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The widespread claim that nonprime loan originators that sold their loans caused the crisis because they "had no skin in the game" ignores the fundamental causes. The ultra sophisticated buyers knew the originators had no skin in the game. Neoclassical economics and finance predicts that because they know that the nonprime originators have perverse incentives to sell them toxic loans they will take particular care in their due diligence to detect and block any such sales. They assuredly would never buy assets that the trade openly labeled as fraudulent, after receiving FBI warnings of a fraud epidemic, without the taking exceptional due diligence precautions. The rating agencies' concerns for their reputations would make them even more cautious. Real markets, however, became perverse -- "due diligence" and "private market discipline" became oxymoronic. These two documents are enough to begin to understand:

• the FBI accurately described mortgage fraud as "epidemic"
  
• nonprime lenders are overwhelmingly responsible for the epidemic
  
• the fraud was so endemic that it would have been easy to spot if anyone looked
  
• the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy
  
• willful blindness was essential to originate, sell, pool and resell the loans
  
• willful blindness was the pretext for not posting loss reserves
  
• both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed
  
• the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses
  

the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation

• many of the big banks are deeply insolvent due to severe credit losses
  
• those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files
  
• a "stress test" can't remedy the banks' problem -- they do not have the loan files