RE: Remainder who rip on securitization and AAA ratings. How come this worked for almost 40 years and rarely any problems?

That is not the way I read the article, Soros’ comments and securitization not being commonly known as a derivative.

by CalculatedRisk on 3/30/2009 05:02:00 PM

For your reading enjoyment … here is an article about a software programmer who wrote some of the software for securitizing mortgages.

From Michael Osinski in New York Magazine: My Manhattan Project How I helped build the bomb that blew up Wall Street

I have been called the devil by strangers and “the Facilitator” by friends. It’s not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It’s been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds

Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in. I don’t completely disagree. But in my view, and of course I’m inescapably biased, there’s nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.”

With that as prelude here is what I posted at CalculatedRisk today:

Yea, if only, but the problem is that securitization is flawed precisely b/c it was enthusiastically done to defraud/fool buyers, i.e., not correctly or conservatively.

“Risk diversification” was nothing more than “risk concealment”. Hide lots of bad under a little good.

“Wall Street used mathematicians and indescribably complicated formulae to construct and deconstruct these securities specifically in order to obfuscate the underlying collateral and potential risks. The point, in fact, was complication. You see, if you could construct something that nobody could actually understand, they couldn’t dispute what they were told or what they read in black and white. Then, combined with the vaunted AAA rating + a high yield, and people, in their greed and desire NOT to know, became willing believers. People can understand a whole loan. Not much issue there. But, these securities were designed to be beyond analysis. All you needed to know was that there was a lot of math involved and that there was a AAA rating. That’s it.”

I hope all y’all recognize the Truth when it’s in front of you..b/c G.K. put it, just, there.

as an aside, it explains why the “Champagne Tower” explanation of ‘how these work’ is, really, just so much mordant BS.
http://www.thefreedictionary.com/mordant
try def.#2

I think some of you are naive. Wall Street used mathematicians and indescribably complicated formulae to construct and deconstruct these securities specifically in order to obfuscate the underlying collateral and potential risks. The point, in fact, was complication. You see, if you could construct something that nobody could actually understand, they couldn’t dispute what they were told or what they read in black and white. Then, combined with the vaunted AAA rating + a high yield, and people, in their greed and desire NOT to know, became willing believers. People can understand a whole loan. Not much issue there. But, these securities were designed to be beyond analysis. All you needed to know was that there was a lot of math involved and that there was a AAA rating. That’s it.

spigzoine: Securitization is not lying, it is merely transferring the loan. Lenders have always sold loans throughout history.

“Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”

The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.” He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”. ”

http://www.timesonline.co.uk/tol/news/uk/article5989163.ece

I think Mr. Soros hit the bullseye here.

“If I sign a mortgage with my local financial institution I should rightly expect…”
“It’s really just that simple.”

spigzone,

I’ve U$D 100 that says you signed a release of ‘motgage servicing rights’ during your ‘closing’

remember, Reading Is Fundamental