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It makes exactly as much sense as me charging Citi a million dollars every time I make fun of them, which I really need to start doing.
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Indeed Bandit used to be on here every other day and now I haven’t seen him in while which is a bit of a bummer.

1. Use capital to write a bunch of mortgages.
2. Pool said mortgages into ABS bonds. Continue to collect fees for administering mortgages.
3. Split the revenue from the ABS bonds into different categories: principal, interest, straight pass-through; collect fees for this structuring.
4. Create ABS CDO structure on whatever ABS structured securities couldn’t be sold; collect fees for doing this. Sell AAA tranches to investors, keep equity tranche.
5. Roll unsold mezzanine tranches into CDO CDO. Collect fees for doing this. Loop back step 4 a few times
6. By now you have recovered almost all of your capital used in step 1. Return to step 1 and repeat.

In theory the retention of the “first loss” equity tranches was supposed to keep you honest, but in reality the “first profit” position represented by the various fees was larger – you couldn’t lose. Also – once the equity tranche is wiped out, you no longer have skin in the game. And your guaranteed upside is multiplied by enormous leverage.