# Force people who made money from sub-prime mess to pay for it **URL:** \ **Category:** Great Debates\ **Created:** [September 22, 2008, 12:18am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607 "2008-09-22T00:18:09Z")\ **Posts on this page:** 20\ **Page:** 5
**Author:** ![SmartAleq](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/smartaleq/32/163_2.png) [@SmartAleq](https://boards.straightdope.com/u/SmartAleq)\ **Post date:** [September 24, 2008, 12:55am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/81 "2008-09-24T00:55:07Z")
I’ll tell you where your scenario falls down there, **IdahoMauleMan** –the trick is in Section 8 of the Paulson plan which reads, in its 32 word entirety, as follows: > [@](#): > > _Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency._ Huh. Reflect on that for a minute. No oversight, no review, no accountability. So basically, we hand Paulson close to a trillion bucks, he puts it into a large canvas sack with $$$ printed on the side, slips his domino mask down over his face and slopes off to Wall Street, where he opens up that window and says “Yo, I buying yo dogshit bags hyeah!” And the little piggies line up. Here’s where the fun part starts. Phil Gramm, senior executive of UBS (a Swiss bank, but Paulson’s already admitted that he’s totally okay with giving US taxpayer money to foreign banks who were having lotsa fun swapping around toxic CDS bundles but who don’t like getting the dogshit bag just like Americans) comes up to the window and says “Hank, buddy, we go way back–you’re gonna give me 110 cents on the dollar for these _wink wink_ VERY VALUABLE ASSETS, right?” And old Hank does just that! Wow! Lucky Phil! Then up comes Goldman Sachs, and says “Hank! You worked for us for thirty years, you can’t let your old buddies get fucked in the poopchute just because we were stupid and greedy, right? You wanna give us 150 cents on the dollar, right?” And whee, old Hank reaches into that canvas sack and tosses big old handfuls of money at Goldman Sachs! Then a whole bunch of people come running up, wanting to sell all kinds of numb shit, like car loans and mountaintop houses in Florida, and Brooklyn Bridges, and bad money orders from Nigerian diplomats and they say “Hank, if you buy these things from us at the value we say they are we’ll give you a blowjob AND toss your salad, whaddaya say?” And old Hank does just that! He buys buckets of cocaine! He has a money giveaway! He gives a million bucks to anyone who’ll stage a bum fight/geek show for his best friends! It’s a PARTAY! Then old Hank wakes up and decides to just give away shitloads of that cash to various friends of his because he likes them! Whee, it’s Christmas in September with Santa Hank! Hookers and blow! Pretty soon the whole canvas bag is empty–and for some odd reason the American taxpayer wants to know what happened to their money, especially since that giveaway didn’t really do the job (which, by the way, many economists are in no way sanguine that the bailout will do what Paulson swears it will) but they can’t find out because of Section 8. Even if they DID find out, even if gratuitously illegal things were done with that money, even if millions of dollars had been used to charter a jet for a hundred Wall Street CEOs to take a trip to Bangkok for a little pedophilia tourism on the American people’s dime–not one slim thing can be done about it because of Section 8. This is the plan, including good old Section 8, that Paulson is suddenly trying to ramrod through Congress with no delay or amendment. Now why, pray tell, should he be so paranoid about people finding out what he did with the money and be able to prosecute wrongdoing if he’s all on the up & up, just wanting to save our hides from the economic disaster he’s been insisting all along isn’t real? Hmmm. Anybody? Bueller? ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 24, 2008, 1:14am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/82 "2008-09-24T01:14:38Z")
**SmartAleq** makes it sound too easy. In fact that one million of subprime mortgages is buried in a bunch of prime mortgages, so no one knows for sure how good they are. I mentioned reverse auctions since it seemed like a reasonable way to deal with this, but I’ve never seen anything saying that was going to be the mechanism. **IdahoMauleMan** , did you see a place where it says that they’re doing it that way (if so, I feel very clever.) On Marketplace yesterday they said that the Feds might take an equity stake in companies being bailed out, as is usually done. If so, they speculated that foreign governments might not like us getting a piece of UBS, say, and would put up their own money. And only in the Bush Administration would a deal like this be proposed with no oversight. Yikes! ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 24, 2008, 1:23am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/83 "2008-09-24T01:23:45Z")
Paulson was not elected. Where does he get off running a new and possibly the most important agency in history? ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [September 24, 2008, 2:40am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/84 "2008-09-24T02:40:22Z")
> [@Oy](#): > > I’ve felt for a long time that no corporation should be allowed to go into bankruptcy without the CEO being reduced to a certain low financial level first. The idea of corporation as separate human entity is horsefeathers - it was a lovely idea at first, but it has been perverted beyond recognition. Of course, the problem here is CEO bail-out. Some guy is CEO for a month when the company goes under. So it would have to be pro-rated. This idea is absolutely ridiculous. If your goal is to prevent the collapse of large companies like we’ve witnessed lately, then you would absolutely succeed because there wouldn’t be any large companies to begin with. ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [September 24, 2008, 2:44am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/85 "2008-09-24T02:44:50Z")
> [@IdahoMauleMan](#): > > Here’s a wildly counterintutive thought for the Board. > > How about giving them MORE money, or putting them in positions of power? > > I’m not talking about the CEOs of Lehman or Merrill or anything like that. I’m talking about the guys at Goldman, and the hedge funds, and the analysts who advise the hedge funds and the short sellers who saw this train wreck coming. Just like the folks who saw the Enron collapse coming when Enron was up around $70 a share. > > And got rich when the collapse happened, even though ‘the crowd’ was still running headlong the other way. Because they had the sack between the legs to make big bets with their own money when ‘the crowd’ was doing something else. > > Those guys seem pretty damn prescient and smart now. Don’t they? Why don’t we reward them? > > Or put them in the chairs currently occupied by Barney Frank and Chris Dodd, who as best as I can tell, are STILL trying to pump more volume through the government lending entities. > > Just a thought. Amazing post. Welcome to the boards. Please post as often as your schedule permits. ---
**Author:** ![Polerius](https://avatars.discourse-cdn.com/v4/letter/p/d78d45/32.png) [@Polerius](https://boards.straightdope.com/u/Polerius)\ **Post date:** [September 24, 2008, 3:00am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/86 "2008-09-24T03:00:48Z")
I think it’s funny & disturbing that people in this thread are trying to blame the politicians, and, of course the Democrats, since, you know, _they are the ones who were in power the last eight years_.:rolleyes: Forget the Democrats. Forget even the Republicans. It’s those stupid shit-faced morons who thought they can squeeze oil from a stone, by making “innovative financial instruments” (my ass!) and making money out of nothing or, worse, out of idiotic loans given to people who can’t afford them. This is not rocket science. This situation has been predicted many times [Dr Doom warns of derivatives market time bomb](http://findarticles.com/p/articles/mi_hb5555/is_200207/ai_n21943222) > [@](#): > > **July, 2002** Tony Dye, the fund manager dubbed Dr Doom for his pessimistic outlook on stock markets during the technology boom, warned on Tuesday of a lurking time bomb of creative accounting in the derivatives market.Speaking at a hedge fund conference in London, he said the value of contracts in the over-the-counter derivatives market has hit $110 trillion, with the market now worth three times the global economy [Buffett’s “time bomb” goes off on Wall Street](http://www.reuters.com/article/newsOne/idUSN1837154020080918?pageNumber=2&virtualBrandChannel=0&sp=true) > [@](#): > > **Five years ago** , billionaire investor Warren Buffett called them a “time bomb” and “financial weapons of mass destruction” and many many others. You don’t have to be Warren Buffet to realize that what these morons did was stupid and bound to blow up in their faces. What’s bad, of course, is that it blew up in all of our faces. It’s funny how people are now blaming politicians/the government/etc for not passing “better” regulation. They want Daddy coming in and telling people that they are behaving stupidly and to “stop it, this minute!” The role of regulation is to provide the ground rules for the free market to operate, to make sure there is a level playing field, and that everyone follows the rules. The role of regulation is not for the government to tell people or companies what to trade and when to trade it and to avoid risky trades. The free market is supposed to take care of that. If you want government coming in, in the future, and telling companies: “That trade you are about to make (or that contract you are about to sign, or that ‘innovative financial instrument you just pulled out of your ass’) is too risky, don’t go ahead with it” then it is not a free market any more. If you think that is the only way for society to function properly, then you have just agreed that the free market has failed and is an unworkable system. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 24, 2008, 3:13am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/87 "2008-09-24T03:13:10Z")
> [@Polerius](#): > > The role of regulation is not for the government to tell people or companies what to trade and when to trade it and to avoid risky trades. The free market is supposed to take care of that. No, regulations could validly command “Thou shalt not guarantee a debt without putting up the necessary assets to back your promise.” That’s a valid regulation. You’re espousing an absolute free market. I don’t think that works. ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [September 24, 2008, 3:17am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/88 "2008-09-24T03:17:09Z")
> [@SmartAleq](#): > > See, that’s the other neat trick–CDSs are kinda like the mystery bag. They could be fulla dogshit, they could be fulla Krugerrands but there’s no way to tell, really. > > Let’s say we have this guy who has a bunch of subprime mortgages that we say have a face value of 1 million bucks–ten mortgages of 100,000 each. So as long as the houses really are worth a hundred grand each, we can all agree on the value. > > But it gets funner–the mortgages are ARMs and have a variable value according to what the prime rate is, so one day someone can make the case that they’re REALLY worth 1.5 million because the interest is up, and convinces someone else to buy the bundle at that price, whee! > > Then the real estate market goes up so the guy who bought it at 1.5 says “dude, those houses are now worth 150 grand each, plus the higher interest makes this bundle worth 2 million!” and somebody else buys it for that. > > See our problem here? Something that had a backable value of a million bucks is now considered to be 2 million worth of stuff–now watch the housing bubble pop and the values go down to where the houses are only worth 50 grand each, and the interest rates fall so THAT money is gone and then a whole bunch of defaults happen so the bet they all made that the original mortgages were gonna pay off is gone and suddenly somebody spent two million bucks for a wad of toilet paper and the only thing there is to back it up is ten shitty houses worth a buck eighty five each. > > See? Mystery bag–buy my bag that I say is very good and maybe you’ll make out or maybe you’ll have a lapful o’dogshit, but no way to tell until you buy it. Since the “values” are arbitrary and are just based on whatever you can con some other sucker into paying, the “value” keeps inflating beyond any sort of reason, but they kept on doing it because nobody wants to be holding the dogshit bag when the music stops. Multiply that by a pantsload, then figure in that those companies that bought shitloads of those derivatives swapped perfectly good real assets for toilet paper and you have a big fucking mess. Now the government wants us to buy those wads of toilet paper at the premium price the fools who have it now bought it for, never mind that it will never be worth even the initial face value unless there’s a fucking miracle. So the government trades good money for used bumwad, Wall Street gets rid of used bumwad in favor of good money, we get stuck with the bill and there’s no guarantee this will even work. If we trade off enough cows for magic beans we’re gonna be fucked and the government will have to print money to keep us from being assraped by high interest loans from other countries who already own our butts. It will NOT be pretty. > > I’d really rather concentrate on making those bad loans worth more by stabilizing the market on the ground, getting dodgy loans rewritten into something that will keep the foreclosures from happening. Even though most people hate the idea of “helping out the lazy and stupid,” every foreclosure averted is a percentage point added to the value of surrounding houses. A real estate rule of thumb says you can take one percent off the value of your house for every foreclosed property within a mile of you. It stabilizes the real estate market to keep foreclosures to a minimum, and it’s better to fix a bad loan product than it is to buy the derivatives of a whole shitload of bad loan products. The only people hurt by this kind of bottom up relief is the shitbirds who did it in the first place. This . . . is not really how it worked. The value of the mortgage-backed securities didn’t fluctuate with the value of the real estate that secured the mortgages. Rather, the shit hit the fan when the default rates on the mortgages got a lot higher than the rating on the securities indicated they would be. The best run-down of the subprime mess for the layman (which definitely includes me, make no mistake) is one-hour spot that aired on This American Life on NPR. Look for it on their website (you can get it as a podcast). There are a view typical liberal douchebag angles thrown in, but it’s pretty good nonetheless. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [September 24, 2008, 3:21am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/89 "2008-09-24T03:21:11Z")
> [@SmartAleq](#): > > I’ll tell you where your scenario falls down there, **IdahoMauleMan** –the trick is in Section 8 of the Paulson plan which reads, in its 32 word entirety, as follows: > > Huh. Reflect on that for a minute. No oversight, no review, no accountability. So basically, we hand Paulson close to a trillion bucks, he puts it into a large canvas sack with $$$ printed on the side, slips his domino mask down over his face and slopes off to Wall Street, where he opens up that window and says “Yo, I buying yo dogshit bags hyeah!” And the little piggies line up. > > Here’s where the fun part starts. Phil Gramm, senior executive of UBS (a Swiss bank, but Paulson’s already admitted that he’s totally okay with giving US taxpayer money to foreign banks who were having lotsa fun swapping around toxic CDS bundles but who don’t like getting the dogshit bag just like Americans) comes up to the window and says “Hank, buddy, we go way back–you’re gonna give me 110 cents on the dollar for these _wink wink_ VERY VALUABLE ASSETS, right?” And old Hank does just that! Wow! Lucky Phil! > > Then up comes Goldman Sachs, and says “Hank! You worked for us for thirty years, you can’t let your old buddies get fucked in the poopchute just because we were stupid and greedy, right? You wanna give us 150 cents on the dollar, right?” And whee, old Hank reaches into that canvas sack and tosses big old handfuls of money at Goldman Sachs! > > Then a whole bunch of people come running up, wanting to sell all kinds of numb shit, like car loans and mountaintop houses in Florida, and Brooklyn Bridges, and bad money orders from Nigerian diplomats and they say “Hank, if you buy these things from us at the value we say they are we’ll give you a blowjob AND toss your salad, whaddaya say?” And old Hank does just that! He buys buckets of cocaine! He has a money giveaway! He gives a million bucks to anyone who’ll stage a bum fight/geek show for his best friends! It’s a PARTAY! > > Then old Hank wakes up and decides to just give away shitloads of that cash to various friends of his because he likes them! Whee, it’s Christmas in September with Santa Hank! Hookers and blow! Pretty soon the whole canvas bag is empty–and for some odd reason the American taxpayer wants to know what happened to their money, especially since that giveaway didn’t really do the job (which, by the way, many economists are in no way sanguine that the bailout will do what Paulson swears it will) but they can’t find out because of Section 8. > > Even if they DID find out, even if gratuitously illegal things were done with that money, even if millions of dollars had been used to charter a jet for a hundred Wall Street CEOs to take a trip to Bangkok for a little pedophilia tourism on the American people’s dime–not one slim thing can be done about it because of Section 8. > > This is the plan, including good old Section 8, that Paulson is suddenly trying to ramrod through Congress with no delay or amendment. Now why, pray tell, should he be so paranoid about people finding out what he did with the money and be able to prosecute wrongdoing if he’s all on the up & up, just wanting to save our hides from the economic disaster he’s been insisting all along isn’t real? Hmmm. Anybody? Bueller? I like that. That’s good. “Hank! Buddy! We go waaaayyyy back, don’t we?” Nice post. 🙂 ---
**Author:** ![Polerius](https://avatars.discourse-cdn.com/v4/letter/p/d78d45/32.png) [@Polerius](https://boards.straightdope.com/u/Polerius)\ **Post date:** [September 24, 2008, 3:24am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/90 "2008-09-24T03:24:21Z")
> [@MOIDALIZE](#): > > No, regulations could validly command “Thou shalt not guarantee a debt without putting up the necessary assets to back your promise.” That’s a valid regulation. > > You’re espousing an absolute free market. I don’t think that works. An absolute free market is one with minimal to no rules, which is unworkable. Rules are needed to make sure there is a level playing field, that contracts are legally binding, etc. But that is it. Anything beyond the smallest amount of regulation that enables the functioning of the market is going outside of the scope of a “free market” If you need to limit how risky loans/contracts/etc can be, in order to make sure the market does not collapse every now and then, then you are limiting the freedom of transactions, so this is not a free market. A properly functioning free-market will, in theory, punish excessive risk takers and therefore there is no need for government to be a nanny and hold market participants’ hands. Of course, the above is in theory. In practice, we see that a “properly functioning free-market” does not exist because it does not punish excessive risk takers until it is too late and the entire economy is threatened (e.g. LTCM, the recent fiasco, etc) ---
**Author:** ![Polerius](https://avatars.discourse-cdn.com/v4/letter/p/d78d45/32.png) [@Polerius](https://boards.straightdope.com/u/Polerius)\ **Post date:** [September 24, 2008, 3:29am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/91 "2008-09-24T03:29:12Z")
> [@MOIDALIZE](#): > > No, regulations could validly command “Thou shalt not guarantee a debt without putting up the necessary assets to back your promise.” That’s a valid regulation. Why is that a valid regulation? Shouldn’t the parties in the transaction determine whether they are willing to take the risk? If I want to lend money to someone who can’t put up the necessary assets to back his promise, I should be free to do so, because I may get better returns than if I lend it to someone else. It’s my money and I should be able to choose the level of risk I am comfortable with. At least that’s what should be the case in a free market. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [September 24, 2008, 4:13am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/92 "2008-09-24T04:13:16Z")
> [@Whack-a-Mole](#): > > Huh? You are saying regulation caused these issues? I’d be interested in seeing someone try to make that case. Sure. That’s exactly what I’m saying. I’ll be happy to give it a go. Was just browsing Wikipedia and they seem to list a number of theories from both the left and right, so we have plenty of arrows in our respective quivers with which to start. The one that is missing, and the one I would argue might be of importance only after monetary contraction by the Fed, is restrictions on branch banking in the Dust Bowl states. I don’t know why they left that one out. Otherwise, it looks like a reasonable starting point. And there is one error in Wikipedia you should be aware of. It says that Murray Rothbard was born in 1926 in the Bronx. That is incorrect. He was born in Bethelem, in a manger, on December 25 in the year 0. Please make the appropriate notation in your records. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 24, 2008, 4:25am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/93 "2008-09-24T04:25:03Z")
> [@Rand\_Rover](#): > > This . . . is not really how it worked. The value of the mortgage-backed securities didn’t fluctuate with the value of the real estate that secured the mortgages. Rather, the shit hit the fan when the default rates on the mortgages got a lot higher than the rating on the securities indicated they would be. > > The best run-down of the subprime mess for the layman (which definitely includes me, make no mistake) is one-hour spot that aired on This American Life on NPR. Look for it on their website (you can get it as a podcast). There are a view typical liberal douchebag angles thrown in, but it’s pretty good nonetheless. He’s not talking about the mortgage backed securites, he’s talking about the credit debt swaps. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 24, 2008, 4:29am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/94 "2008-09-24T04:29:46Z")
> [@Polerius](#): > > Why is that a valid regulation? Shouldn’t the parties in the transaction determine whether they are willing to take the risk? > > If I want to lend money to someone who can’t put up the necessary assets to back his promise, I should be free to do so, because I may get better returns than if I lend it to someone else. > > It’s my money and I should be able to choose the level of risk I am comfortable with. > > At least that’s what should be the case in a free market. I’m not talking about the lending side. I’m talking about an agreement whereby company A agrees to guarantee the debt owed by third parties to company B in exchange for periodic payments from B to A. Company B expected A to pay out in the event those third parties defaulted on their obligations, but there was no regulations in place to compel A secure their obligation. That’s why I said they were “sort of like” insurance. Once these agreements got sold in the marketplace like any other security, the business relationship you’re describing disappeared. ---
**Author:** ![SmartAleq](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/smartaleq/32/163_2.png) [@SmartAleq](https://boards.straightdope.com/u/SmartAleq)\ **Post date:** [September 24, 2008, 6:02am UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/95 "2008-09-24T06:02:00Z")
> [@MOIDALIZE](#): > > He’s not talking about the mortgage backed securites, he’s talking about the credit debt swaps. “She,” actually, and yes–what I was illustrating was the unregulated and ultimately nonexistent nature of the credit default swaps. Just because mortgages are the major source of these little gems doesn’t mean that’s the only derivative out there, just the most toxic at the moment. A huge feature causing the toxicity of the default swaps is that they’re essentially private contracts and therefore not only unregulated but also weirdly opaque. There’s no objective valuation possible for the damned things, really–they’re kind of like the Schrodinger’s Cat of the financial world in that it’s only by the act of closely observing the damned things that causes the wave fronts of probability to collapse and you find out whether you have dogshit or Krugerrands in the bag. One really has to ask oneself why in hell did people whose whole _raison d’etre_ is to make secure loans that will be paid back went so far overboard on those weird loan products. I read [this article](http://finance.yahoo.com/expert/article/yourlife/109609;_ylt=AihYXGa_2tf9PJDeCl.2G0S7YWsA) by Ben Stein, not someone I would normally waste my time on but he made a couple of really good points: > [@](#): > > \*Here s one big part of the answer. First, the alert reader will notice that Ben Stein said many times that the amount of money at risk in the subprime meltdown was just not enough to sink an economy of this size. And I was right…to a point. The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy. > > The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn’t have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default. > > The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. **(In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse…)** > > These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America. > > Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability - which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability. > > This is what your humble servant, moi, missed. This is what all of the big investment banks and banks and insurance companies missed. This is what the federal government totally and utterly missed. This is what the truly brilliant speculators in these instruments did not miss. They could insure a liability they could also create and control. It is as if they could insure a Cadillac for its value upon theft - but they could control what the value the insurer had to pay off was. The insurer thought it might be fifty thousand dollars - but it was manipulated into being two million. > > This is the whirlpool sucking down finance. > > Now, we are about to have a similar phenomenon happen with commercial mortgage debt, debt from mergers and acquisitions, credit card debt, and car loan debt. Many trillions of dollars in Credit Default Swaps have been sold on all of this, and the prices of all of them have fallen and can be made to fall more.\* Notice the bolded section–were I not too tired to get up I’d be putting on my tinfoil hat right now. It does seem to be curiously…_coincidental_…does it not? This is one of the major reasons why I favor a bottom up approach to stabilizing the market. Mortgages stable, real estate stable, reasonable valuation possible on CDSs that are mortgage derived. The rest of it is all phantom profit, made possible only by an egregious distortion of the market and I don’t think anyone’s entitled to just pull money out of thin air like that and be able to hold people to it. This is the larger version of eBay or other auction fraud, where a shill bids up an item then drops out when it peaks, leaving some poor sucker holding the worthless item that was made to look valuable. That’s not real profit, either, and it’s neither legal nor ethical. You get caught doing shit like that in some auctions you’ll end up arrested or just beat to peanut butter for your shenanigans. Then when I do get my tinfoil hat on it occurs to me that Bush has always been in the Saudis pockets, and that those pockets are plenty deep enough to have arranged this little contretemps. Just throwin’ it out there. ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [September 24, 2008, 1:48pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/96 "2008-09-24T13:48:48Z")
Ack, sorry, I shouldn’t post so late at night. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [September 24, 2008, 2:18pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/97 "2008-09-24T14:18:30Z")
> [@Polerius](#): > > Why is that a valid regulation? Shouldn’t the parties in the transaction determine whether they are willing to take the risk? > > If I want to lend money to someone who can’t put up the necessary assets to back his promise, I should be free to do so, because I may get better returns than if I lend it to someone else. > > It’s my money and I should be able to choose the level of risk I am comfortable with. > > At least that’s what should be the case in a free market. I agree to an extent but there are a few issues with this. First, as I think **SmartAleq** is pointing out, is the risk is actually hidden. It is one thing for me to knowingly understand the risk and invest with that knowledge. But the real risk of the underlying mortgages got washed out of the system. Good loans are bundled with bad loans and all the purchaser sees is a package of loans worth X-dollars. What percentage of those loans are high risk and likely to default and which are held by Warren Buffet and Bill Gates? Second, which goes to having assets to backup your obligations, is these companies just got too large. Their obligations were staggering in scope. It is one thing if you lend me $1000 of unsecured money and I default. It is something else when these companies have several hundreds of billions of dollars that is not backed up by other assets. The knock-on effects of their failure now affects other people. People who did not accept that risk are now being held to make good on that bad paper. Maybe i do other business with AIG and had no part in this aspect of the business as I did not want to accept the risk. Why should I be screwed along with the people who chose to play there? As such I think reasonable regulations would be for better transparency in these instruments (or maybe only allow essentially identical loans to be bundled…if you want to buy the bag of bad loans for a better return with greater risk then fine…your choice but you know what you are getting in to). Additionally, I see no problem with a regulation that does not allow a given institution to have more unsecured debt than they can reasonably be expected to pay back if the worse happens. Over some limit, if the company is SO huge and the debt SO substantial that their failure wrecks the economy or is in danger of starting a domino effect of failures I think the government has a legitimate position in saying they need to be more responsible so tax payers are not left holding the bag. ---
**Author:** ![Polerius](https://avatars.discourse-cdn.com/v4/letter/p/d78d45/32.png) [@Polerius](https://boards.straightdope.com/u/Polerius)\ **Post date:** [September 24, 2008, 4:57pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/98 "2008-09-24T16:57:49Z")
> [@Whack-a-Mole](#): > > First, as I think **SmartAleq** is pointing out, is the risk is actually hidden. It is one thing for me to knowingly understand the risk and invest with that knowledge. But the real risk of the underlying mortgages got washed out of the system. Good loans are bundled with bad loans and all the purchaser sees is a package of loans worth X-dollars. What percentage of those loans are high risk and likely to default and which are held by Warren Buffet and Bill Gates? I keep hearing about these cases and my mind boggles. Why would anyone want to buy these “bundled” loans, when they didn’t know what percentage was bad loans and what percentage was good loans? Who the hell authorized the purchase of these “unknown risk” bundled loans? In any case, if there is a company that is stupid enough to buy an asset with an unknown amount of risk, in a free market they should be allowed to buy that asset. It’s their money. If they want to waste it, it’s their decision. As long as they inform their shareholders that they are making such risky moves as buying assets with unknown risk (“hey, we have no frikkin’ clue how safe these bundled loans are, but they look like a good bet”), the free market should allow them to make those risky moves. By forcing transparency in these assets by law, we are forcing market participants to be prudent. In a free market, if we believe that it works and does it job, the imprudent participants will be weeded out. We shouldn’t need the law to force participants to be prudent. If we need to make a law that prevents people and companies from buying assets so ridiculous that the buyer has no idea what the composition and risk profile of the asset is, then we have no faith in the market participants, and we have no faith in the fact that the free market will weed out such stupid behavior before it all blows up and bring the whole economy down. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [September 24, 2008, 5:04pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/99 "2008-09-24T17:04:24Z")
> [@SmartAleq](#): > > “She,” actually, My apologies ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 24, 2008, 5:06pm UTC](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607/100 "2008-09-24T17:06:21Z")
The bundles loans were bought because they appeared to increase the net worth of the company. They got huge bonuses ,salaries and parting gifts for doing it. There was no pressure not to. The average company was leveraged at about 30 to 1. That is inexcusable. [Previous page](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607.md?page=4) [Next page](https://boards.straightdope.com/t/force-people-who-made-money-from-sub-prime-mess-to-pay-for-it/464607.md?page=6)