patrick.net

Over the past 18 months or so of regular posting here, I've taken a considerable amount of flack for my criticism of MBS/CDO debt instruments as being a primary cause of the current housing bubble --and why I believe this bubble is so much larger in magnitude and global scope than previous relatively localized bubbles. In particular, I've criticized mortgage-backed securities as being a bankster stealth vehicle, used primarily for transferring mortgage default risk from lenders to main street (retail investors, pensioners & taxpayers). Some of the big "L" Libertarians disagree with me on this.

Some of you might be familiar with my mantra (even if you disagree with it): "Privatize Profits, Socialize Risk".

Well, last Friday my point-of-view just received some direct confirmation from a rather unlikely source: Wells Fargo's President and COO, John Stumpf. You may recall that Wells Fargo is the nation's largest sub-prime lender (see the Mortgage Lender Implode-O-Meter for rankings).

Reuters: Mortgages are different story for Wells Fargo-COO

Here's an excerpt:

Wells Fargo President and COO John Stumpf said: "It's a very different story at Wells," citing the fact that most of the subprime mortgages it issues are sold to Wall Street banks which then assume the risks.

In the first half of 2006, 72 percent of the bank's subprime mortgages were co-issued with Wall Street firms, he said.

"They take those risks and they sell that off to investors so we never get into the chain of ownership," he said. "It's that simple."

There you have it straight from the horse's mouth: MBSs exist primarily for risk-transference to protect the lenders --"it's just that simple".

Oh, and after they repackage and sell these loans to "Wall Street firms" (think Fidelity, Merrill Lynch, Goldman Sachs, etc.), do you think those firms personally keep them on the company's books or re-sell them downstream as fast as possible to retail sucke-- er, investors (think 401k plans, pension funds, grandma, sister, etc.)? I think we can finally can close the book on this particular "debate" now ;-).[1] [2]

[1] In light of recent information from Mike, FAB, Randy, etc., I am reconsidering my postition. If most of the default/repurchase risk is concentrated in the lowest MBS tranches, and these tranches are basically off-limits to retail investors and pension funds, then the only people getting screwed are hedge funds and FCBs. If that's indeed the case, then more power to Mr. Stumpf & Co.

[2] Another poster (News) recently (2/22/07) pointed out that the Amaranth Hedge Fund blow-up last September cost the San Diego County employees' pension fund $87 million in losses. While this was related to natural gas trades --not MBS/CDO-- this example illustrates how my original contention about retail investors being exposed to HF/derivatives risk might turn out to be true. Isolated data point, or an early indication of an emerging trend? The next few years will tell the tale, as $Trillions in option-ARM and I/O mortgages start resetting.

Discuss, enjoy...
HARM

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