The very financial product that triggered the GFC – subprime mortgages, aka banks making home loans to people who can’t afford them – is apparently the hot new thing on Wall Street – again.

“Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump….Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. (Bloomberg)

According to the Smirking Chimp:

This is how it works: The new program offers incentives to banks and other deep-pocketed investors (in mortgage-backed securities) to slash the principal on underwater mortgages which keeps people from strategic default or foreclosure. Sounds good, right? But here’s the catch: When the mortgage is refinanced, it’s converted into a FHA-backed loan which provides an explicit gov-guarantee. So, for a slight loss on the face-value of the MBS, the investors (ie–investment banks, hedgies, etc) are able to resuscitate their moribund securitizations (MBS) and reap hefty gains. It’s like taking Fido’s steaming pile on the front lawn and turning it into the Hope Diamond. Abracadabra!

Geithner has figured out how to put together a bailout that will cost taxpayers hundreds of billions of dollars without any money actually exchanging hands. The value of the putrid mortgage-paper will soar because of the gov-underwriting, and the ginormous losses won’t be realized until the mortgages start blowing up sometime in the future. That’s when FHA will be put-to-pasture along with fellow-homicide victims, Fannie and Freddie. Pretty clever, eh?

So, the cutthroat speculators and bunko artists who fleeced us all with their dogshit subprimes, have returned for another dip at the public trough. That means taxpayers will get scalped on the same investments a second time. Hey, it’s a double-whammy!

I’m currently reading “The Creature From Jekyll Island” and “Whoops!“, two books about how the U.S. Federal Reserve, Congress, The White House and Wall Street have been working together for nearly a century (The Fed was created in 1910) to fleece the American public. The thing most people don’t understand is that The System is designed to encourage stupid risks which deliver massive profits to a small group of bankers for a decade, then collapse, only to be bailed out by the American public. It’s been going on for a century and isn’t about to stop anytime soon, because Congress and The White House are all on the payroll.