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Thread: How Mortgage Defaults Affect Wall Street and You

  1. #1
    God/dess threlayer's Avatar
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    Default How Mortgage Defaults Affect Wall Street and You

    Interesting 60 Minutes show Sunday.

    They got at least close to the heart of the matter connecting the financial bailouts to the mortgage boondoggle. Here's a summary.

    The mortgages get packaged by lenders into Collateralized Debt Obligations, CDOs. Then they are often sold on the market. Finance houses that pick the CDOs up are the insurance companies, stock trading houses and maybe even other larger banks. Once the CDOs are bought, they can be traded like any other commodity.

    Along with the CDOs, the traders sell a hedge against the risk of the CDOs called Credit Default Swaps, CDSs. This is so that trading the risky CDOs have a kind of insurance, since the CDSs act that way. The companies selling these CDSs are the likes of Lehman Bros, Bear-Sterns, AIG, Merrill-Lynch, etc. Here's the thing: the CDSs purposefully are not called insurance contracts to allow the companies selling these to avoid having the required financial reserves that would otherwise be required if they were actually called insurance contracts. This is how the financial houses got around the law, until reality caught up with them.

    Now when the bubble burst and the CDOs became less valuable, and how much value remains is still a big question, the CDSs started to kick in, just like an insurance product. After a short while the CDS contract providers ran out of cash reserves, if they had any at all, and the CDSs largely became useless, taking the companies selling CDSs like Lehman Bros, Bear-Sterns, AIG, Merrill-Lynch, etc down, and almost taking Citigroup down too. All because they had no reserve requirements and were not able to fulfill their
    obligations.

    So that resulted in the lack of confidence in finance houses, banks, etc, and their assets. And now you can't get working capital to buy that lumber for the big construction job contract you got back in July or make payroll until the last job pays off your invoice. And that also means you can't even take your crew to the strip club to celebrate finishing that last job 2 weeks early.

    Pretty stupid, eh?

    So that's how the mortgage boondoggle caused the rescue boodndoggle and even more problems for you.

    (Well, simplified quite a bit, I guess.)
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Banned Eric Stoner's Avatar
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    Default Re: How Mortgage Defaults Affect Wall Street and You

    It's actually worse than that. The CDO's were insured by CDSs which in turn were spun into derivatives. Here's how it worked. A lends money to B. A buys insurance that B will pay him back; (the CDS) BUT some of those were made into derivatives where C , D and E could BET on whether or not B would pay back A. And there was NO CONTROL over how the "bets" broke down so that the bets on particular loans were often way out of balance i.e. many more bets on a payback than a default or worse yet; more bets on a default than a payback. It was Vegas without the most elementary of controls. Bookies know how to lay off bets and/or manipulate the line or the odds so that bets on one team balance out ( more or less ) with bets on their opponent. And AIG issued the lion's share of CDSs and banks like Lehman Brothers played with the derivatives selling them to its customers and investing in them itself.

    The CDSs were Insurance WITHOUT standard underwriting and RESERVE requirements. Insurance works by spreading the risk and charging adequate premiums and maintaining adequate cash reserves to pay claims. AIG didn't do that.

    The derivatives were SUPPOSED to be like REINSURANCE where a company cuts up the premium pie and gives pieces to REINSURERS in return for their assumption of a proportionate share of the risk. ( Like a bookie laying off of a big bet.) The problem was that when the mortgage defaults occurred NOBODY involved had adequate cash reserves. The SEC had shifted to a voluntary compliance system for inter alia leveraging so that Lehman Brothers could lend out not $12 for every dollar in cash reserves ( the old industry standard ) but as high as 30 to 1. Some analysts say it was even higher.

    The loans went into default and the lenders wanted to collect on their CDSs and so did those derivative holders who BET ON A DEFAULT ! Nobody had enough cash on hand to make good.

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    Banned Melonie's Avatar
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    Default Re: How Mortgage Defaults Affect Wall Street and You

    ^^^ I would add that a lot of the 'losing bettors' were in fact European banks, investment houses, and hedge funds. As of last monday's auction, anybody who wrote a CDS on Fannie / Freddie paper was officially informed of default ... triggering a payoff on the part of the CDS writer ... and a payoff IN US DOLLARS. This is the reason that the European economy is heading for the tank, and also the reason that the US dollar is still strengthening.

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    Default Re: How Mortgage Defaults Affect Wall Street and You

    Yes. Worse than I thought. I knew about the excessive leverage and hedge funds. It turned into a gambling orgy. AS i said elsewhere, they turned Wall Street into a kind of Vegas. Except that Vegas has rules and some stability. Those Wall St firms had no rules apparently. What a horrid bunch of irresponsible stupidity. I hope that some jail terms come out of this.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Banned Eric Stoner's Avatar
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    Default Re: How Mortgage Defaults Affect Wall Street and You

    Quote Originally Posted by threlayer View Post
    Yes. Worse than I thought. I knew about the excessive leverage and hedge funds. It turned into a gambling orgy. AS i said elsewhere, they turned Wall Street into a kind of Vegas. Except that Vegas has rules and some stability. Those Wall St firms had no rules apparently. What a horrid bunch of irresponsible stupidity. I hope that some jail terms come out of this.
    The problem with derivative and CDS regulation was ...... THERE WAS NO REGULATION !!!!!! It was a "private transaction" done secretly. Maybe, MAYBE since AIG was a publicly traded company (as was Lehman Brothers and some others) there might, MIGHT have been some securities law violations. There does appear to be some possible violations of accounting requirements.

    For instance, the FBI is looking into Fannie and Freddie and there should be some indictments. It depends how much President Obama is willing to see some Dem stalwarts go to jail. They're also looking at Bear Stearns and Lehman Brothers.

    We''ll see.

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    God/dess threlayer's Avatar
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    Default Re: How Mortgage Defaults Affect Wall Street and You

    You know, lack of regulation was not the only problem, though it should have been. Hard to believe that those huge transactions were clandestine. The FBI followed the money in Spitzer's case, which was essentially peanuts; of course he was probably blown in. Some people being crooks was a big part of the big problem too. Hard to believe that someone knowledgable didn't, or couldn't have, get wind of that stink. Those are my opinions on it.
    Last edited by threlayer; 10-10-2008 at 08:38 AM.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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