For those of you who enjoyed The Big Short, both the film and the book by Michael Lewis, the story behind it is both elucidating and entertaining. The film was entertaining but the book was descriptive of the period on Wall Street that directly contributed to the collapse of the economy in 2008-9.

The basic premise of the book was that a few investors and individuals became aware of the fact that the entire housing market and the financing behind the bubble that caused its collapse was due to the creation of a cute little financial instrument called a CDO, or Collateralized Debt Obligation. Originally, it was a CMO, or Collateralized Mortgage Obligation. It was the brain- child of a Wall Street trader named Lou Ranieri who originally worked for Salomon Brothers. The concept was simple if the small print wasn’t. Mortgages were used as the fodder, or, rather, the main asset which stuffed CDO’s and were then traded as securities. They also included airplane leases and other flotsam and jetsam but it was the mortgages that made them infamous.

Lew Ranieri

Meet the father of mortgage-backed bonds. In the late 1970s, the college dropout and Salomon trader coined the term securitization to name a tidy bit of financial alchemy in which home loans were packaged together by Wall Street firms and sold to institutional investors. In 1984 Ranieri boasted that his mortgage-trading desk “made more money than all the rest of Wall Street combined.” The good times rolled: as homeownership exploded in the early ’00s, the mortgage-bond business inflated Wall Street’s bottom line. So the firms placed even bigger bets on these securities. But when subprime borrowers started missing payments, the mortgage market stalled and bond prices collapsed. Investment banks, overexposed to the toxic assets, closed their doors. Investors lost fortunes.

http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877342,00.html

Beginning some time after the Long-Term Capital Management implosion, the default of the Russian Ruble in 1998 and the Dot-Com bust in 2000, CDO’s became THE game on Wall Street and were pushed by the banks. Bond Traders saw an opportunity and banks enjoyed the great margins and appetite for mind blowing income. Once the banks, mortgage brokers and real estate agents realized what was coming everyone jumped on the bandwagon.

Borrowers and small investors had no idea what was behind the seemingly endless amounts of cash that was being funnelled into the real estate marketplace. Thus, was born the Liar Loan. Essentially, computer programs created an interface between mortgage brokers and bank reps who colluded with each other to input just the right information so that the bank website would spit out an approved loan document. The banks only cared about volume. How many mortgage loans could be obtained in the shortest amount of time so that the thousands of loans could be stuffed into CDO’s which the banks could then sell off as securities. They’d bought the rating agencies so that the Triple-A rating would guarantee pension funds and investors would be interested in buying these securities.

Mortgage brokers like WCS Lending used brokers to push through loans using dubious information from employees like Neil Stein who would brow-beat borrowers into submitting fictional information that WCS submitted for loan approvals; Countrywide Financial used “The Hustle” to manipulate information that got loan approvals; and Deutsche Bank negotiated the purchase of MortgageIt, a fraudulent, fly-by-night mortgage bank that never saw a borrower it didn’t like, dead or alive.

JPMorgan Chase joined the game, Wells Fargo never saw a fraud it didn’t like, Bear Stearns and Lehman Brothers collapsed and were absorbed, Goldman Sachs got a pat on the back from Treasury Secretary Paulson who had been a Goldman CEO as well as a Christian Scientist, and Merrill Lynch and Morgan Stanley took part in the festivities. But, Deutsche Bank was a stand-out, not only in its penchant for fraud but for its sheer stupidity in the investment realm.

When the shit hit the fan beginning in 2006 and 2007, after the real estate market started to resemble a bubble, home values collapsed and mortgages defaulted, everyone scurried to save themselves. Of course, the banks had TARP, the troubled asset relief program, the bond traders that had been making a few million a year left town, along with the mortgage brokers, and the bankers just told the Board of Directors to write them another check. Jamies Dimon got a $16 million dollar bonus in 2009 for “steering the bank” through the turmoil that Chase had helped create and then received $25 Billion just ‘cause, well, they helped out didn’t they?

Despite the rampant fraud, no banker went to jail.

— D. Clark MacPherson