Think Twice Finance

The Subprime Mortgage Crisis: Part 7. The “Master Conduit” Ends the Beginning of the Crisis.

When deception becomes denial, the revelation of truth can be as painful as Don Quixote’s classic look in the mirror. The big banks’ “Quixote moment” came when the major banks and the Secretary of the Treasury got together over the weekend and asked themselves, relatively early in the crisis, “How can we solve this problem?”

The question fairly dripped with hubris. That the problem was solvable at all was laughable. Everyone in that room new that at least $1 Trillion in liabilities were placed in Asset-Backed Commercial Paper Conduits. The plan was to be “creative” about the fact that there was next to no capital supporting the assets in the conduits. The hope was that attention could be drawn away from this fact.

The idea was to form a single “master conduit” that would buy the assets of the individual banks’ mortgage conduits, financed by its own issue of commercial paper. This could not have been a more embarrassing proposal for the banks and their regulators. The theory was, “Mortgage conduits fooled the public into buying these risky assets. Let’s make a really big mortgage conduit and push that one. The public won’t notice that they are the same assets with the same risks, will they?”

They would. The idea died a slow, lingering death. But it displayed for all the world to see that these institutions and their regulators, when they speak of innovation, are talking about yet another way to hide their irresponsible risk-taking.