http://www.theatlantic.com/magazine/...ing-bust/8977/

Here’s the interesting (but unstated) fact that emerges from this article. “Investors” who got stuck with bundled, securitized toxic mortgages - sold to them by greed-obsessed Wall Street banks – are now using companies like Digital Risk to help them uncover fraud and deceit. Once they receive this bought-and-paid-for “evidence” that they were deceived and misled, they threaten the banks with a lawsuit. The banks (or most of the banks) buy back these non-performing assets from the burned investors since taking these cases to a jury (and losing) could be disastrous. Plus, Wall Street bankers are not thought of as sympathetic defendants by the public at large, so it’s better to quietly buy back the bad mortgages and avoid a courtroom showdown. So who ultimately winds up paying for all this fraud and deceit? Take a look in the mirror. The folks who ultimately get screwed are a species of hapless inept financial operators known as taxpayers. Taxpayers are the folks who ultimately pick up the tab when these “Too Big to Fail” banks have to be bailed out.

By using companies like Digital Risk to help offload their losses onto taxpayers, we have another instance of crafty investors finding a way to privatize profits while socializing losses.

Sounds fair enough. The people vote for the government who were penultimately responsible for this mess and its the people who are ultimately responsible.

The people will always end up paying, they should exercise a lot more care.

Well considering that these Too Big To Fail banks paid back bailouts long ago, your assessment is wrong.

t_roy:

In a country that truly believes in free enterprise capitalism and recognizes the inherent risks associated with moral hazard, none of these banks should have (or would have) been bailed out. (And neither would the auto industry.) Justifying bailouts by saying "Well, the banks all paid back the money, so it's OK" is indefensible. If the banks had not paid back the money would that have made the bailouts "wrong"? (That's a rhetorical question.)

If you want to try and make the case that the bailouts were defensible simply because these banks are large, the consistent policy would be for the Government to bail out every failed business - and every failed businessman - irrespective of size. (In your world, I suppose all losing poker players should be bailed out too.) Why should only the rich and the ultra rich be the ones who get bailed out? That's the thorny briar patch you step in once you start justifying taxpayer bailouts.

When only the rich and the well connected are bailed out, you no longer have free enterprise capitalism - you have crony capitalism ... the same kind of crony capitalism being practiced in Vladimir Putin's Russia and communist China.

Why do you think lending money and having it paid back with interest is "indefensible"?

They paid back the official bailout. The unofficial (and much larger) carry trade bailout is ongoing.

EDIT: and it will never ever have to be paid back. And this doesn't even cover the completely ludicrous profit injection (for the banks) that was QE1 and QE2.

Actually we have pension funds and other retail investing fronts trying to claw back the money that was blatantly scammed out of them. THEN we have the banks gradually 'drawing down' the cost of paying back the money they basically stole (by selling blatantly terrible products to said pension funds). They cover the draw down by making massive profits borrowing from the fed at 0.5% and lending it to the world at 2-5%.

My point was that the tax payers aren't footing the bill for the "fraud and deceit" that you are talking about, because they have paid us back.

Besides, the bailouts were really just a short term cash injection. It's not like the banks were bankrupt they just needed to be kept from putting all of their assets up in a fire sale. Not saying that there wasn't a better way, but the bank bailouts were not all that bad like people make it out to be. We were in uncharted territory so you can't blame the feds to much for it.

And my point is that they paid back the short term loan they got from the government (the official bailout) and then proceeded to enjoy a massive free money period from the fed from 2009- to at least 2014. When they give back the money they've made from a period of insanely cheap capital they get to say 'we paid everyone back now stfu'.(which american savers have basically paid for and will pay even more dearly for when the economy actually recovers in the form of inflation). They have definitely NOT proven that they aren't a huge danger to society at this point.

Come on people... This whole recent JPMorgan disaster trade wasn't a disastrous trade at all... It was the inefficiency of size in action. It's impossible to hedge a 400+ billion dollar bond portfolio perfectly... There will be areas where your ass is hanging out. This is why no one at JPMorgan has come out and said "This was a terrible trade by a guy who clearly had no idea what he was doing... and he will never work again." Nope. 'The Whale' remains a very important person over at Chase. Why? Because despite him running bad the hedge he built is probably STILL the best thing they've come up with.

This would NOT happen if they were trying to hedge a much much smaller portfolio. This size issue is a big part of why 'too big to fail' is so terrible. It's also 'too big to have sane risk management'.

Good points Mr. Bored. Here's something else to think about. Currently there is somewhere in the neighborhood of $675 TRILLION dollars worth of derivatives floating around the world. (This is a bit of an improvement since there was over 700 TRILLION in derivatives a year ago.) Defenders of the derivatives market will tell you that all this handwringing and worry about derivatives is overblown since most of the positions are perfectly balanced and "netted out" and nothing untoward is likely to happen - despite all the contrary "evidence" that tends to suggest otherwise. Remember Long Term Capital Management and AIG? Now there's JPMorgan-Chase and this "London whale". How many of these canary-in-the coal-mine disasters have to happen before we have a chain reaction calamity?

Does anybody (besides the apologists) really believe there aren't "losers" who have placed bad bets in and among that pool of 600-plus TRILLION? All these TBTF financial institutions are in the process of trying to unwind these sticks of dynamite, but that process is going to take anywhere from one to two decades. We'll be lucky if there isn't a derivatives triggered train wreck in the interim. The world needs to be weaned away from financial derivatives. They're enriching a few at the risk of generating a calamity for the many.

What makes you think we would be better off without financial derivatives? Your posts sound like politically fashionable soundbites.

The real problem isn't so much that the banks were selling blatantly terrible products but that people were buying blatently terrible products. Not just ordinary mug punters but 'sophisticated' professionals were buying mega-amounts of the stuff. The cooncept of scamming pension funds with blatantly terrible products is an oxymoron.

We might also wonder how, if the products were so blatantly terrible the sellers ended upholding so much of the risk.

and how despite several calamities along the way did the bubble keep growing.

More reason to think currency collapse is likely. Only bad investors would have bought any mortgages in 2007. You didn't need a credit rating. It will not be passed on to taxpayers, it will be passed on to savers and businesses as inflation tax. The core budget is out of balance, thus any additional is deficit. Who was mainly responsible for the housing crisis? The federal government. They forced banks to give loans to people with low credit ratings. So conservative grandma that saved her money at $1 per hour washing dishes is going to pay for it all. When the money runs out she will be on the street because the nursing home wants real money.

The people that should be paying for it is government, they should be getting a cut in their pensions. To pay for the losses their pensions took investing in the housing bubble they created. Also, all the current homeowners on debt, should pay a percentage or two higher to pay for all the bad mortgages. Also, the people that got homes foreclosed on should be getting a bill.

Will the homeowners pay more? No, they will make grandma pay more. Will savers get to collect on debtors, no! Will we have real money and full reserve banking, no!

A previous CEO of MF Global went to help run a pension fund in New York.

The banks are not responsible for the QE. There was to contract to pay back so they owe nothing.

QE was not done to just make the banks money. It was done to help the economy. It's not the banks fault, it's the feds fault. Banks can not and should not be held liable.

Bull****. The Fed buying bonds was tremendously helpful to the banks and no one else. The incredibly low discount rate is also a blatant bank handout. Obviously there is no contract as the fed is unilaterally giving money to the banks...