Liar's loans were closely related to NINJA loans - No Income, No Job, No Assets.
These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk.
Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft.
All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'.
Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.
Sidestepping the editorial : The basic problem with NINJA loans was that the historical payment/default characteristics were very encouraging.
When the rating agencies modeled up new asset classes, they naturally gathered as much historical data as possible. For NINJA loans, the historical dataset was pretty small, since banks don't normally lend to such hopeless cases. However, when they did lend, the facts of the particular loan normally went something like : House buyer works for himself as a builder/developer, gets paid in cash, plays golf with the bank manager - and everyone knows that he's good for repayment (even if his tax returns don't show any income).
The major problem with this is that the statistical data did not contain these qualitative factors, and showed only that people with No (declared) Income, No (on-the-books) Job and No (visible) Assets paid back their loans consistently. That became codified into a simple fill-in-the-form application which missed the entire point... And loan brokers went to town, with the loans eventually packaged up and dumped into a pool.
At it's heart, the root cause of the problem is that rating agencies did a horrible job of understanding the risks that were embedded in the different types of loans. And no-one had an incentive to let them in on the 'trick' (and, perhaps, the rating agencies were willfully blind to what was going on). Since the middle-men were only short-term holders of each mortgage, the risk got transferred from modeling spreadsheet to investors in pools who trusted the ratings agencies within months or weeks.
Frankly, the politicians were completely outside the loop, and the regulators trusted that the Rating Agencies were doing a good job. Terrible assumptions.
These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk.
Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft.
All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'.
Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.