Naked Capitalism, Yves Smith’s blog, today criticizes the Financial Crisis Inquiry Commission report for noting that mortgage underwriting standards were abandoned, allowing many more loans to be made, but failing to ask the key questions: Why were standards abandoned? Who wanted the bad loans? How did their demand affect and distort the market?
Smith’s answer: Speculators demanded bad loans so they could bet against them. Investment and commercial banks wanted them because Basel standards let traders make a lot of money off of them using collateralized debt obligations and credit default swaps, especially after June 2005 when the International Swaps and Derivatives Association standardized credit default swaps.
As RepoWatch readers know, the banks often financed the securities with repo loans or used the securities as collateral for repo loans. When repo lenders lost faith in the repo borrowers, they demanded their money back, and that was the credit crisis of 2007 and 2008.
… a lot, over half, wound up at dealer banks, particularly Eurobanks! And this is why the damned banks all were stuffed full of CDOs and had a systemic crisis! The CDOs were a catastrophic fail. The haircuts went from 2-4% for repo purposes to 95% in Sept. 2008.