The Loan is the Essential Fallacy: Splitting up the debt, note and mortgage

Here is what almost everyone is getting wrong and why it matters:

In the run up to the mortgage meltdown, investment banks were described as taking foolish risks, buying loans that were likely or even guaranteed to fail. It’s true, some investment banks that were not in on the grand scheme did exactly that and Lehman might have been one of them, Bear Stearns another.

But for the TBTF banks it was a different story. They were not lending money nor buying mortgage loans. They were funding the origination of loans likely or guaranteed to fail with incoming investor money that was intended by the investors to buy good quality loans that were seasoned by some period of time in which payments were made by the borrower. They were purchasing loans the same way. And they were not buying derivatives, they were selling them. SO the entire “bailout” was a farce. There were no losses.

Why does this matter?