Bugs, there is a huge disconnect here, but you still arrive at what I feel is the right conclusion. Banks made money by selling loans, in essence they became brokers, hence the moral hazard. Once they sold the loan the only way for them to be held responsible would be re-assignment of those loans based on fraud, usually a FPD or something like it. Will these re-assignments be enough to sink banks is the question, or will the CDO investors who bought them take the lions share of the losses?
At the tail end of the boom when credit quality was at its lowest, the banks began to be unable to pass these mortgages onto the secondary market. Those loans they still hold and will become toxic on their balance sheets.
I think what will end up burning the banks is that they shifted to a broker business model and when that goes away, shifting back to making loans that they actually hold the paper on will be very painful and far less profitable.
After seeing what happened this week to the credit markets, I too feel its far past the point of bumby rides.
