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post #9736 of 11826
Quote:
Originally Posted by dizzy View Post

http://www.nakedcapitalism.com/2015/12/debunking-the-big-short-how-michael-lewis-turned-the-real-villains-of-the-crisis-into-heros.html

Make of it what you will. I read it with a grain of salt since I don't know anything about the writer, or even enough about the actual situation to say whether the person is right or not.

LOL. Glancing at it for three seconds or so makes clear the writer is a nutjob catering to intrinsically butthurt conspiracy theorists. Anyway, as I said, the central premise relies on circular reasoning and doesn't really make sense.
post #9737 of 11826
Quote:
Originally Posted by dizzy View Post

I read that the people who made out big in The Big Short were also partly responsible for exacerbating the situation. The logic was that their demand for short instruments only created more demand for the instruments they were shorting, and it ended up expanding the market for those instruments greatly. So not only did they see what was going to happen, but they threw fuel onto the fire as well. If that's true, then it's pretty disgusting behavior on everyone's part.

Well someone had to be buying the CDS in order to create the synthetic CDOs. They were part of that market. No way to know how much though, I'd doubt they accounted for even a majority of it. A lot of people who had decent risk management probably bought them as a part of every day hedging. The reason the crisis got so bad was because it turned out the CDS sellers were very concentrated and couldn't meet their obligations thereby triggering a snowball. 

 

I'd heavily doubt any claims that this was intentional though. AIG made the situation far worse by being a massive CDS seller as the premiums were attractive, likely they would have done this anyway. A few billion dollars of CDS volume isn't much. 

 

Quote:
Originally Posted by Piobaire View Post


Just wanted verification the movie explanation, and quick Internet references like Wiki, were more or less on target and you seem to indicate they are. Thanks.
 
Yup. The re-packaging of mortgages was insanely stupid, especially based on the assumption that housing prices in different markets were not correlated across the whole US. Keep in mind though people made fortunes post crashing buying up CDOs and MBSs since the whole sector got taken down and many didn't deserve to be as much as they were. The US government also made a decent amount of money offloading them to hedge funds.
 
The rating agencies really failed in their job here. 
 
 
 
Quote:
Originally Posted by Piobaire View Post


Considering it seems they had trouble convincing folks to sell them the shorts I'm fairly dubious of this claim.
 
That part of the movie is BS. There was a thriving CDS market long before any of those firms wanted in. Certainly no one laughed in their faces. The one small hedge fund without an ISDA maybe. 
 
Think of it this way. If no one had wanted a CDS on mortgages before, how did they create all the synthetic CDOs that require a CDS? 
 
 
post #9738 of 11826
Quote:
Originally Posted by dizzy View Post


http://www.nakedcapitalism.com/2015/12/debunking-the-big-short-how-michael-lewis-turned-the-real-villains-of-the-crisis-into-heros.html

Make of it what you will. I read it with a grain of salt since I don't know anything about the writer, or even enough about the actual situation to say whether the person is right or not.

Having read about half of it now, it's a pretty fair point.

 

As more and more companies were pulling back from the market and fewer loans were issued it became harder to meet demand for CDOs. AIG actually stopped selling CDS a year or so before the crisis. It was people who realized how bad the market was who were buying the CDS which in turn led to the creation of more synthetic CDOs.

 

So while the "heros" may have not been a major market player, by the end they were probably some of the only buyers of CDS and thereby made the crisis worse than it otherwise would have been. He also alleges many other firms were making far larger bets, in which case his argument is much stronger. 

 

I'd argue though the concentration of CDS risk is still why there was a systemic failure though. The S&L crisis and previous crises were far more limited because you didn't have such extensive unsecured netting. Once major investment banks started going down everything was on the table. 

post #9739 of 11826
MS, thanks for the insight.
post #9740 of 11826
Packing of mortgages in itself isn't stupid. Selling of mortgages that were shit mortgages that everyone thought were great mortgages were stupid.

If you know it's a shit pack of mortgages and buy it, that's fine, you can account for credit losses in the purchasing price. The problem was the mid-reading of credit risk (partly due to refit agencies), and unexpected correlation across the spectrum.

Also - banks were so damn sloppy with their paperwork. The number of assignments and notes that were missing, unsigned, etc was ridiculous.
post #9741 of 11826
Quote:
Originally Posted by venividivicibj View Post

Packing of mortgages in itself isn't stupid. Selling of mortgages that were shit mortgages that everyone thought were great mortgages were stupid.

If you know it's a shit pack of mortgages and buy it, that's fine, you can account for credit losses in the purchasing price. The problem was the mid-reading of credit risk (partly due to refit agencies), and unexpected correlation across the spectrum.

Also - banks were so damn sloppy with their paperwork. The number of assignments and notes that were missing, unsigned, etc was ridiculous.

Yup, that is why I said re-packaging. 

 

Hey if we take this BBB tranche and this BBB tranche we can repackage it into a whole new structure! I'm sure none of these assets are correlated. There is a reason the CLO market recovered but the sub prime CLO market never really did. 

 

As you point out it's easy enough to account for if the background is there. Remember this was a time when credit standards were a lot less strict and one could get a loan with a self declared income. Lots of failures in a lot of places. 

post #9742 of 11826
MS, how much do you blame the ratings agencies and the ability of companies like AIG to basically transfer their AAA status to sub-prime tranches and then insuring them without at least partial capital reserves in case of default?
post #9743 of 11826
Quote:
Originally Posted by Piobaire View Post

MS, how much do you blame the ratings agencies and the ability of companies like AIG to basically transfer their AAA status to sub-prime tranches and then insuring them without at least partial capital reserves in case of default?

Ratings agencies get 100% of the blame. They should have known better.

 

AIG also gets full blame as they should have had proper controls in place. It wasn't that they were transfering their AAA status, but that they were profiting from selling insurance on mortgages. The problem is all their risks were off balance sheet, hence no one realized that when called upon they couldn't afford their potential liabilities.  

 

At the same time an event of that scale had never happened before. No shortage of blame to go around. 

post #9744 of 11826
Quote:
Originally Posted by MSchapiro View Post

Ratings agencies get 100% of the blame. They should have known better.

AIG also gets full blame as they should have had proper controls in place. It wasn't that they were transfering their AAA status, but that they were profiting from selling insurance on mortgages. The problem is all their risks were off balance sheet, hence no one realized that when called upon they couldn't afford their potential liabilities.  

At the same time an event of that scale had never happened before. No shortage of blame to go around. 

When I say transferring their AAA status, what I mean is, by them insuring the sub-prime tranches players that could not buy them due to their charter (like insurance funds) were able to buy them. Do I have that right?
post #9745 of 11826
Quote:
Originally Posted by Piobaire View Post


When I say transferring their AAA status, what I mean is, by them insuring the sub-prime tranches players that could not buy them due to their charter (like insurance funds) were able to buy them. Do I have that right?

Not exactly.

 

Anyone could and did sell CDS. Being AAA is only relevant because CDS were done OTC rather than on an exchange thereby making it easy for AIG to sell and not for other people. 

 

The reason that the top tranches were rated AAA was the structure of the CLO. In theory nothing should cause a diversified portfolio of mortgages to incur greater than a 40% loss on a historical basis so the people at the top of the structure should have virtually no risk of capital losses. The analogy was to think of a building flooding. The mezzanine level took on water first and the people at the top were safest. No one on top a sky scraper really faces a risk of flooding since the water would have to get up 40 floors or so to reach you. Of course it turned out some of the CLOs were made up of mezzanine debt from other CLOs. You may be sitting on top of a sky scraper, but if it is made of paper the whole thing is going down when it gets wet. 

 

Some also came bundled with a CDS to make them AAA,but I don't believe that was the only AAA structure and I think it was far less common. 

post #9746 of 11826
What the fuck Elon Musk?
post #9747 of 11826
It's a weird decision in my opinion, even weirder to be sold as 'no-brainer'.
post #9748 of 11826

Time to buy that TSLA?

post #9749 of 11826
Quote:
Originally Posted by brokencycle View Post

Time to buy that TSLA?
Well, I'm pretty sure that a year or two down the road it won't be anywhere close to its current $200/share.
post #9750 of 11826
Quote:
Originally Posted by lawyerdad View Post


Well, I'm pretty sure that a year or two down the road it won't be anywhere close to its current $200/share.

 

Well, I need the up or down broheims.

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