Securitization is 'designed to fail'

[JonCris]

We all knew it & here's the 1st official proof we might be correct. Suggest you include this in your next bundle or skeleton when you appear in court in your attempt to defeat the charlatans

 

Goldman Sachs 'facing a criminal probe into fraud on a historic scale'

 

 

By Mail Foreign Service

Last updated at 8:50 AM on 30th April 2010

 

The U.S. attorney's office has launched a criminal investigation of Goldman Sachs over mortgage securities deals arranged by the Wall Street giant, a source said today.

The source said the probe stemmed from a criminal referral by the Securities and Exchange Commission.

Earlier this month the SEC filed civil fraud charges against Goldman and a trader in connection with the transactions.

 

News of the criminal investigation into Goldman Sachs came after the Wall Street Giant was questioned in the U.S. Senate. Here, Goldman chief executive Lloyd Blankfein testifies in the hearing

 

The SEC claimed Goldman misled investors by failing to tell them the sub-prime mortgage securities had been chosen with help from a Goldman hedge fund client that was betting the investments would fail.

Goldman has denied the charges and said it will contest them in court.

News of the action came a day after a group of 62 House of Representatives members, including Democratic Judiciary Committee chairman John Conyers, called for a criminal probe of Goldman.

 

 

More...

 

 

• 'You shouldn't be selling crap': U.S. Senate's blistering cross-examination of defiant Goldman bosses
  
• The Moonies of Mammon: A damning insight into the beleaguered cult of secrecy that is Goldman Sachs
  

 

The lawmakers wrote in a letter to Attorney General Eric Holder: 'On the face of the SEC filing, criminal fraud on a historic scale seems to have occurred in this instance.'

SEC spokesman John Nester would not confirm or deny that the agency had made a referral to the Justice Department for a criminal investigation.

Goldman spokesman Lucas van Praag said: 'Given the recent focus on the firm, we're not surprised by the report of an inquiry.

'We would co-operate fully with any request for information.'

 

 

Dressed in black and white jail outfits, the protesters held up signs throughout the testimonies

 

The Wall Street Journal first reported the Justice Department action.

The probe is the latest in a dramatic twists in the Goldman saga, which has pitted the culture of Wall Street against angry lawmakers in an election year, in the wake of the most severe recession the country has seen since the 1930s Great Depression.

At Congress on Thursday, following days of failed test votes, the Senate launched into action on sweeping legislation backed by the Obama administration that would clamp down on Wall Street and the high-risk investments that nearly brought down the economy in 2008.

Two days earlier, a day-long showdown before a Senate investigative panel put Goldman's defense of its conduct in the run-up to the financial crisis on display before indignant lawmakers and a national audience.

The panel, which investigated Goldman's activities for 18 months, alleges that the Wall Street powerhouse bet against its clients - and the housing market - by taking short positions on mortgage securities and failed to tell them that the securities it was selling were at very high risk of default.

Goldman CEO Lloyd Blankfein told the investigative subcommittee that clients who bought the subprime mortgage securities from the firm in 2006 and 2007 came looking for risk 'and that's what they got.'

Blankfein said the company didn't bet against its clients - and can't survive without their trust.

 

Goldman Sachs banker Fabrice Tourre is sworn in as he prepares to defend himself before a U.S. Senate panel in Washington

 

He repeated the company's assertion that it lost $1.2billion in the residential mortgage meltdown in 2007 and 2008.

He also argued that Goldman wasn't making an aggressive negative bet - or short - on the mortgage market's slide.

WHAT IS GOLDMAN SACHS ACCUSED OF?

 

The Securities and Exchange Commission filed a civil fraud case against the bank this month, saying it misled investors about securities tied to home loans.

The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co.

Paulson was betting on the investments to fail. When they did - as America's sub-prime mortgage market collapsed, eventually triggering off a global financial crisis - the hedge fund profited handsomely.

The idea Goldman would sell the product to investors apparently knowing that it was believed it would fail, and the fact that it did not disclose to investors that Paulson had been involved in designing the transaction, is at the centre of the SEC allegations.

Goldman disputes the charges and says it will contest them in court.

Tourre himself is accused of designing the transactions involved.

In a brash January 2007 e-mail, Tourre called himself 'The fabulous Fab ... standing in the middle of all these complex ... exotic trades he created.'

The SEC has charged him with a £650million fraud.

 

 

In addition to the $2billion so-called collateralised debt obligation that is the focus of the SEC's charges against Goldman, the subcommittee analysed five other such transactions, totaling around $4.5billion.

All told, they formed a 'Goldman Sachs conveyor belt,' the panel said, that dumped toxic mortgage securities into the bloodstream of the financial system.

A collateralised debt obligation or CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom.

Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off.

But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.

It wasn't immediately known whether the Justice Department's inquiry also encompasses the five other transactions.

The investigation, even though it is currently only at a preliminary stage, opens a momentous new front in the legal aftermath of the near-meltdown of the financial system.

The Justice Department and the SEC have previously launched wide-ranging investigations of companies across the financial services industry.

But a year after the crisis struck, charges haven't yet come in the majority of the probes.

In addition to fallen mortgage lender Countrywide Financial Corp. and bailed-out insurance giant American International Group Inc., the investigations also have targeted government-owned mortgage lenders Fannie Mae and Freddie Mac and crisis casualty Lehman Brothers.

Last August, a federal jury in New York convicted former Credit Suisse broker Eric Butler of conspiracy and securities fraud in connection with a $1billion subprime mortgage fraud.

But the acquittal in November of two former Bear Stearns executives in the government's criminal case tied to the financial meltdown showed how difficult it can be to prove that investment bank executives committed fraud by lying to investors.

The SEC sued the two executives in a civil suit, and that case is still pending.

The government must show that executives were actually committing fraud and not simply doing their best to manage the worst financial crisis in decades, some legal experts say.

The SEC civil fraud case against Goldman also could be difficult and faces pitfalls, in the view of some experts.

 

Goldman Sachs bankers including Blankfein will 'co-operate fully with any request for information', according to a spokesman for the company

 

To prove it, they say the agency must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The experts added that the greatest challenge will be boiling the case down to a simple matter of fraud - the issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the SEC's claims.

Political intrigue has surrounded the SEC suit, as some Republicans have accused the agency of timing the April 16 announcement of fraud charges against Goldman to bolster prospects for the financial overhaul legislation while it was at a critical stage in the Senate.

The speculation was heightened by the revelation that the SEC commissioners approved filing of the charges on a 3-2 vote, along party lines, with both Republicans opposing the move.

SEC Chairman Mary Schapiro has insisted there was no connection between the timing of the agency lawsuit, which followed a month-long investigation of the firm, and the push for the legislation in the Senate.

Last week, President Barack Obama denied any White House involvement in the timing of the SEC case.

Speaking to a Senate Appropriations subcommittee on Wednesday, Schapiro said: 'We don't time our enforcement actions by the legislative calendar or by anybody else's wishes.

'We bring our cases when we have the law and the facts we believe support bringing our cases.'

 

 

 

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Read more: Goldman Sachs 'facing a criminal probe' over mortgage securities deals | Mail Online

[Suetonius]

The SEC claimed Goldman misled investors by failing to tell them the sub-prime mortgage securities had been chosen with help from a Goldman hedge fund client that was betting the investments would fail.

 

Cough, cough, cough, investors, cough cough...

 

Sorry had something stuck in my throat

[Suetonius]

More...

 

 

• 'You shouldn't be selling crap': U.S. Senate's blistering cross-examination of defiant Goldman bosses

 

"WHAT IS GOLDMAN SACHS ACCUSED OF?

 

The Securities and Exchange Commission filed a civil fraud case against the bank this month, saying it misled investors about securities tied to home loans"

[JonCris]

Cough, cough, cough, investors, cough cough...

 

Sorry had something stuck in my throat

 

Correct & in order to save their skins they have been liquidating (repossessing) the assets/homes ever since. This was always intended within 5 years anyway when investors stopped buying these now toxic derivatives

[enoughisenough]

Sue

 

Just out of interest you would agree that PwC and the regulators are doing their level headed best to stave off an investor revolt?

 

Secondly, following on, would you also agree that the most expeditious way of doing so is to pursue, through the likes of Capstone (look at Northern Rock) an aggressive repossession strategy?

 

What sticks in my craw is the way in which the investors get looked after as best as (what goes up may go down) but the borrower (25 years not five) is getting stiffed royally here.

 

No wonder the word mortgage contains within it the French word for death. In this case not signed up for life but screwed for life. Even after possession.

[rocket1]

Unfortunately all this refers only to fraud being committed by Goldman Sachs towards the investors of the sub prime derivative bonds containing the bundles of individual mortgage loans.

 

Nobody seems to be bothering about the fraud committed against the homeowners themselves.

 

So, this story isn't of much use to homeowners fighting eviction.

 

We need government accusations of fraud by sub prime mortgage lending companies against the homeowners being duped into taking out the fraudulent mortgages.

[JonCris]

Rocket your missing the point The fact that these derivatives are meant to default means the 'investment' (your property) has to be realized within 5 years hence if the derivative/bond becomes unsaleable, (as they have) your 25 year mortgage is a sham .....so it's not only the investor who's stuffed but the debtor also & all because they were ALL misled

 

The only party who CAN default is the borrower namely you so in order to achieve that they add phantom hitherto undisclosed charges to your account then accuse you of being in arrears & seek repo

[Suetonius]

Sue

 

Just out of interest you would agree that PwC and the regulators are doing their level headed best to stave off an investor revolt?

 

Secondly, following on, would you also agree that the most expeditious way of doing so is to pursue, through the likes of Capstone (look at Northern Rock) an aggressive repossession strategy?

 

What sticks in my craw is the way in which the investors get looked after as best as (what goes up may go down) but the borrower (25 years not five) is getting stiffed royally here.

 

No wonder the word mortgage contains within it the French word for death. In this case not signed up for life but screwed for life. Even after possession.

 

Changes may be afoot...

 

Much a long the lines of the treating customers fairly angle, previously championed by you and JC.

 

U.K. Banks? CDO Marketing Comes Under FSA Scrutiny (Update1) - BusinessWeek

 

Treating Customers Fairly

 

“The FSA has a reasonably strong suspicion that in the later days of the mortgage-backed market, there was such a rush to originate products that they were sweeping up anything that could be remotely described as a mortgage,” he said. “The person they visit may say that they complied with statutory disclosure obligations, and that may be true, but the FSA will ask: were you treating your customers fairly?”

[JebediahSpringfield]

JonCris, you have your facts wrong. It's not that securitisation was "designed to fail". The SEC alleges these synthetic securities were designed to fail. But that's not even the basis of the SEC complaint. They are really alleging that there was a failure to disclose the involvement of John Paulson in the deal. I could rattle on about this case, but I'll leave it at that. Securitisation does have a valid purpose and central banks including the Bank of England have bought enormous amounts of mortgage backed securities (the BoE bought over £200 billion in mortgage backed securities last year) to maintain a minimum level of liquidity and lending in the market. I grant you the fact that many mortgages should never have been made, and banks were irresponsible in making them. This doesn't negate the value of securitisation. "The fact that these derivatives are meant to default means the 'investment' (your property) has to be realized within 5 years hence if the derivative/bond becomes unsaleable, (as they have) your 25 year mortgage is a sham";. Again, you are wrong. I'm not sure where you are coming up "realized within 5 years". I worked in sales/trading at a major bank selling mortgage backed securities, so I do have a very good guess as to where you derived that erroneous information. The prospectus of a transaction often refers to the 'weighted average life' of the notes. And often you will see that this weighted average life is around 4 to 5 years. Key word there AVERAGE. There's no guarantee the notes will pay off in 5 years. It's based on a prepayment rate assumption that may or may not be true. The LEGAL FINAL maturity of the bonds is usually after 2040 in most cases. An investor assumes the risk that the loans prepay more slowly than any prepayment assumption dictates and in worst case, at the legal final maturity date. An investor can't demand his money back if he hasn't received his money back within 5 years. That's nonsense.

Edited May 5, 2010 by JebediahSpringfield

[Suetonius]

One thing that still continues to trouble me with regard to the 5 year argument is what about the people that have had a mortgage with the same lender for more than 5 years. Also what about the people that have had a mortgage with the same lender for 10, 15 or 20 years etc.

[Suetonius]

JonCris, you have your facts wrong. It's not that securitisation was "designed to fail". The SEC alleges these synthetic securities were designed to fail. But that's not even the basis of the SEC complaint. They are really alleging that there was a failure to disclose the involvement of John Paulson in the deal. I could rattle on about this case, but I'll leave it at that. Securitisation does have a valid purpose and central banks including the Bank of England have bought enormous amounts of mortgage backed securities (the BoE bought over £200 billion in mortgage backed securities last year). I grant you the fact that many mortgages should never have been made, and banks were irresponsible in making them. This doesn't negate the value of securitisation. "The fact that these derivatives are meant to default means the 'investment' (your property) has to be realized within 5 years hence if the derivative/bond becomes unsaleable, (as they have) your 25 year mortgage is a sham";. Again, you are wrong. I'm not sure where you are coming up "realized within 5 years". I worked in sales/trading at a major bank selling mortgage backed securities, so I do have a very good guess as to where you derived that erroneous information. The prospectus of a transaction often refers to the 'weighted average life' of the notes. And often you will see that this weighted average life is around 4 to 5 years. Key word there AVERAGE. There's no guarantee the notes will pay off in 5 years. It's based on a prepayment rate assumption that may or may not be true. The LEGAL FINAL maturity of the bonds is usually after 2040 in most cases. An investor assumes the risk that the loans prepay more slowly than any prepayment assumption dictates and in worst case, at the legal final maturity date. An investor can't demand his money back if he hasn't received his money back within 5 years. That's nonsense.

 

Thank you for the above clarification and welcome to CAG

[kegi]

JonCris, you have your facts wrong. It's not that securitisation was "designed to fail". The SEC alleges these synthetic securities were designed to fail. But that's not even the basis of the SEC complaint. They are really alleging that there was a failure to disclose the involvement of John Paulson in the deal. I could rattle on about this case, but I'll leave it at that. Securitisation does have a valid purpose and central banks including the Bank of England have bought enormous amounts of mortgage backed securities (the BoE bought over £200 billion in mortgage backed securities last year) to maintain a minimum level of liquidity and lending in the market. I grant you the fact that many mortgages should never have been made, and banks were irresponsible in making them. This doesn't negate the value of securitisation. "The fact that these derivatives are meant to default means the 'investment' (your property) has to be realized within 5 years hence if the derivative/bond becomes unsaleable, (as they have) your 25 year mortgage is a sham";. Again, you are wrong. I'm not sure where you are coming up "realized within 5 years". I worked in sales/trading at a major bank selling mortgage backed securities, so I do have a very good guess as to where you derived that erroneous information. The prospectus of a transaction often refers to the 'weighted average life' of the notes. And often you will see that this weighted average life is around 4 to 5 years. Key word there AVERAGE. There's no guarantee the notes will pay off in 5 years. It's based on a prepayment rate assumption that may or may not be true. The LEGAL FINAL maturity of the bonds is usually after 2040 in most cases. An investor assumes the risk that the loans prepay more slowly than any prepayment assumption dictates and in worst case, at the legal final maturity date. An investor can't demand his money back if he hasn't received his money back within 5 years. That's nonsense.

 

Fully agree with your comments jebediah at last someone else see's the light its never been about the actual mortgage only the notes in terms of maturity, those who bought short term ie 3,5,6 years were aware of the risks involved. That does not turn a 25 year mortgage into a 5 year one or any other for that matter.

kegi

[kegi]

One thing that still continues to trouble me with regard to the 5 year argument is what about the people that have had a mortgage with the same lender for more than 5 years. Also what about the people that have had a mortgage with the same lender for 10, 15 or 20 years etc.

 

 

It shouldn't Sue [trouble you] that is, it’s a fact and still is and securitization as not brought about their demise

kegi

[JonCris]

JonCris, you have your facts wrong. It's not that securitisation was "designed to fail". The SEC alleges these synthetic securities were designed to fail. But that's not even the basis of the SEC complaint. They are really alleging that there was a failure to disclose the involvement of John Paulson in the deal. I could rattle on about this case, but I'll leave it at that. Securitisation does have a valid purpose and central banks including the Bank of England have bought enormous amounts of mortgage backed securities (the BoE bought over £200 billion in mortgage backed securities last year) to maintain a minimum level of liquidity and lending in the market. I grant you the fact that many mortgages should never have been made, and banks were irresponsible in making them. This doesn't negate the value of securitisation. "The fact that these derivatives are meant to default means the 'investment' (your property) has to be realized within 5 years hence if the derivative/bond becomes unsaleable, (as they have) your 25 year mortgage is a sham";. Again, you are wrong. I'm not sure where you are coming up "realized within 5 years". I worked in sales/trading at a major bank selling mortgage backed securities, so I do have a very good guess as to where you derived that erroneous information. The prospectus of a transaction often refers to the 'weighted average life' of the notes. And often you will see that this weighted average life is around 4 to 5 years. Key word there AVERAGE. There's no guarantee the notes will pay off in 5 years. It's based on a prepayment rate assumption that may or may not be true. The LEGAL FINAL maturity of the bonds is usually after 2040 in most cases. An investor assumes the risk that the loans prepay more slowly than any prepayment assumption dictates and in worst case, at the legal final maturity date. An investor can't demand his money back if he hasn't received his money back within 5 years. That's nonsense.

 

I disagree. These securities were sold without disclosing their true content namely sub-prime. These were all bundled together in order to obtain a triple A rating. It was also intended that they could be sold on every 5 years so no one would be any the wiser. Unfortunately the credit crunch came people couldn't pay their mortgages & suddenly they were not producing an income & they couldn't be moved on. The only solution as the default insurers AIG had no money was/is to liquidate the assets, in other words repossess the properties homes & in order to justify it they find ways to place some borrowers in default by adding hitherto undisclosed fees & charges

[JebediahSpringfield]

If you believe that investors did not know what they were buying, you don't understand the market.

 

Here's an example:

 

Unassociated Document

 

From the Risk Factors section...

 

The securities will be directly or indirectly backed by mortgage loans or by conditional or installment sales contracts or installment loan agreements, referred to as contracts, secured by manufactured homes. The types of mortgage loans or contracts included in a trust fund may include loans made to borrowers who do not qualify for loans conforming to underwriting standards of more traditional lenders and as a result of the credit quality of such borrowers, such mortgage loans may have a greater likelihood of delinquency and foreclosure, and a greater likelihood of loss in the event of delinquency and foreclosure. You should be aware that if the mortgaged properties or manufactured homes fail to provide adequate security for the mortgage loans or contracts, as applicable, included in a trust fund, any resulting losses, to the extent not covered by credit support, will be allocated to the related securities in the manner described in the related prospectus supplement and consequently would adversely affect the yield to maturity on those securities. The depositor cannot assure you that the values of the mortgaged properties or manufactured homes have remained or will remain at the appraised values on the dates of origination of the related mortgage loans or contracts. Manufactured homes, unlike mortgaged properties, generally depreciate in value. Consequently, at any time after origination it is possible, especially in the case of contracts with high loan-to-value ratios, that the market value of the manufactured home or home may be lower than the principal amount outstanding under the related contract. The prospectus supplement for each series of securities will describe the mortgage loans and contracts which are to be included in the trust fund related to your security and risks associated with those mortgage loans which you should carefully consider in connection with the purchase of your security.

 

Non-conforming Loans. Non-conforming mortgage loans are mortgage loans that do not qualify for purchase by government sponsored agencies such as the Fannie Mae and the Freddie Mac due to credit characteristics that to not satisfy the Fannie Mae and Freddie Mac guidelines, including mortgagors whose creditworthiness and repayment ability do not satisfy the Fannie Mae and Freddie Mac underwriting guidelines and mortgagors who may have a record of credit write-offs, outstanding judgments, prior bankruptcies and other derogatory credit items. Accordingly, non-conforming mortgage loans are likely to experience rates of delinquency, foreclosure and loss that are higher, and that may be substantially higher, than mortgage loans originated in accordance with Fannie Mae or Freddie Mac underwriting guidelines. The principal differences between conforming mortgage loans and non-conforming mortgage loans include:

 

●the applicable loan-to-value ratios,

 

●the credit and income histories of the related mortgagors,

 

●the documentation required for approval of the related mortgage loans,

 

●the types of properties securing the mortgage loans, the loan sizes, and

 

●the mortgagors' occupancy status with respect to the mortgaged properties.

 

As a result of these and other factors, the interest rates charged on non-conforming mortgage loans are often higher than those charged for conforming mortgage loans. The combination of different underwriting criteria and higher rates of interest may also lead to higher delinquency, foreclosure and losses on non-conforming mortgage loans as compared to conforming mortgage loans.

 

And here in another transaction, you find this paragraph in the risk factors section of a preliminary prospectus (from early 2007):

 

If this document is a Prospectus Supplement, do not delete this paragraph

 

Recent Developments in the Residential Mortgage Market May Adversely Affect the Performance and Market Value of Your Securities

 

Recently, the residential mortgage market in the United States has experienced a variety of difficulties and changed economic conditions that may adversely affect the performance and market value of your securities. Delinquencies and losses with respect to residential mortgage loans generally have increased in recent months, and may continue to increase, particularly in the subprime sector. In addition, in recent months housing prices and appraisal values in many states have declined or stopped appreciating, after extended periods of significant appreciation. A continued decline or an extended flattening of those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, particularly with respect to second homes and investor properties and with respect to any residential mortgage loans whose aggregate loan amounts (including any subordinate liens) are close to or greater than the related property values.

 

Another factor that may have contributed to, and may in the future result in, higher delinquency rates is the increase in monthly payments on adjustable rate mortgage loans. Borrowers with adjustable payment mortgage loans are being exposed to increased monthly payments when the related mortgage interest rate adjusts upward from the initial fixed rate or a low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans.

Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance, and in addition, many mortgage loans have prepayment premiums that inhibit refinancing. Furthermore, borrowers who intend to sell their homes on or before the expiration of the fixed rate periods on their mortgage loans may find that they cannot sell their properties for an amount equal to or greater than the unpaid principal balance of their loans. These events, alone or in combination, may contribute to higher delinquency rates.

 

In addition, numerous residential mortgage loan originators that originate subprime mortgage loans have recently experienced serious financial difficulties and, in some cases, bankruptcy. Those difficulties have resulted in part from declining markets for mortgage loans as well as from claims for repurchases of mortgage loans previously sold under provisions that require repurchase in the event of early payment defaults, or for material breaches of representations and warranties made on the mortgage loans, such as fraud claims. The inability to repurchase these loans in the event of early payment defaults or breaches of representations and warranties may also affect the performance and market value of your securities.

The mortgage loans in the trust fund include subprime mortgage loans, and it is possible that an originator, due to substantial economic exposure to the subprime mortgage market, for financial or other reasons may not be capable of repurchasing or substituting for any defective mortgage loans in the trust fund. You should consider that the general market conditions discussed above may adversely affect the performance and market value of your securities.

 

Guess what? Investors still bought the deal, which punches a hole in your argument that investors did not know what they were getting themselves into. Maybe they didn't appreciate the severity of the downturn/market collapse, but they certainly knew what they were buying. Investors were drawn to higher risk mortgages because the securitised bonds carried a higher yield than standard mortgage securitisations. Additionally, they overly relied on rating agency opinions to give them comfort notwithstanding the higher risk. In essence, they didn't do the appropriate credit analysis and outsourced it to a third party in exchange for higher returns.

 

You keep harping on this '5 year' point. Please provide a source, because that is not correct. The mortgage backed securities market was traditionally a buy and hold market, it was not a market where these instruments were traded freely (except until AFTER the financial crisis when investors were trying to sell everything they owned). Investors traditionally held these instruments till the deal paid down on its own. So this idea you have that these were sold as 5 year investments is incorrect. If you're erroneously referring to the weighted average life section of a prospectus, see below from the Citi prospectus.

 

The prepayment experience on the mortgage loans and contracts underlying or comprising the trust fund assets in a trust fund will affect the weighted average life of the related series of securities. Weighted average life refers to the average amount of time that will elapse from the date of issuance of a security until each dollar of principal of such security will be repaid to the investor. The weighted average life of the securities of a series will be influenced by the rate at which principal on the mortgage loans underlying or comprising the trust fund assets included in the related trust fund is paid, which payments may be in the form of scheduled amortization or prepayments, for this purpose, the term “prepayment” includes prepayments, in whole or in part, and liquidations due to default and hazard or condemnation losses. The rate of prepayment with respect to fixed rate mortgage loans has fluctuated significantly in recent years. In general, if interest rates fall below the interest rates on the mortgage loans underlying or comprising the trust fund assets, the rate of prepayment would be expected to increase. There can be no assurance as to the rate of prepayment of the mortgage loans underlying or comprising the trust fund assets in any trust fund. The depositor is not aware of any publicly available statistics relating to the principal prepayment experience of diverse portfolios of mortgage loans over an extended period of time. All statistics known to the depositor that have been compiled with respect to prepayment experience on mortgage loans indicates that while some mortgage loans may remain outstanding until their stated maturities, a substantial number will be paid prior to their respective stated maturities.

 

The above can't be clearer that the weighted average life of the notes is UNCERTAIN.

[JebediahSpringfield]

And thanks to the posters above.

[JonCris]

If you believe that investors did not know what they were buying, you don't understand the market.

 

Here's an example:

 

Unassociated Document

 

From the Risk Factors section...

 

 

And here in another transaction, you find this paragraph in the risk factors section of a preliminary prospectus (from early 2007):

 

If this document is a Prospectus Supplement, do not delete this paragraph

 

 

Guess what? Investors still bought the deal, which punches a hole in your argument that investors did not know what they were getting themselves into. Maybe they didn't appreciate the severity of the downturn/market collapse, but they certainly knew what they were buying. Investors were drawn to higher risk mortgages because the securitised bonds carried a higher yield than standard mortgage securitisations. Additionally, they overly relied on rating agency opinions to give them comfort notwithstanding the higher risk. In essence, they didn't do the appropriate credit analysis and outsourced it to a third party in exchange for higher returns.

 

You keep harping on this '5 year' point. Please provide a source, because that is not correct. The mortgage backed securities market was traditionally a buy and hold market, it was not a market where these instruments were traded freely (except until AFTER the financial crisis when investors were trying to sell everything they owned). Investors traditionally held these instruments till the deal paid down on its own. So this idea you have that these were sold as 5 year investments is incorrect. If you're erroneously referring to the weighted average life section of a prospectus, see below from the Citi prospectus.

 

 

The above can't be clearer that the weighted average life of the notes is UNCERTAIN.

 

Then why are they AND governments screaming blue murder that they didn't know. I suggest it wasn't that they weren't informed but that they were blinded by their greed & didn't care or they really did not understand ......... much like the Maddoff investors

 

Also you must have read the various forums, if you have you'll know that managmant companies are provoking defaults after which they, unlike traditional lenders, move with indecent haste to repossession

[JonCris]

Also why did the agencies give them triple A ratings

[actionnotwords]

These arguments which relate to the American market can quite easily be applied here.The group that many are concerned with here are the Lehmans subprime entities.The various prospectuses have been written for the English market and show far less caution to potential investors.

It is in fact significant that this group only having started some 5 years ago have caused so much distress to so many people.

The prospectuses give great weight to lending criteria,such criteria was never adhered to,it is apparent from evidence from people on this site that such criteria was relaxed to the extent that people on benefits were being offered substantial loans,affordability criteria was ignored in fact it would appear that nearly all could obtain a loan, a fact unknown and kept well away from the investor who lived in the fools paradise of believing that if such a loan had missold contracturally the originator would be compelled to buy it back,which is exactly what happened in the early days when I believe a broker fraud was exposed(other such frauds carried on unabated no doubt the loans were simply repackaged and sold on in the next securitization it was gravy boat time for all ).

This group are still trading as shells and have pursued vigorous repossession strategies, many through manufactured arrears and have escaped consequence from both their regulators and investors.The parent has gone ,their is no one left to pick up the bills or take responsibility.The consumer and the investor were both missold the product.

We now have the spectacle of the investor turning on the spv because of failing returns,the spv turning on the administrator who in turn is turning on the borrower whilst the real profiteers are in the wind.

Edited May 7, 2010 by actionnotwords

[JonCris]

These arguments which relate to the American market can quite easily be applied here.The group that many are concerned with here are the Lehmans subprime entities.The various prospectuses have been written for the English market and show far less caution to potential investors.

It is in fact significant that this group only having started some 5 years ago have caused so much distress to so many people.

The prospectuses give great weight to lending criteria,such criteria was never adhered to,it is apparent from evidence from people on this site that such criteria was relaxed to the extent that people on benefits were being offered substantial loans,affordability criteria was ignored in fact it would appear that nearly all could obtain a loan, a fact unknown and kept well away from the investor who lived in the fools paradise of believing that if such a loan had missold contracturally the originator would be compelled to buy it back,which is exactly what happened in the early days when I believe a broker fraud was exposed(other such frauds carried on unabated no doubt the loans were simply repackaged and sold on in the next securitization it was gravy boat time for all ).

This group are still trading as shells and have pursued vigorous repossession strategies, many through manufactured arrears and have escaped consequence from both their regulators and investors.The parent has gone ,their is no one left to pick up the bills or take responsibility.The consumer and the investor were both missold the product.

We now have the spectacle of the investor turning on the spv because of failing returns,the spv turning on the administrator who in turn is turning on the borrower whilst the real profiteers are in the wind.

 

Yup:cool:

[kegi]

There is no way in my mind that investors were not aware of what they were putting their money too when it states openly in the prospectus the pool of mortgages /loans they were buying into .ie SPPL SPPL LMC PML ETC all subprime,the rating agencies also state the higher risk of defaults in such pools in the event of a downturn in the economy which is taken into account and from what I have read lead the investors to barter a better deal with the SPV based on that.

 

As to the rating itself again from docs published on the net it would appear that when the O/L sold on the beneficial interest to the SPV it was with the intent of getting a better rating in so much as the rating was given based mostly on the income coming from the pool of mortgages ignoring the sh..te who sold it [can't speak for prime or near prime in that]

 

Also [don't take my word for it] the pools of mortgages according to secritization setup had to be of the same sort in terms of years to maturity ie 10 yrs 15yrs.25 yrs and if in a pool a mortgage defaulted ie repoed it had to be replaced ASAP by another of the same type so as not to effect the income flow and performance of the notes ,hence as said before such default happenings were not to the benefit of the investors .

 

So where I differ slightly to JS AND NOT BEING PRIVY TO ANY OF THE INVESTOR AGREEMENTS [and only talking subprime]there must have been a number of various notes set up, short term, medium ,and long term based on the maturity date of the pool of mortgages.One doc I read I believe from MERRILL LYNCH set out the way it would work .

All notes had to mature before the pool of mortgages so in a ten year one say you could have a six year note + maybe a short one, or 2 three year ones + another something along those lines. One of the eurosail pdf\s shows a pool ,all of which are in the region of ten years to maturity .Another one I saw was of all fixed rate mortgages for whatever term they were set at, maybe thats where this idea of 5 years and gone comes from . Its certainly not the actual mortgage thats for sure .

 

thats my take on it so fire :paway

 

kegi

[Suetonius]

Also why did the agencies give them triple A ratings

 

Just to clarify the agencies did not give them all triple A ratings.

 

http://www2.standardandpoors.com/spf/pdf/fixedincome/051006_eurosailSNAP.pdf

 

This report shows that different ratings were given (admittedly still a very rosey picture painted by the agency)

[Suetonius]

I disagree. These securities were sold without disclosing their true content namely sub-prime.

 

 

http://www2.standardandpoors.com/spf/pdf/fixedincome/051006_eurosailSNAP.pdf

 

From the same report

"The mortgage loans in the pool consist of a combination of "near prime" and nonconforming mortgages. A portion of the pool is characterized as "near prime" as these loans have been made to borrowers with little or no adverse credit history. Approximately half of the provisional pool comprises nonconforming mortgages. Of the borrowers whose mortgage loans are included in the provisional pool, 18.94% have been subject to a county court judgment, and 2.42% of the provisional pool comprises loans to borrowers that have previously been bankrupt."

[Suetonius]

It was also intended that they could be sold on every 5 years so no one would be any the wiser. Unfortunately the credit crunch came people couldn't pay their mortgages & suddenly they were not producing an income & they couldn't be moved on.

 

Isn't the above in contradiction to the title of this thread that they were designed to fail.

[JonCris]

 

FT Alphaville Moody’s receives an unwelcome (Wells) notice

 

Oops it appears it DID start in Europe