sophisticated investor malice

Examples abound these days. Here's one from Washington Times, "The complexity of the loans was exceeded only by the complicated schemes banks developed to package the loans and market them to sophisticated investors..." (Blame abounds for the housing bust, WT, Dec. 27, 2007). We're left wondering who really these "sophisticated" investors may be? The Persian gulf sheiks? The Chinese barons? The Russian oligarchs? The Norwegians pensioners? Really.

The massive fraud perpetrated on the citizens of the world by the US bulge banks is reflected in the statement of one of the brains in this business, John Stumpf, CEO of Wells Fargo bank in the same article, "It's interesting that the industry has invented new ways to lose money, when the old ways seemed to work just fine." It is called greed, Mr. Stumpf. When opportunities exist to bilk more milk from the herd, "sophisticated investors" will exploit it.

Aside from all the accolades bestowed on the sophisticated investor, who by the way, is now losing his shirt, the root cause of this mess is the securitization of mortgage in the first place. It was not long ago, roughly 30 years ago, that a house was a place to live, raise a family, grow old, nurture relationships with neighbors and friends, and expect that it was a safe place to live. Not anymore, thanks to RMBS (residential mortgage-back security). An oxymoron, in the exact sense of the word. RMBS was created in the 80's to expand the lending. It did a lot of good. RMBS, as packages, were sold initially, but the the underlying loans, and by default the risk, were kept on the balance sheets of the originating banks. This meant in the minimum that capital was stashed away to hold the loans. It also meant that houses were still viewed as places to live. No longer. Thanks to derivatives and hedging, loans are not kept in house, therefore, banks saw it, at least until the beginning of this year, as not a risk on the balance sheet. Once "sophisticated investors" got involved, then houses were like stocks, with the same amount of security and longevity. Enter condo flippers, the equivalent of stock day traders. Now, we're here!