How Goldman Sachs wrecked the economy

Many people are searching on google for this strange term “securitization audit”.  What is it?   Who needs a securitization audit?     What does a securitization audit do?   Do I need a Securitization audit?   Ok lets see..    Bear with me I have to explain a little about the credit default swap and CDO madness first.

For a long time in order to mitigate risk or very specifically to aggregate specific types of risks, saavy investment bankers and institutions have pooled assets into portfolios and sold pieces of the pool of investments off to investors.   Mutual funds, investment companies, real estate partnerships all have been designed to group either like assets or varied classes of assets into groups that were thought by the selling entity to have some marketable value to some section of the investment community or the public at large.    The evolution of the mortgage bond did not hit its most damaging  stride until after 2005 where very clever financial alchemists on wall street started to think that there really were methods of creating money from nothing.

Mortgages are by definition  already asset backed paper collateralized by the underlying fair market value of the real property they encumber.    Countrywide has underwritten $97 billion in subprime mortgages now serviced in large part by Bank of America but owned by mortgage backed securities pools and CDO’s all over the map.   A subprime mortgage is a mortgage backed by real property differentiated from other conventional mortgages by  the  lack of creditworthiness  and potential inability to pay of the actual homeowner exacerbated by the lack of information provided to the underwriter by the consumer (in what are commonly known as stated or liar loans).

The underwriters and ultimate purchasers of mortgages use a sliding scale to assess the extent to which a mortgage is subprime.    The higher the credit score the less subprime.   The higher the appraisal on underlying property (lower LTV) relative to the amount borrowed,  the less subprime.    The more information received in the form of tax returns, income, bank accounts, the less subprime.        The more this information revealed to the underwriter such as:  high income,  significant savings and net personal equity, job stability,  higher fica score and thus responsibility well  obviously the less subprime.      The more a homeowner puts down, the less subprime.

Goldman Sachs  is largely  responsible for the financial mess our world  economy is in because of the role they played in creating a market for a completely  an unregulated form of insurance bet and for Goldman Sachs role in designing an opaque  form of derivative security (the CDO) from the most subprime of all mortgages  and for taking complete advantage of AIG and AIGfd’s unwitting willingness to insure the most toxic layers of pools of subprime mortgages.     They did this  by taking the this riskiest bottom layer of Mortgage backed securities pools, scraping the risk off of these pools and selling the risk to AIG who was already over exposed to subprime through other CDS’s on standard Mortgage Backed Securities pools.     Then Goldman payed Moody’s, Fitch and S&P to rate  these newly formed “collateralized debt obligations”  as  investment grade or AAA rated paper.      Goldman Sachs  did this because a few very well researched speculators figured out a way go short on mortgage backed bonds and had an appetite for bets against the most toxic of mortgage pools and basically showed Goldman exactly what to create for them.    They basically short ordered an economic disaster from Goldman so they could get rich on it.  Goldman played the spread between what the speculators were willing to pay 2-3% annual premiums on the value of the pool they were buying insurance for and the 12 basis points Goldman tricked AIG into taking for insuring the pool.

These now criminally  AAA rated but extremely complicated CDO securities allowed Goldman Sachs to stand in the middle of a trading triangle  and make money from every side with very high margins because of the lack of understanding of how CDO’s truly function.     They brokered deals between AIG and loan originators for CDS’s on MBS’s, between AIG and outright short speculators. (Greg Lippman and Mike Burry-Read Mike Lewis’ Big Short)     Guys like these had a very serious appetite for CDS’s on the shittiest of mortgage paper because that was the best short bet on the mortgage backed securities market.    And of Course between the large subprime lenders and investors with a huge appetite for paper that was now rated AAA, safe as treasuries but with much higher potential returns because they were backed with the ugliest of subprime mortgage notes with criminally high  APR’s to be paid on the backs of unsuspecting homeowners who just wanted to  buy a house to live in.

Here’s what wrecked our economy.     Goldmans greed to stay in this highly lucrative triangle scenario was taunted by their inability to find pools of really shitty mortgage paper (for which  there was now the highest demand.   Demand  for cds’s coming from speculators that AIG was unwittingly willing to sell to.    This  created Goldmans lowest hanging fruit for creating and marketing  CDS’s.    These factors and Goldmans unbelievable willingness to allow AIG to get wrecked for profit prompted Goldman to create and sell  the gold embossed bags of shit (CDO,s) to investors for huge profits.     Guess what every other Investment Banking firm on wall street did?    Of Course, they created their own little trading triangle.    This dramatically increased wall streets demand for shitty paper (golly gee, lets let anyone have a loan so Goldman can make money wrecking our economy) and this created the real estate bubble..   end of that little story.

OK I’m way off base..   I wanted to write an article on  securitization auditing.   Ok I have a little A.D.D sorry.