
That’s not exactly a hidden fact about them. It’s more a priori.
Felix Salmon’s highly critical take on this:
I agree that Oleander’s column is polemic and inaccurate in many ways. However, I would not
be too dismissive of the assertion of fraud. If those who bundled the loans (e.g. banks)
knew or should have known that the originators were acting fraudulently, then the bundlers could be liable at least for the monetary harm done to bond holders. While not a criminal charge, it
could be very expensive.
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