In what could be a movie plot, the story starts with a meeting of Wall Street traders eating Chinese food on a cold February night in 2005. They met to figure out how they can turn the massive U.S. mortgage securities market into a cash cow for Wall Street, just like the $12 trillion corporate credit market. They had no idea at that time how the plot would develop into today's subprime meltdown that could actually set us on a bullet train heading toward the ultimate Wall Street disaster flick - the next Great Depression.

This could make for great movie entertainment if the story weren't true. Bloomberg first exposed the depths of this story in December 2007, but so far the rest of the U.S. financial press has pretty much ignored it. I wonder why. The only other newspaper that picked this up was the New Zealand Herald, but I did see discussions of the story on various other hedge fund blogs.

Bloomberg's primary source for the story was Greg Lippmann, one of the key players in the story, who was then a 36-year-old trader at Deutsche Bank. He was part of what Bloomberg calls the "Group of 5" that included Goldman Sachs (NYSE: GS) Trader Rajiv Kamilla (34-years-old) and Todd Kushman (32-years-old) of Bear Stearns (NYSE: BSC). Representatives unnamed in the story came from Citigroup (NYSE: C) and JP Morgan Chase (NYSE: JPM). Through a series of meetings that grew larger and larger, including ultimately almost all Wall Street banks, subprime mortgage securities were born. The International Swaps and Derivatives Association, which sets trading terms for dealers on these complicated financial vehicles, finally got involved to help draft what ultimately became the subprime mortgage securities contract. The inability to appropriately price these securities based on their high risk has already resulted in over $100 billion in write-downs by Wall Street banks and brokerage houses, as subprime foreclosures continue to mount.

Continue reading How Wall Street traders fueled the subprime meltdown

How Wall Street traders fueled the subprime meltdown originally appeared on BloggingStocks on Fri, 18 Jan 2008 13:15:00 EST. Please see our terms for use of feeds.