> The repackaging and reselling of worthless loans, creating money out of thin air, seems pretty immoral to me, and was arguably one of the triggers of the crisis.
The loans aren't worthless now and weren't worthless then. They're just worth less.
Combining loans into a fund doesn't "create money". It merely allows folks to spread their risk over more loans, to diversify.
What happened was that the collective risk was misunderstood. When folks figured that out, they stopped buying those packages. Since US regs require mark-to-market, 0 buyers means 0 "value". Since US regs also require that banks have sufficient assets, marking huge portions of their portfolios to 0 made them technically insolvent.
Note that most of these loans are still performing and the funds are still producing cash, so they're clearly not worth 0.
The other thing that happened is that a lot of folks decided to insure that risk. These folks thought that being paid to cover losses beyond some threshold was free money. Since they didn't get paid enough to compensate them for their actual risk, they're losing gobs of money.
Which is as it should be. If you're willing to take the profit, you should take the loss.
The loans aren't worthless now and weren't worthless then. They're just worth less.
Combining loans into a fund doesn't "create money". It merely allows folks to spread their risk over more loans, to diversify.
What happened was that the collective risk was misunderstood. When folks figured that out, they stopped buying those packages. Since US regs require mark-to-market, 0 buyers means 0 "value". Since US regs also require that banks have sufficient assets, marking huge portions of their portfolios to 0 made them technically insolvent.
Note that most of these loans are still performing and the funds are still producing cash, so they're clearly not worth 0.
The other thing that happened is that a lot of folks decided to insure that risk. These folks thought that being paid to cover losses beyond some threshold was free money. Since they didn't get paid enough to compensate them for their actual risk, they're losing gobs of money.
Which is as it should be. If you're willing to take the profit, you should take the loss.