The REAL Problem... (well, one of them)

Discussion in 'Economics' started by gnome, Aug 20, 2007.

  1. Highly risky, poorly underwritten mortgage loans were made and securitized (so that investors like us could be the bag holders).

    Then when the obvious and inevitable risk comes home to roost, everybody screams for the Fed to bail out all of this greed and foolishness.

    In addition to the greedy lenders, the Fed, SEC, and Banking regulators share responsibility. And it's not even like they were duped... just negligent. Criminally so, in my view.

  2. I won't go that far ... let's don't forget that the "greedy lenders" had to find some greedy investors who wanted more than the Tbill rate as a return for their investment.

    Most of the time investors take the "no questions asked" approach when high yields are at stake (see Amaranth ... ).:eek:

    Plus one can't expect the FED to protect the investors from all evil doers, common sense should play some role here as well :cool:
  3. You can't legislate against stupidity. If the general public doesn't want to take major losses during investment bubbles, they are quite free to stand aside and follow sound and conservative financial principles, which are widely taught and openly available in a free and educated society like the US. But as always, greed gets the better of them and so periodically there is a washout and they take a bath. That's just the natural order of things.

    As for the role of regulators and government officials, the day we start paying central bankers and SEC chairmen the same as leading hedge fund managers is the day we will get prescient top-performers who are capable of recognising bubbles in advance and then acting appropriately. But when you pay someone 1/100th or less of the rewards available in the private sector, you are highly unlikely to get the cream of the crop. The performance will thus be equivalent to the rewards on offer. In any case, do you really think the public will listen if warned in advance? Remember Greenspan's futile "irrational exuberance" speech, which was promptly ignored by joe public and the fund management industry. Even if a Fed chairman is smart enough to warn of a bubble, it will just cause a small dip and then the market will rebound to new highs in an orgy of speculation (see China for a current example).

    The fact is, successful traders/speculators neither want nor are wanted as establishment regulators. Half of them would want to abolish the institution the moment they took up their position in charge.

    We should just accept that many people are ignorant and greedy, and can only learn from their mistakes. Each new crop has to learn from scratch. Trying to stop this process is like trying to tell a child not to touch a hot plate - even if they believe you, they still feel the need to touch it and find out for themselves.
  4. I highly doubt that a Chairman of a central bank, a bank whose debtor is the largest country in the world, makes only a little bit of money.

    Can you imagine how much Bernanke could make only in the forex markets? Hedge fund money would seem small.
  5. What I dont understand is WHY were banks doing this in the first loans to people who hade "no credit" or poor credit, and then shitting their pants when these people weren't able to pay off their loans...duh??..

    What was in it for them?...

    now both sides are getting screwed.

  6. It wasn't so much banks, unless you consider "mortgage brokers" bankers. The brokers had an incentive to push the loans through.
  7. SteveD


    Banks aren't the lenders.....private lenders...

  8. Banks aren't the ones holding the bags,,... they wouldn't do this given such risks.. well, that's an overstatement.. may be they took on some of level risks.. but most of these loans were simply packaged and sold to Wall St. inverstors and Hedge Funds..
  9. piezoe


    There were, in most cases, several layers of detachment between those signing up folks for new sub-prime loans and the final resting place for the mortgages which was as sliced and diced collaterallized debt obligations. Those promoting the mortgages did so for the fees, then immediately sold the mortgages which eventually got bundled, sliced and diced, and resold as CDOs. (I believe Salomon Bros. invented this method of repackaging mortgages)

    Those collecting the fees could care less about the credit worthiness of the applicants, they were only interested in collecting the fees, since they were not going to keep the mortgages in their bond inventory. And those who sliced and diced could care less (until now perhaps) so long as they could get the rating agencies to give a high rating to the CDO's that resulted, because they were going to peddle those CDO's to the final holders, i.e, your pension fund. Thus by the time the CDO's came to their final resting place in the inventory of a pension, money market, or hedge fund, the credit worthiness of the original borrower had long since been buried in a pile of paper. It was assumed, because of the rating, that the CDO was safe. Unfortunately the rating agencies used data provided by the slicers and dicers (your friendly Wall Street investment bank) to make their rating. They never went back to look at the credit worthiness of the original borrower. In fact the rating agencies served as consultants to the slicers and dicers and told them how to package and present the CDO's in order to get the best ratings.