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I don't quite understand what banks...
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I don't quite understand what banks had to gain from sub prime lending. Was it incompetence or greed?

They gained all the servicing and originating fees. The government purchases nearly all residential mortgages it's a moral hazard and a win win for banks.
do some sub prime lending yourself and you'll see.
go on lending club and check out the sub prime borrowers.

higher failure rates sure but also a much higher tolerance for failure rates.

$1000 at average rate of 16% apr vs
$1000 at average rate of 7% apr

at 25$ per loan thats 40 loans

year end 1070 vs 1160 no failures
1043 1 failure vs 1044 4 failures
1016.5 2 fails vs 1015 5 fails
989.75 3 fails vs 986 6 fails

total failure rates of 2.5 and 10, 5 and 12.5, 7.5 and 15 respectively

total failures who didn't pay from day 1.
if they fail later it fattens the case for the second. its much more likely to get a lower than expected failure rate than is required for the break even point.
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And if you were the bank, you just securitized it and sold it off to some other sucker, hoping that some city's pension fund got holding the bag when the shit hit the fan.

The incompetence part came when the banks themselves failed to realize that their hedges against the risk of being the bagholder were effectively contingent on everybody's hedges working. If the bank on the other side of the trade fails, your bank was fucked too.
The Community Reinvestment Act mandated that banks meet numeric goals on home loans to people who shouldn't really get good loans (low-income people, and minority groups, who tend to suffer and be unable to pay for all sorts of reasons.) Additionally, giants Fannie Mae and Freddie Mac dealt in similarly shitty subprime loans, and investors were less discriminating against borrowers with poor credit, knowing they could just pass it on to those two and not deal with it.
tl;dr: Gubbmint subsidized bad loans, banks traded on the loans as if they were good because they didn't have any skin in them. See >>1023970
for more details.
>mortgage-backed securities are created
>investment banks eat it up because mortgages are one of the safest forms of consumer debt due to ever-rising home values while also giving the holders an extremely high rate of return
>S&P and Moody's give these securities their highest ratings
>local mortgage lenders start loosening their credit standards and coming up with ridiculous new types of mortgages so they can lend more to satisfy demand for MBS; once they punt off MBS to and Investment Bank they're no longer their problem
>S&P and Moody's never catch onto this, Wall Street banks don't ask any questions because the rating is still high, or if they do catch on they can simply take out unreasonably cheap insurance (Credit Default Swap) on it at someone else's expense (AIG)
>Banks proceed to hold an extremely large portion of their assets in the form of MBS

Half of both, OP.

Also, don't listen the AEI shills trying to blame the government. Nobody told Wall Street's investment banks to devour hundreds of billions of dollars in shitty mortgages at the expense of all other assets.
>don't listen to the AEI shills trying to blame the government
Let me pre-emptively correct this: Don't listen to people blaming government housing policy.

If someone wants to blame the Fed for keeping rates way too low for way too long, thus enabling the credit bubble, that person would be correct.
It embodied a wider problem. Think about the main groups involved.

>The Majority Shareholds
>Get to essentially appoint the Board of Directors who appoint the CEO
>Have diverse holdings across a lot of industries and can absorb big hits, they're international
>Can recover from bubbles popping
>Disproportionately enjoy high dividends and skyrocketing stocks
>Secure in the knowledge that the powers that be will secure their investments through bailouts, subsidies etc

>The Corporate Executives
>Paid salaries and bonuses based on short term performance only
>Severance packages and corporate headhunting plus their networks mean golden parachutes if shit hits the fan

>They're fucking bookies, they make money no matter what
>If there is a glut of shit securities hitting the market they get a piece of it regardless
>They get a piece of rising stocks and buying frenzies while seeing none of the downside

These three groups understood that they had more to gain than lose from taking reckless gambles with the state of the economy. They're still re-leveraging to an even greater degree than before.
Indeed. The government bailing out TBTFs is a sure thing, and people like to bet on sure things.

This video explains MBS/CDO/SPL very well.

/pol/ here

I warned you about Jews dog

I warned you
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