Along the winding way, due diligence was ‘all too hard and costly’ so mortgages, whole or in pieces, as it were, simply passed on with no devaluation of asset quality — and in many cases, no proper paper trail.

It appear 3/4 of ALL residential mortgages were securitized — i.e., sold off by the banks into MBS, ending up in CDOs, CDO^2,and CDO^3 et bloody cetera.

One would assume, based on foreclosure cases thrown out in five states — as I recall, Deutsche Bank in the Ohio case was first. The judge simple concluded they could show no actual holding of the 14 mortgages in question. Conclusion: many of the foreclosures that have already happened were illegal on the part of specific banks. They may have maintained a service for the securities but they themselves no long own said mortgages.

And with all the slicing’n’dicing, some of those mortgages were a reverse Frankenstein — they’re in pieces in various instruments.

Also, all this didn’t start this decade. There would have been pretty secure mortgages from the 90s and perhaps even the 80s; yet, it only takes one personal disaster, loss of job or major medical problem to come unstuck.

If Bill Gross can accurately value the Lehman CDS’ why is Lehman still in bankruptcy? What went wrong?

What is a glass of lemonade worth? Maybe 50cents?
Drink a glass and then ask what the value of the next one might be?

Value is always in the gray area between buyer and seller.

What went wrong is Republican ideology. Reagan said the government is the enemy and Norquist said they should make government weak enough to drown and McCain & company said deregulate and now we have some chaos and anarchy — which means that for this era George W Bush is the perfect Republican to be in charge. Too bad for everybody else.

There are 60 trillion dollars in the world, and about the same aggregate notional value in credit-default swaps. Visibly, most default-swaps cannot be paid off. IMHO, they should all be declared null, void, and unenforceable (like illegal sports bets) by the governments of the world.

Okay, consider that idea. What happens then?

A lot of mortgage holders will then know foreclosure doesn’t give them CDS payoffs. Will that force them to offer refinancing or will they just foreclose anyway?

Who gets hurt? Will the big holders go belly-up or will they just write it off and keep going with real money and real assets & such?

This is big math and I doubt you or I have the numbers. I doubt the big banks even let that out in the vaguest terms, so only government might be able to find out. That brings us to Paulson and how the Bush admin. views this ‘disaster’.

Do the Bushies see this as a ‘disaster’ or ‘an opportunity’?

value the underlying mortgage backed securities. If he can’t do that, how can he value the CDS’?

People with good sense might think you should properly(!) evaluate the asset to be “insured”, but what if you were talking about a pig in a poke? What if I said I want to insure something for $1M and you said sure, but it will cost you $1K/year. What difference does it make if the thing to be insured is a pocket watch, a bank or a house worth whatever the fluctuating market says it’s worth. If two people want to make a contract, then what’s logic got to do with it. Question is whether they were just playing games and everybody KNEW the ARMs were going to crash the market and that those who offered CDSs were NEVER going to pay off or they were just going to turn around and insure their CDSs with a ‘bigger fool’.

It turns into a game of musical chair with the biggest fools always banking on being ‘too big to fail’ backing by the government.

That’s where we stand. All the smaller fools are gone or suffering and the bigger fools are standing in the government bread-line.

I have a harder and harder time trying to imagine why the government should pay off any of these jokers who were just playing with imaginary dollars and photocopiers spinning out CDSs as fast as possible. We can’t let a photocopier become a new money printing press, can we?

I couldn’t figure out why they would *not* want to save the house from being foreclosed upon. It didn’t make sense. Now I’m starting to get a picture that there was probably something in it for them NOT to work with me.

Careful with your lingo. As I understand it, there is no ‘underlying asset’ as a CDS is an unregulated contract (somewhat like an insurance policy) attached to NOTHING. It relates to an asset, but isn’t tied to it.

I couldn’t figure out why they would *not* want to save the house from being foreclosed upon. It didn’t make sense. Now I’m starting to get a picture that there was probably something in it for them NOT to work with me.

Right after 9/11 I saw a lot of indications there were some advantages to certain people if certain disastrous things happened. Some of these advantages were political, some economic.

Apparently this idea of gain through disaster, insuring and then destroying, has infested Wall Street as well as Republican ideological thinking. “Creative destruction” should be confined to the prison cell of history.