Did Wall St firms know about the risk bundled into MBS(Mortgaged Backed Securities)?

[Democracy_for_Breakf]

I’ve been argued that the Wall St firms DID know about the high risk, but didn’t consider it because the high return seemed too appealing. They knew it would be highly profitable if they got customers to buy huge bundles of MBS’ for extra houses. Even if the Bailouts eliminated risk, I wonder if they still knew, or just didn’t notice.

If every customer had bought up these assets, then everyone would be in hardhit debt by the recession.

Regardless, the MBS wouldn’t have been so huge if the interest rates weren’t put excessively low, by The Federal Reserve.

[billott1]

Lets be more specific, firms do not know anything, individuals do. Were there individuals who computed or through other means predicted the popping of the mortgage bubble and the sharp declines in prices of mortgage backed securities: Yes of course. Peter Schiff was one such person. In fact one of the Fed Member Banks, Bank of America I think or possibly Wells Fargo, sold its mortgage business prior to the pop.

The reason seems to me to be that the senior managers at the banks just failed to read the markets and were caught with too many under-performing mortgages. They ran with blinders on and why wouldn’t they when there are the big sugar daddies: the Fed and FDIC to help them and guarantee their depositors get the lesser valued currency in payment for their deposits.

[wilderness]

yeap, moral hazard

[Caley_McKibbin]

Peter Schiff explained in his LvMI speech that the concensus was that you had to be batshit insane to think that house prices could ever go down.

[Stranger]

That is like asking whether motorcycle dealers know about the risk involved in motorcycles.

[Democracy_for_Breakf]

Interesting that people should mention Peter Schiff, since I live in CT. I really hope he wins, but I doubt he will.

@Bogart

Lets be more specific, firms do not know anything, individuals do. Were there individuals who computed or through other means predicted the popping of the mortgage bubble and the sharp declines in prices of mortgage backed securities: Yes of course. Peter Schiff was one such person. In fact one of the Fed Member Banks, Bank of America I think or possibly Wells Fargo, sold its mortgage business prior to the pop.

The reason seems to me to be that the senior managers at the banks just failed to read the markets and were caught with too many under-performing mortgages. They ran with blinders on and why wouldn’t they when there are the big sugar daddies: the Fed and FDIC to help them and guarantee their depositors get the lesser valued currency in payment for their deposits.

I agree with that statement, but let me remind you that Peter Schiff was put down on TV whenever he spoke about that. Do we blame the firms for not listening to him, or him being made fun of who caused an economic disaster?

[Caley_McKibbin]

The relevent information has always been there. All the CEO at AIG had to do was pick up a copy of Human Action. Most people in finance believe that what hurts them helps them.

[DanielMuffinburg]

@Democracy for Breakfast

I’ve been argued that the Wall St firms DID know about the high risk, but didn’t consider it because the high return seemed too appealing. They knew it would be highly profitable if they got customers to buy huge bundles of MBS’ for extra houses. Even if the Bailouts eliminated risk, I wonder if they still knew, or just didn’t notice.

If every customer had bought up these assets, then everyone would be in hardhit debt by the recession.

Regardless, the MBS wouldn’t have been so huge if the interest rates weren’t put excessively low, by The Federal Reserve.

There was an article a while back that described how becuase of government regulation a firm risk management team could never communicate with the firm’s trading team.