I actually had one of those loans. It was a terrific product for the right borrower. Specifically people who made a lot of their money in a short time: commissioned sales, execs with high end of year bonuses, etc. It allowed the borrower to manage his cash flow. The underlying index, typically COFE, was a very stable index so not a lot of movement.
That's exactly right. ARMs were invented for just those kind of people.
When the industry started offering them by the millions to middle class borrowers, that should have been a HUGE red flag. To the SEC, to Congress, to the ratings agencies, to everyone in the industry.
I can't help it if some people were too stupid to understand the loan.
But the bank can. They deliberately pushed these onto people they knew did not understand them. They threw centuries of underwriting laws of the Universe out the window. Their entire model was based on extremely flawed assumptions, so a lot of it was stupidity on the part of the banks as well.
But there were those in the financial world who knew exactly what they were doing, and they created what they knew to be massives risks and transferred those risks to the rubes on the other end of the chain. Pension fund managers, insurance companies, college endowment funds, city treasurers, etc.
And this wasn't just home loans. This was commerical loans and sovereign debt as well.
