Recovery has been poor, partly because so many of the loans are heavily underwater, partly because they are dragging out the process in the hope things will improve.

The CP-funded SIVs existed solely as a result of regulation. As I am sure you know, as long as the debt was less than 365 days you got preferential treatment in accounting and regulatory capital terms. Upshot people used ultra-short term financing which meant when the liquidity dryed up they were screwed. Not sure that is “false demand” since investors bought into these CDOs.

By the way, for Felix… This is a question that I have no idea about the answer to – how many of these bonds actually defaulted, ie what is the actual credit loss people have taken on these bonds. I am not talking about the changes in prices, I mean what value of bonds defaulted and what was the recovery on those defaults in either absolute terms or relative to the size of the market.

Oh, let’s just market those new-issue CDO to municipalities in coastal Australia. Hey, it’s AAA since moodys said so (oh, by the way you actually hold BBB/BBB- subordinate RMBS). Without that blessed rating, much less of this market existed and therefore demand would have chosen an alternate investment product.

Let’s discuss those wondrous off-balance sheet SIV entities. $100-200 billion in CP-funded SIV conduits (largely run via Citigroup and the like). That is false demand for product, and created a false signal for spreads and structured products.

Plenty of “demand” buy-side investors chose not to participate. We agree to disagree, perhaps.

I’ll do my best to connect the dots. A non-bank lender, such as New Century, would have access to warehouse lines via WallSt based financing. most likely these warehouse lines would support 60-90 days of approved / closed mortgage loan activity.

A. Mortgage loan approved, and funded, by warehouse line. Without warehouse lines in place, non-bank finance lending would struggle. Can’t be funded with deposits, or in the CP/Repo market (perhaps so, i’ll guess).
B. Mortgage loans aggregated, until sufficient volume accumulates to sell onward to a trading desk (most likely by the firm / warehouse line financing) these consummated package of residential whole loans
C. EPD should be getting kicked out. EPD were routinely not, late ’06/early ’07, and early delinquency status could prove it.
D. These WL packages were sold onward to an SPE/Conduit, in order to issue private-label MBS or a form of structured product
F. By this point, surely the rating wizardry via moodys or S&P or Fitch has been applied to the underlying collateral. Maybe, just maybe, a team of analysts have looked closely into the 105 LTV lending or the no-doc 660 FICO loans.

Once complete, the structured MBS or CDO product is available for public consumption (or 144A consumption, as the case may be). Every single cog in this wheel gets blame. Wall st firms, while not in the direct business of residential lending, were surely not of a collective mind to stand in the way of progress.

New Century and other mortgage financers went bankrupt and from the best of my recollection no one is suing on their behalf the liars and idiots who overextended themselves on loans from New Century and others.

Those overpaid fund managers are as much in the wrong as the absolute lacking of due diligence, of any kind, performed on these non-bank finance mortgage lenders who promptly failed (New Century, Ameriquest). And the lousy crap loans those very companies were issuing.

Or you could go after the people who lied on their mortgage applications. Or who were told to lie on them. Or the incompetent, overpaid fund managers who were not keeping their fiduciary duty to their investors – this is the real duty not the made up one market makers are meant to have. Wouldn’t it be a crazy idea if people were held responsible for their decisions?