Jon Schwarz: I Was Wrong: Big Banks Actually Were Exactly Like Counterfeiters

[marmar]

by Jon Schwarz


(The Intercept) In a recent post about the new movie The Big Short, I argued that it’s not actually necessary to decipher the abstruse jargon of the 2008 financial crisis — i.e., credit default swaps, mezzanine tranches, synthetic collateralized debt obligations, etc. — in order to understand what happened. What the big banks did during the housing bubble of the mid-2000s was in essence straightforward counterfeiting. The difference between what they did and regular counterfeiting was simply the kind of fake paper; regular counterfeiters print fake, valueless cash, while the banks were printing fake, valueless bonds.

However, I then made a very serious mistake — I claimed there was a “small difference” between regular counterfeiters and the ones on Wall Street:

Regular counterfeiters generally want to spend all their bad paper themselves, whereas Wall Street just took a percentage for running the presses. Then they often, though not always, passed their bad paper along to others.

If in 2005 a bank packaged worthless mortgages together into a bond with a face value of, say, $100 million, it would generally collect fees of about 1.5 percent, or $1.5 million. The $100 million face value wasn’t real, but the fees definitely were.

What I didn’t understand, and commenter Larry Headlund pointed out, is that counterfeiting cash actually does work the same way. That is, counterfeiters would not print up $100 million in cash and then spend it all themselves. Instead, they sell their fake cash to others for a percentage of the face value. ..................(more)

https://theintercept.com/2016/01/02/i-was-wrong-big-banks-actually-were-exactly-like-counterfeiters/

[hobbit709]

1. They not only sold paper they knew was worthless, then demanded payment in full

on the paper.

For that alone they should have been shortened.

[longship]

2. However, the CDSs and synthetic CDOs were the raw material.

What's important is how they did it, not just that they did it. Therein lies any chance for regulation.

As Steve Eisman is quoted in The Big Short,

"They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," said Eisman. "They were creating them out of whole cloth. One hundred times over! That's why the losses in the financial system are so much greater than just the subprime loans. That's when I realized they needed us to keep the machine running. I was like, This is allowed?"

R&K