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TREES ON THE CLIFF : A NOVEL OF KOREA AND TWO STORIES

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Whang Sun-won

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“Long Beach Savings was the first existing bank to adopt what was called the “originate and sell” model. This proved such a hit—Wall Street would buy your loans, even if you would not!—that a new company, called B&C mortgage, was founded to do nothing but originate and sell.”

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“By early 2005 all the big Wall Street investment banks were deep into the subprime game. Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley all had what they termed “shelves” for their subprime wares, with strange names like HEAT and SAIL and GSAMP, that made it a bit more difficult for the general audience to see that these subprime bonds were being underwritten by Wall Street’s biggest names.”

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“Back in July 2003, he’d written them a long essay on the causes and consequences of what he took to be a likely housing crash: “Alan Greenspan assures us that home prices are not prone to bubbles—or major deflations—on any national scale,” he’d said. “This is ridiculous, of course…. In 1933, during the fourth year of the Great Depression, the United States found itself in the midst of a housing crisis that put housing starts at 10% of the level of 1925. Roughly half of all mortgage debt was in default. During the 1930s, housing prices collapsed nationwide by roughly 80%.”

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“There was more than one way to think about Mike Burry’s purchase of a billion dollars in credit default swaps. The first was as a simple, even innocent, insurance contract. Burry made his semiannual premium payments and, in return, received protection against the default of a billion dollars’ worth of bonds. He’d either be paid zero, if the triple-B-rated bonds he’d insured proved good, or a billion dollars, if those triple-B-rated bonds went bad. But of course Mike Burry didn’t own any triple-B-rated subprime mortgage bonds, or anything like them. He had no property to “insure” it was as if he had bought fire insurance on some slum with a history of burning down. To him, as to Steve Eisman, a credit default swap wasn’t insurance at all but an outright speculative bet against the market—and this was the second way to think about it.”

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