BofA was able to do this because RMBS deals were and still are opaque.
Investing requires transparency.
Regular readers know that the investment process has three steps:
- Independent analysis of the data disclose to assess the risk of and value a security;
- Soliciting prices from Wall Street that it would be willing to buy/sell the security at; and
- Comparing Wall Street's prices with the result of the independent assessment to make buy/hold/sell investment decisions.
Bank of America Corp.’s traders fought off efforts by the firm in 2007 to include risky Alt-A mortgages in a securitization. That wasn’t enough to spare investors from being cheated, according to the U.S.
The Department of Justice accused the company in a lawsuit yesterday of misleading investors about the quality of loans tied to $850 million in mortgage-backed securities.
The complaint chronicles friction among bank staff in 2007 and 2008 as they excluded risky Alt-A loans while leaving in wholesale debts once scorned as “toxic waste” by the firm’s then-chief.
“None of these loans are suitable for a prime jumbo A-credit securitization,” one trader wrote in an e-mail, expressing discomfort with adding the low-documentation Alt-A debts to the pool.
“Like a fat kid in dodgeball, these need to stay on the sidelines,” another trader wrote, according to the Justice Department’s complaint.