Jon Schwarz: I Was Wrong: Big Banks Actually Were Exactly Like Counterfeiters [View all]

[marmar]

by Jon Schwarz


(The Intercept) In a recent post about the new movie The Big Short, I argued that it’s not actually necessary to decipher the abstruse jargon of the 2008 financial crisis — i.e., credit default swaps, mezzanine tranches, synthetic collateralized debt obligations, etc. — in order to understand what happened. What the big banks did during the housing bubble of the mid-2000s was in essence straightforward counterfeiting. The difference between what they did and regular counterfeiting was simply the kind of fake paper; regular counterfeiters print fake, valueless cash, while the banks were printing fake, valueless bonds.

However, I then made a very serious mistake — I claimed there was a “small difference” between regular counterfeiters and the ones on Wall Street:

Regular counterfeiters generally want to spend all their bad paper themselves, whereas Wall Street just took a percentage for running the presses. Then they often, though not always, passed their bad paper along to others.

If in 2005 a bank packaged worthless mortgages together into a bond with a face value of, say, $100 million, it would generally collect fees of about 1.5 percent, or $1.5 million. The $100 million face value wasn’t real, but the fees definitely were.

What I didn’t understand, and commenter Larry Headlund pointed out, is that counterfeiting cash actually does work the same way. That is, counterfeiters would not print up $100 million in cash and then spend it all themselves. Instead, they sell their fake cash to others for a percentage of the face value. ..................(more)

https://theintercept.com/2016/01/02/i-was-wrong-big-banks-actually-were-exactly-like-counterfeiters/