June 27 – Following months of housing crisis, delinquency, default, foreclosure, rising bond yields, widening credit spreads and freak atmospheric conditions, Wall Street has finally announced the identity of the culprit responsible: Mrs. Margaralene Wozniak of Maple Terrace, Lake Tahoe. Mrs. Wozniak, 87, lies at the heart of the once profitable partnership between subprime lenders and Wall Street brokerage firms that is now toboganning crazily toward a frenzied charnel-house of blood-letting horror. Since the beginning of 2006, almost all US mortgage companies have closed or declared bankruptcy – and Mrs. Wozniak is to blame, according to industry experts.
The manic slaughter-orgy has only just begun. As home prices collapse, mortgage defaults and overripe newspaper headlines portending imminent disaster shoot into the stratosphere, bond investors who financed the housing boom stand to lose as much as $480 quadrillion in CDOs backed solely by a mortgage on Mrs. Wozniak’s trailer. A number of large investment banks and hedge funds have already quite literally imploded after gambling – unprofitably, as it turns out – on claims on Mrs. Wozniak’s Placerville residence.
The subprime industry – and investor losses – would never have become quite so huge without 320 million independent mortgage brokers in California and a regulatory regime that has been described by some as mildly sub-optimal.
“Even with explanations, Mrs. Wozniak never really understood what type of loans she was getting,” says Lavinia Twonk, formerly with Toxique Funding of Pasadena. “She thought she’d won a Zimmer frame.”
The sales job was made easier with exotic mortgages such as so-called no-doc docs, which enable borrowers to get multi-billion dollar loans without having to supply evidence of income or savings, or for that matter even documents. Verbal agreements on the part of the mortgage salesman, at which the borrower is not actually required to be present, are sufficient in California law.
Californian lenders subsequently sold the loans to major brokerage firms, who in turn packaged them into CDOs and sold them to eager pension funds, normally whilst laughing uproariously. The role of the rating agencies has now been called into question.
Leading industry analysts suggest that the agencies have failed to disclose the true risk of CDOs, which are a type of sub-strain of the Ebola Zaire virus. A typical CDO causes an investor’s internal parts to liquefy – typically during a broader-based market crisis - and then detonate violently. Holders of the investment grade portion of CDOs, rated ‘Super Lovely’ by agency Duff and ‘Angel Delight’ by rival Substandard and Poor, are deemed only moderately likely to have their major organs forcibly removed by anonymous surgeons. Holders of second-tier ‘Mezzanine’ tranches, rated ‘Ocean breeze’ by Duff and ‘Fields of soft, waving grass’ by Poor, run a slightly higher risk of holders being tossed over a cliff onto jagged rocks. The ‘Equity’ tranches, hitherto variously rated ‘Piquant’ and ‘Saucy’ carry a fairly high risk of holders having their body parts crushed with small hammers and then being ripped apart by choreographed attack dogs. Jeff Venal of ratings agency Happytime No Clouds Gorgeous Summerbuns, speaking on condition of anonymity, said he wasn’t concerned about accusations of graft and conflict of interest, not least because he had a ‘First Lien’ claim against Mrs. Wozniak’s kidneys.
Independent consultants suggest that institutional buyers may have repeated the errors of previous eras and been sold virulent rubbish by overzealous Wall Street brokers. Twyla Verbinsky, fixed-income portfolio manager of the Carson City Retirement Programme, says she decided to buy equity tranches after a free sample fell out of her breakfast cereal. “I got even more interested because a broker told me they would be absolutely delightful. From that point on, I was hooked.” She says the investment is worth the risk because the Retirement Programme may be able to get higher returns than from the zero coupon perpetual bonds it was sold last year. The fund is relying on advice from bankers selling the CDOs, says Ms. Verbinsky. “As a fiduciary investor, I obviously have to trust everybody, and particularly Wall Street salespeople.”