Toxity 0

What it means in the world of “toxic assets” (emphasis added):

The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S&P estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

(snip)

The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

What was happening is simple. Financial institutions were issuing funky mortgages to everybody they could rope in, without doing credit checks due diligence, so they could turn around and sell these bonds.

They didn’t want the mortgages. They wanted to sell the bonds.

And the ratings agencies, which were paid by the issuers of the insecurities, gave this junk the highest ratings. As long as everything was going up, everything kept going up. “Intrinsic value” had nothing to do with it.

The whole scam makes Bernie Madoff look like a piker.

No, I am not alleging conspiracy. I am alleging criminal greed, negligence, and immorality, all hidden in three-piece suits and Bentleys.

Just as “negligent homicide” is a real criminal charge, so too should be “negligent marketing.”

But the bozos who did this will not be going to jail. After all, they have three-piece suits and Bentleys.

The family that lost its house and its possessions and gets caught shoplifting a loaf of bread–it’s gonna be the Big House for them.

(Aside: If you believe in “market capitalism” in any form, non-regulated, deregulated, or regulated, that bond is worth 37 cents, because that’s what someone was willing to pay for it. Where S&P gets 87 cents I cannot imagine.)

IHT story via Harry Shearer.