The whole Big Shitpile comes down to one simple phrase.
Americans know what Confederate Money was. It was money printed by the Confederacy during the recent unpleasantness. Early in the war it was very good money. When fortunes turned it became very bad money, eventually worthless money, thus a shorthand way of saying worthless money, non-money money.
CDOs are Confederate Money. What our laws allowed, and what our bankers did, was to take a bunch of mortgages — good, bad and indifferent — bundle them into a single security, then sell that as a valuable bond, with a "guarantee" provided by insurance and, often, the backing of Fannie Mae or Freddie Mac.
While the mortgages were being paid on time, this was good money. Real money. It was treated as such by bankers around the world. After all, it was insured, and it had the approval of the U.S. government.
The Gettysburg here was the foreclosure crisis. When mortgages started going bad, you couldn’t tell from looking at your CDO whether you had bad mortgages in it. A $10 million face value security with 1 bad mortgage in it might be worth 99 cents on the dollar (plus interest, so make it $105), or it might be worth 95 cents on the dollar. Or there might be two bad mortgages in there. Or five. Or ten. There was no way to tell.
Thus these securities became impossible to trade. You couldn’t place a value on them. They became worthless. They became Confederate Money.
But they’re not. Not really. Most mortgages are still being paid. Most
mortgages in America are not sub-prime, or Alt-A, or liar loans or
anything of the sort. Most people pay, even after the value of their
house goes down. They believe in America.
Here’s the problem. As more mortgages default, and new ones get hard to
get, home values plummet. More and more people own more than the house
is worth. More mortgages default. If these mortgages are in your CDO,
it’s losing value and there is nothing you can do about it. You can’t
get "inside" the instrument and do a deal that will save you some of
So here’s what we do. We get a big pile of capital, $700 billion because it’s a very big number. And we buy this Confederate Money.
For the lowest price people will sell it to us. Those banks which have
been following "mark to market" rules have already valued this stuff at
30 cents on the dollar, without looking inside. We start with them.
Then we look inside. We see which mortgages have defaulted, which can
renegotiated, which are good. We repackage these mortgages in new
instruments. Smaller face values. More certain interest rates. Like to
like, so you know the risk.
So you can price it.
Then we re-sell these new instruments. A CDO we buy for 30 cents on the
dollar might be worth much more, once it is taken apart and put back
together. It probably is.
This is a good business to be in. You start out giving the "good
bankers" cash which they can then use to make new loans. You sell new
instruments that are safer and can always find a value. Other people
may get into this game and God love ’em for it — it takes the
Confederate Money out of circulation that much faster.
What are we left with? A profit, for one thing. And more money in
circulation, money that is looking for opportunity. It can go anywhere.
It can go to Africa, or Latin America, or China, or India. It can come
here. It depends on what the entrepreneurs in those places have
available. It depends on the risk tolerance of investors. It’s called a
It will be bigger and better than ever if we can just get rid of all
this Confederate Money. That’s what your $700 billion investment is
doing. And it’s fair that you should be making it. Because you allowed
this Confederate Money to be created. American laws allowed this,
American bankers did this. We have infested the world’s banking system
with Confederate Money, and the whole thing will go down the tubes
unless we unwind it.
This is the right and proper thing to do. This is our responsibility,
as the creators of this Confederate Money. After the work begins we can
change the laws and make it impossible to print Confederate Money. We
can find some confederates and toss them in jail.
But first we have to get this Confederate Money out of circulation.