But there might have been another reason that loaning to borrower who couldn't repay was the prevalent business model.
As foreclosure expert Neil Garfield notes, mortgages are worth a lot more if they default than if they perform.
Specifically, a mortgage worth $300,000 if the homeowner repays in full might be worth $9 million to the various owners of synthetic cdos and credit default swaps if the owner defaults.
We know - as alleged by the SEC:
Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure.Paulson also advised Los Angeles apartment mogul Jeff Greene to do something similar. Greene was heavily involved in the subprime market, and he bought the worst of the mortgage backed securities, and then bet against the bonds using CDS.
But Garfield says that it is broader than just a couple of investors like Paulson and Greene. He believes that was basically the business model for the entire mortgage industry.
He said that the big banks that packaged mortgage backed securities had an incentive to suck in really bad mortgages. If a certain percentage of the mortgages default, the cdo and cds side bets pay many times more than the actual mortgage could possibly pay.
This is yet another nail in the coffin, as far as I am concerned and explains the Goldman Sachs people laughing about their "shit mortgage funds" they were selling and then shorting! It also explains WHY all the Big Wall Street Firms have MADE Money this year while those they advice have Lost Money this year, due to their advice.
They Sell junk purposely and created mortgages purposely to Fail in packages just so they could short and bet against them! The evil that I thought I knew of the Wall Street banks, is no where close to the evil they really are! They will go against homeowners and investors for their idolizing the Paper of a Dollar!