The Opposite of Asset Protection

In previous posts regarding strategic default, we discussed the concept of speculation.

Here’s why mortgage insurance, or MMIF, failed to be enough: While real estate became the subject of speculation by individuals, mortgages became the subject of the speculation by banks.  That’s right, banks began speculating.  Rather than providing a vault to protect money, banks and investment companies created a market worth trillions of dollars that was completely disconnected from mortgage insurance.

Here’s how banks speculate, in VERY general terms.  Step 1: Write a bunch of mortgages and lend money.  Step 2: Package mortgages together and sell off portions of the package to “diversify.”  We call this a mortgage backed security or “MBS.”  Step 3: Buy insurance.  But why insurance, when the MMIF exists?  There are a number of reasons, but the simplest explanation (and this writer’s opinion) is that MMIF insurance doesn’t “trade” (think stocks), and Wall Street guys and gals LOVE to trade.

So somewhere along the way a very “smart” person decided to write an insurance policy on an entire package of mortgages.  The terms of the insurance policies eventually created varied greatly, but in many cases they could be cashed in after a certain percentage of mortgages defaulted OR if the “insurer” became strapped for cash.  The “insurers,” however, were not insurance companies and they were not regulated.  They were banks and investment firms betting with your money!

What eventually happened is these insurance policies, or credit default swaps as they are known on Wall Street, were being created out of thin air as a way for investment firms to speculate on the mortgage market.  Credit default swaps could be bought and sold even if no MBS was owned!  Imagine if you could buy insurance on an asset that you don’t own!  That’s what was happening!  And you know what happened?  The credit default swap market became much bigger than the mortgage market.  When mortgages started heading south, investment firms and banks were unable to meet the demands of the insurance they had sold, and guess what . . . while the mortgages were covered by insurance like MMFI in some cases, the credit default swap market was not!

That’s a view from 10,000 miles of why we had to bail out the banks.  It wasn’t because of bad mortgages.  It was because of speculation by the banks.  In very general terms, speculation is the opposite of asset protection.  If you want to learn how to manage risk, preserve your wealth, and protect yourself against what speculation can do to our economy and your wealth, contact an asset protection attorney.