Many of you may recall the movie BIG SHORT which was about how Ninja mortgages+ MBS + CDO + CDS were created and how it all created the GFC One question being bugging me for years ... and that is - Although people ( and pension funds) lost money and due to domino effect other real estate owners lost money .. is it not true that Money did not disappear! it changed hands Let me put forward a simple example ( figures are just for illustration purposes and lets take it up to MBS only and not get in to CDO and CDS) 1) Bank has $100 capital , it then gave out really bad home loans... 2) people purchased homes worth $100 so money goes from Bank to sellers of homes ( be it old home owners or new developers and then also brokers + govt fees etc ) 3) Banks then shifted the risk by making a Special purpose vehicle called Mortgage Backed securities and soled them like share of a company MBS inc... THUS the bank got it's $100 back + some so far ok? 3) Because of the low quality of mortgages there were defaults and the share value of these MBS .INC. went from $100 to say $40 so investors lost money .. HOWEVER THE ORGINAL $100 WAS STILL WITH THE BANK.. and the money that the sellers got would have circulated in the economy it did not disappear It is like If I sell you something for $15 which then tanks to $2 sure you loose $13 but the $15 you paid me has got in to the economy (unless I don;t spend it and keep it under my bed for a long time) IT DID NOT DISAPEAR ! CORRECT So why is nobody pointing out to this fact? and only talk about the losses I am not saying that what happened WAS ok it is just the math's of circular economy that is I am trying to understand Or I am completely bonkers?
I agree with you, money did not disappear. If the short sellers did not short then market is still fine, or just minor pullback.
What happened is Wall Street sold mortgage backed securities. However, how will they sell it when they knew investors also, knew that those loans are very high risk. So, they came out with mortgage backed securities which they guaranteed. Banks did in fact lost monies because the value of the mortgages once, foreclosed, went way down. Those who saw what was happening shorted it and made lots of monies. People who bought homes, lost all their life savings because the bank is not going to give back what they already paid in. Big investors who swooped in to buy the foreclosed properties for pennies on the dollar also, cleaned up since, they rented out those properties which they got real cheap. Those who sold mortgage back securities also, lost big time because they guaranteed the investors will not lose monies and had to pay up. Yes, monies changed hands for sure but, people did lose monies. The investors and traders with bank stocks, builder stocks, etc., people who took out mortgages they could not afford and the greedy banks who loaned those monies.
Correct. There is no money in the stock market. Buy 100 shares of a stock, money goes to those on the other side who sold. Who previously bought from someone else who got their money. Amounts change but yet still, no money stays in. Cash balances are cash balances - not "in the market" at the time. Round and round.
You forgot three very important pieces: AIG: the insurer of these securities; Uncle Sam, who bailed out AIG; and the lowly taxpayer, who ultimately took it up the @$$. The money did disappear. When things went south, these MBSs suffered massive losses. AIG, as the insurer, was on the hook to pay the investors. They were bankrupt, so Uncle Sam stepped in and bailed them out, effectively bailing out the investment banks who bought these securities. Let's be specific about some of the parties involved: 1. Loan Originator: The bank that wrote sn original loan. Banks don't just keep money laying around to lend: they'll borrow it from the central bank, mark up the interest rate, and resell the money at a profit, and repay as mortgage payments come in... but they usually sell these loans... 2. Loan Servicer: After a loan is written, it's usually was sold off to a servicer. So the loan originator made their profit and is typically out of the picture. Once a basket of loans was securitized into a MBS, and traunched, and insured by AIG enter... 3. Investors. These were also banks--investment banks--like GS, MS, Bear, Lehman, etc. MBS are typically only available to institutional traders. Now when the crisis hit, the money _should_ have exited the system as loss to the investors, but the securities were insured by AIG. The only problem is thst they were insolvent; they couldn't pay! So then Uncle Sam stepped in and bailed out AIG, and really bailed out the Investors--the investment banks--and here new money entered the system. Back to your argument, it's true that the cash never left the system, and the "banks" made their money, but you have to be specific about which banks. The investment banks, who took on the bulk of the risk, got their money back, only because we the taxpayer ultimately insured all these bad loans and securities. ...which, imnsho, is pure unadulterated bullshit. The rich keeping the rich rich.
Value destruction is when assets are marked down. E.g. you buy a stock for $100 (someone else got $100), but then you sell the stock for $40 (someone paid $40). That's a balance sheet loss. In real life, many companies lost (went bankrupt), and the value of someone of those assets (which were sold at "$100") are trading near zero or were written off. Here's a good example: S&P/Case-Shiller NV-Las Vegas Home Price Index (LVXRNSA) | FRED | St. Louis Fed (stlouisfed.org)
MBS were invested by mon and pop pension fund and they lost it I Get that and I get that it is sad and BS etc .. not saying that this was good ... I am purely looking at it from financial maths point of view my simple proposition is money did not disappear it changed hands. ( keeping brokerage and cost aside for this example) -Bank has 100 to start loan book - People borrow 100 and buy houses worth 100 ( sellers and people involved in selling of houses of houses get 100) - Bank makes an MBS company and sells it's shares for 105 ( Banks get the 100 back) People through pension funds purchase the MBS for 105 - More bad quality MBS created - Houses prices collapse - People who bought the MBS at 105 loose THE MBS IS WORTH say 10 ( Cant be that low as houses and land still has some value but lets assume it is) BUT THE ORIGINAL 100 that the sellers got is still in the economy ! where did it go?
I am not saying that people did not loose money .. they did. My point was just technical not emotional, everybody is thinking about emotional/ social impact .. I was just trying to work out the money flow wise... that is all .. I also lost money and a job during that time...