Discussion:
How Mortgages Are Turned Into CDOs, And How A Sow's Ear is Turned Into A Silk Purse
(too old to reply)
Lisa Lisa
2007-08-06 07:04:45 UTC
Permalink
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LOAN_GRAPHIC.html
Lisa Lisa
2007-08-06 07:09:29 UTC
Permalink
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?

Lisa
alexy
2007-08-06 14:37:00 UTC
Permalink
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.

One expensive lesson some are learning is in this paragraph of the
cited page:

"Some investors do not fully research bond risks, a costly and complex
task, relying instead on ratings agencies or mathematical risk
models." [any typos mine]

Hopefully the securities laws are such that these bonds are not sold
at "retail", instead requiring individuals to meet the "sophisticated
investor" standards.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
mike
2007-08-06 16:32:37 UTC
Permalink
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
One expensive lesson some are learning is in this paragraph of the
"Some investors do not fully research bond risks, a costly and complex
task, relying instead on ratings agencies or mathematical risk
models." [any typos mine]
Hopefully the securities laws are such that these bonds are not sold
at "retail", instead requiring individuals to meet the "sophisticated
investor" standards.
and another:

"Investors rely on ratings agencies ... But the agencies have a conflict:
they are paid by the investment banks -- and thy may be less likely to
steer investors away from those bonds"

never trust the judgment of those being paid to tell you what you want to
hear. a collection of junk mortgage securities renamed CDO and re-rated
AAA, and they fell for it? imo, they're getting what they deserve for
being greedy & lazy. cutting down hedge funds & private equity is a
good thing in my view, but i'm biased after watching CORL (now CREL) get
stripped & flipped by private equity (and my investment with it).
Davinchi
2007-08-07 07:29:52 UTC
Permalink
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
Very well put, I can barely imagine how one would
characterize the situation much better. The cited text
simply does not detail the risks as well as you have.

I myself would probably use some convoluted made up term
like non-cross-collateralized risks - which might be close
to accurate but would confuse more people than it would help.
Post by alexy
One expensive lesson some are learning is in this paragraph of the
"Some investors do not fully research bond risks, a costly and complex
task, relying instead on ratings agencies or mathematical risk
models." [any typos mine]
Hopefully the securities laws are such that these bonds are not sold
at "retail", instead requiring individuals to meet the "sophisticated
investor" standards.
Even at if not retail, so many brokers think they know a
good instrument based on the past performance within the
bubble and a recommendation from some reasonably successful
source, but they didn't do any real research either - just
following the herd like good little sheep. Not to belittle
the brokerage houses, but I bet they have a lot more
marketing and gen. bus. graduates, than Economics and MBAs
on the front line - I could be wrong, but......

At least you seem to know what's what, thanks.
alexy
2007-08-08 13:56:23 UTC
Permalink
Post by Davinchi
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
Very well put, I can barely imagine how one would
characterize the situation much better. The cited text
simply does not detail the risks as well as you have.
I myself would probably use some convoluted made up term
like non-cross-collateralized risks - which might be close
to accurate but would confuse more people than it would help.
Thanks. It just seemed to me that while there is lots to criticize
about this IMPLEMENTATION of the CDO obligations idea, much of the
argument here was along the lines of "I don't understand it, so it
can't be good".

It also strikes me that both Chicken Little and Henny Penny, who seem
so concerned about the losses suffered by these large investment
bankers and the difficulties takeover artists are having raising funds
for their takeovers, would probably be equally negative if the
investment bankers were making money on these transactions, and if
private equity funds were able to borrow freely to accomplish more
takeovers.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
V***@tcq.net
2007-08-08 14:16:00 UTC
Permalink
Post by alexy
Post by Davinchi
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
Very well put, I can barely imagine how one would
characterize the situation much better. The cited text
simply does not detail the risks as well as you have.
I myself would probably use some convoluted made up term
like non-cross-collateralized risks - which might be close
to accurate but would confuse more people than it would help.
Thanks. It just seemed to me that while there is lots to criticize
about this IMPLEMENTATION of the CDO obligations idea, much of the
argument here was along the lines of "I don't understand it, so it
can't be good".
It also strikes me that both Chicken Little and Henny Penny, who seem
so concerned about the losses suffered by these large investment
bankers and the difficulties takeover artists are having raising funds
for their takeovers, would probably be equally negative if the
investment bankers were making money on these transactions, and if
private equity funds were able to borrow freely to accomplish more
takeovers.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
alexy
2007-08-08 15:22:39 UTC
Permalink
Post by V***@tcq.net
Post by alexy
Post by Davinchi
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
Very well put, I can barely imagine how one would
characterize the situation much better. The cited text
simply does not detail the risks as well as you have.
I myself would probably use some convoluted made up term
like non-cross-collateralized risks - which might be close
to accurate but would confuse more people than it would help.
Thanks. It just seemed to me that while there is lots to criticize
about this IMPLEMENTATION of the CDO obligations idea, much of the
argument here was along the lines of "I don't understand it, so it
can't be good".
It also strikes me that both Chicken Little and Henny Penny, who seem
so concerned about the losses suffered by these large investment
bankers and the difficulties takeover artists are having raising funds
for their takeovers, would probably be equally negative if the
investment bankers were making money on these transactions, and if
private equity funds were able to borrow freely to accomplish more
takeovers.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
V***@tcq.net
2007-08-08 15:32:32 UTC
Permalink
Post by alexy
Post by V***@tcq.net
Post by alexy
Post by Davinchi
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
Very well put, I can barely imagine how one would
characterize the situation much better. The cited text
simply does not detail the risks as well as you have.
I myself would probably use some convoluted made up term
like non-cross-collateralized risks - which might be close
to accurate but would confuse more people than it would help.
Thanks. It just seemed to me that while there is lots to criticize
about this IMPLEMENTATION of the CDO obligations idea, much of the
argument here was along the lines of "I don't understand it, so it
can't be good".
It also strikes me that both Chicken Little and Henny Penny, who seem
so concerned about the losses suffered by these large investment
bankers and the difficulties takeover artists are having raising funds
for their takeovers, would probably be equally negative if the
investment bankers were making money on these transactions, and if
private equity funds were able to borrow freely to accomplish more
takeovers.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
or, lets not let reality interfere with ideology.
me
2007-08-08 17:51:53 UTC
Permalink
Post by alexy
Post by V***@tcq.net
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
[snip]
Post by alexy
Post by V***@tcq.net
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
I think that's a bit unfair. The poster may not be expressing
themselves
in a detailed way, but the basic assertion has some validity. It's
a variation of the "if it walks like a duck" version of Occum's Razor.
Basically it is the conflict between the theoretical application of
the economic theory, and the reality that in the application, the
details always seem to get lost and the outcome is bad.

These kinds of instruments practically beg to be misrepresented
and abused, and that is roughly the point. It's not that they
can't work, it's that they are an open invitation to abuse. And
even with supposed "safe guards" in place, it merely serves
to tell the crooks where to hide the bodies.

I understand that everything is open to abuse, and so it is easy
to make a case that if a theoretical product can be a valid
product, it should be allowed. I guess there is just more of a
point of view here that some products are so prone to abuse,
there's little point if allowing their existence.
V***@tcq.net
2007-08-08 21:20:16 UTC
Permalink
Post by me
Post by alexy
Post by V***@tcq.net
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
[snip]
Post by alexy
Post by V***@tcq.net
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
I think that's a bit unfair. The poster may not be expressing
themselves
in a detailed way, but the basic assertion has some validity. It's
a variation of the "if it walks like a duck" version of Occum's Razor.
Basically it is the conflict between the theoretical application of
the economic theory, and the reality that in the application, the
details always seem to get lost and the outcome is bad.
These kinds of instruments practically beg to be misrepresented
and abused, and that is roughly the point. It's not that they
can't work, it's that they are an open invitation to abuse. And
even with supposed "safe guards" in place, it merely serves
to tell the crooks where to hide the bodies.
I understand that everything is open to abuse, and so it is easy
to make a case that if a theoretical product can be a valid
product, it should be allowed. I guess there is just more of a
point of view here that some products are so prone to abuse,
there's little point if allowing their existence.
correct.
Davinchi
2007-08-09 04:32:16 UTC
Permalink
Post by me
Post by alexy
Post by V***@tcq.net
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
[snip]
Post by alexy
Post by V***@tcq.net
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
I think that's a bit unfair. The poster may not be expressing
themselves
in a detailed way, but the basic assertion has some validity. It's
a variation of the "if it walks like a duck" version of Occum's Razor.
Basically it is the conflict between the theoretical application of
the economic theory, and the reality that in the application, the
details always seem to get lost and the outcome is bad.
These kinds of instruments practically beg to be misrepresented
and abused, and that is roughly the point. It's not that they
can't work, it's that they are an open invitation to abuse. And
even with supposed "safe guards" in place, it merely serves
to tell the crooks where to hide the bodies.
I understand that everything is open to abuse, and so it is easy
to make a case that if a theoretical product can be a valid
product, it should be allowed. I guess there is just more of a
point of view here that some products are so prone to abuse,
there's little point if allowing their existence.
In agreement I would say that such a product simply isn't
necessary.

In the most general sense, there is a market whose products
are "goods", and there is a market whose products are
"bads", so it isn't really necessary to have a market whose
products are "goods and bads" where the consumer can't
determine which is which.

Not elegant, but the same idea as above.
alexy
2007-08-09 08:38:51 UTC
Permalink
Post by Davinchi
In agreement I would say that such a product simply isn't
necessary.
"Necessary"? Probably not. Neither are mutual funds, options, or
futures. On the other hand, these instruments serve the needs of three
constituencies:
1) investors who want low-risk debt
2) investors who are willing to take high risks for very attractive
returns
3) usenet posters who like to have something to complain about <g>
Post by Davinchi
In the most general sense, there is a market whose products
are "goods", and there is a market whose products are
"bads", so it isn't really necessary to have a market whose
products are "goods and bads"
I'm not following that. These structured debt offerings provide
investment options that do not exist with just the underlying debt.
Post by Davinchi
where the consumer can't determine which is which.
Except that these aren't sold to consumers. If the buyers can't make
that determination, or are negligent in doing so, shame on them. And
if Bear Stearns committed fraud to keep the buyers from a proper
determination, the courts seem to be a good remedy.
Post by Davinchi
Not elegant, but the same idea as above.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
alexy
2007-08-09 08:38:51 UTC
Permalink
Post by me
Post by alexy
Post by V***@tcq.net
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
In concept yes. In practice, aggregating securities that have many of
the SAME risks (in this case, broad- based economic risk [housing
prices] and poor design or evaluation of the underlying instruments
[poorer than understood credit risk, overselling of low initial rate,
etc.]) does not effectively diversify to lessen the risk.
[snip]
Post by alexy
Post by V***@tcq.net
poor alex. you just do not get it. its the schemes that sink a
economy. it does not matter how they do it, it is that they are
allowed to do it.
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
I think that's a bit unfair.
I don't. But as long as those who believe that the constitution gives
the feds the right to regulate everything are kept out of power, we
can freely express our different opinions.
Post by me
The poster may not be expressing
themselves
in a detailed way, but the basic assertion has some validity. It's
a variation of the "if it walks like a duck" version of Occum's Razor.
Basically it is the conflict between the theoretical application of
the economic theory, and the reality that in the application, the
details always seem to get lost and the outcome is bad.
Do you have any data to back that up? What is the dollar value of CDOs
that have been written in the last ten years, and what is the dollar
value of those that have had a "bad outcome" (assuming that by "bad
outcome", you mean that someone took a risk that did not pay off)?
Post by me
These kinds of instruments practically beg to be misrepresented
and abused, and that is roughly the point. It's not that they
can't work, it's that they are an open invitation to abuse.
Why? They are not selling to consumers. Where is the invitation to
abuse? And now that some folks have been caught not doing due
diligence on these transactions, any "open invitation" will be pretty
quickly withdrawn. Bear Stearns and the holders of its failed funds
are meeting in court to find out if there has been abuse, and the
finding there will inform future practice.
Post by me
And
even with supposed "safe guards" in place, it merely serves
to tell the crooks where to hide the bodies.
Generally, I agree with that sentiment. But here, the safeguards are
the sophisticated investor rules that prevent such offerings from
being made to consumers.
Post by me
I understand that everything is open to abuse, and so it is easy
to make a case that if a theoretical product can be a valid
product, it should be allowed.
Well, that's too broad, IMHO. Davinchi has mentioned here several
times unequal access to information. And an otherwise sound product
sold in a situation of widely disparate information becomes unsound.
Post by me
I guess there is just more of a
point of view here that some products are so prone to abuse,
there's little point if allowing their existence.
Well, no denying that is a point of view. But I don't see why they
would be prone to abuse. And while you see little point of allowing
their existence, apparently there are lots of folks who see their
value and buy them.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
me
2007-08-09 12:36:39 UTC
Permalink
Post by alexy
Post by alexy
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LO...
See how they snuck those crappy bonds into the CDOs? Is that kewl or
what?
[snip]
Post by alexy
Post by alexy
Good example of the "if I don't understand it, it can't be good"
attitude referred to above.
[snip]
Post by alexy
The poster may not be expressing themselves
in a detailed way, but the basic assertion has some validity. It's
a variation of the "if it walks like a duck" version of Occum's Razor.
Basically it is the conflict between the theoretical application of
the economic theory, and the reality that in the application, the
details always seem to get lost and the outcome is bad.
Do you have any data to back that up? What is the dollar value of CDOs
that have been written in the last ten years, and what is the dollar
value of those that have had a "bad outcome" (assuming that by "bad
outcome", you mean that someone took a risk that did not pay off)?
Yeah, that one occured to me after I posted. I haven't really
seen a
good breakdown of the magnitude of this "problem". It does seem
a bit obligatory of the critics to first establish that there really
is a
"problem" before claiming to have solutions.
Post by alexy
These kinds of instruments practically beg to be misrepresented
and abused, and that is roughly the point. It's not that they
can't work, it's that they are an open invitation to abuse.
Why? They are not selling to consumers. Where is the invitation to
abuse? And now that some folks have been caught not doing due
diligence on these transactions, any "open invitation" will be pretty
quickly withdrawn. Bear Stearns and the holders of its failed funds
are meeting in court to find out if there has been abuse, and the
finding there will inform future practice.
The assertion is that virtually everyone in the process has
some interest in "shading the truth" except of course the
final owner. This may sort itself out in the courts, but again,
much like ponzi schemes which seem to constantly re-invent themselves,
time seems to cause a re-occurance of lack of due diligence.
[snip]
Post by alexy
I understand that everything is open to abuse, and so it is easy
to make a case that if a theoretical product can be a valid
product, it should be allowed.
Well, that's too broad, IMHO. Davinchi has mentioned here several
times unequal access to information. And an otherwise sound product
sold in a situation of widely disparate information becomes unsound.
Well, again, it gets back to the incentive to the generators of
that
information. Everyone in the chain has some incentive to bias that
information in a particular direction, and in fact not work to hard to
detect that bias. I'm reminded of the joke about communication
through management where the guy at the beginning says it is
crap and stinks, the guy at the end of the chain of communication
gets told it is powerful and dominating. At each step the description
is changed slightly but no one is particularly guilty of wholesale
fraud.
Post by alexy
I guess there is just more of a
point of view here that some products are so prone to abuse,
there's little point if allowing their existence.
Well, no denying that is a point of view. But I don't see why they
would be prone to abuse. And while you see little point of allowing
their existence, apparently there are lots of folks who see their
value and buy them.
I can't claim to have strong opinions one way or another.
It is just that over the decades, I've constantly seen new
products introduced into the market that in many ways seem
predominately focused on getting around safeguards imposed on
other products. There is a certain smell of that here too.
alexy
2007-08-09 17:14:09 UTC
Permalink
Post by me
Post by alexy
Post by me
Basically it is the conflict between the theoretical application of
the economic theory, and the reality that in the application, the
details always seem to get lost and the outcome is bad.
Do you have any data to back that up? What is the dollar value of CDOs
that have been written in the last ten years, and what is the dollar
value of those that have had a "bad outcome" (assuming that by "bad
outcome", you mean that someone took a risk that did not pay off)?
Yeah, that one occured to me after I posted. I haven't really
seen a
good breakdown of the magnitude of this "problem". It does seem
a bit obligatory of the critics to first establish that there really
is a
"problem" before claiming to have solutions.
That's my point. And I'm certainly not contending that there is NOT a
problem. But so far, the only CDO losses in all the articles posted by
our little prophetess of doom have been those in the Bear Stearns
leveraged funds. Most of the articles are about how the market has
worked well to constrict the availability of such instruments in light
of the unreliability of the ratings systems. And I would contend that
the problem is not in these funds (which merely direct the losses to
those who assumed the risk of those losses in return for better
expected return) but rather with the macroeconomic interest rate
policies and the supervision of _consumer-level_ activity (the
original issue of the loans associated with these mortgages) where the
information availability is clearly and grossly unbalanced.
Post by me
Post by alexy
Post by me
These kinds of instruments practically beg to be misrepresented
and abused, and that is roughly the point. It's not that they
can't work, it's that they are an open invitation to abuse.
Why? They are not selling to consumers. Where is the invitation to
abuse? And now that some folks have been caught not doing due
diligence on these transactions, any "open invitation" will be pretty
quickly withdrawn. Bear Stearns and the holders of its failed funds
are meeting in court to find out if there has been abuse, and the
finding there will inform future practice.
The assertion is that virtually everyone in the process has
some interest in "shading the truth" except of course the
final owner.
I don't disagree, but neither do I find it anything to get excited
about. It seems this is true of any such multistep process. Each party
has their own interests, but at all stages where there are parties of
rough parity, this self-interest is kept honest by the other party.
Eg., the fertilizer producer, cotton grower, mill, clothing
manufacturer, retailer, and end customer all have their interests in
"shading the truth" in the process that leads to the end user buying a
shirt. In this chain, as a matter of public policy, we insist that the
consumer have the protection of content, country of origin, and use
and care labeling. We may also choose to protect others in the chain
that have weaker bargaining positions, such as labor, environment,
etc. But the fertilizer producer, farmer or farm coop, mill, sewing
shop, and retailer are pretty much free to make their own deals. Other
than a legal system that assures fair commerce, does Merrill Lynch
really need protection from Bear Stearns?


<snip>
Post by me
I can't claim to have strong opinions one way or another.
It is just that over the decades, I've constantly seen new
products introduced into the market that in many ways seem
predominately focused on getting around safeguards imposed on
other products.
Well, if you are talking about financial products offered to
consumers, I would agree (but would like to hear some examples of what
you are thinking of). Negative amortization loans or teaser rate ARMs
may well fall into that category. CDOs do not, IMHO. Eliminating CDOs
will not change the losses one iota--it would just prevent those who
are able to absorb that risk from doing so, and would leave it in more
hands, who might be less able to tolerate the risk, but whose losses,
while more severe, would be less spectacular, thus denying usenet
reposters articles to quote<g>. Reducing losses can be accomplished
with interest rate policies and restrictions on loans available at the
lower end of the market, e.g., qualified loans. As far as I know,
there has not been much of a problem in the jumbo market, and I'd see
no reason to prevent individuals of sufficient means from entering
into interest only or negative amortization loans.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
me
2007-08-09 17:31:08 UTC
Permalink
[snip]
Post by alexy
Post by me
The assertion is that virtually everyone in the process has
some interest in "shading the truth" except of course the
final owner.
I don't disagree, but neither do I find it anything to get excited
about. It seems this is true of any such multistep process. Each party
has their own interests, but at all stages where there are parties of
rough parity, this self-interest is kept honest by the other party.
[snip]

Is this really true in this situation however? You start at the
consumer level, where the borrower tries to appear more
qualified than the person arranging the loan. The person
making the arrangements has no real intent on holding the
loan, and sells it almost immediately. That purchaser
wants to bundle them and sell them and he of course
is interested in representing them as lucrative as possible.
They ultimately find their way into a CDO, or worse
a CDO-squared and the investor has little ability to see
the magnitude of the lies down the chain. Truth is,
was anyone aware of the magnitude of the lies? I wonder
if anyone realizes, even the initial arranger, the magnitude
of the distortion across the market. It's not until the bottom
starts to fall out that anyone knows, and by then it's too
late. Companies fail, names change, products get
altered, and soon the cycle starts anew with no ability to
detect the magintude of the distortion.

I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
alexy
2007-08-10 03:44:05 UTC
Permalink
Post by me
[snip]
Post by alexy
Post by me
The assertion is that virtually everyone in the process has
some interest in "shading the truth" except of course the
final owner.
I don't disagree, but neither do I find it anything to get excited
about. It seems this is true of any such multistep process. Each party
has their own interests, but at all stages where there are parties of
rough parity, this self-interest is kept honest by the other party.
[snip]
Is this really true in this situation however?
I think so. Not perfectly, but essentially. On the other hand, I can't
prove my points below, as I suspect you can't prove yours. So we might
have reached the point where we have to agree to disagree. But it has
been quite refreshing to discuss this reasonably. Thanks.
Post by me
You start at the
consumer level, where the borrower tries to appear more
qualified than the person arranging the loan.
Certainly no difference there because of CDOs. [BTW, I am using "CDO"
here loosely to represent the whole subsequent ownership chain of the
mortgage loan.]
Post by me
The person
making the arrangements has no real intent on holding the
loan, and sells it almost immediately.
And maybe the loan originator is less vigilant because he knows he
will not be holding the loan long-term? Maybe. On the other hand, he
wants to sell it, so he has to make sure that it meets the standards
of his buyer. Analogy: If we all bought our milk directly from the
dairy farmer (forget issues of pasteurization, etc. for a simplified
example), it might be argued that we would be more vigilant about the
quality of the milk we accept. However, the coop who buys from the
farmer knows that it is going to have to sell the milk to the dairy,
and the dairy will do quality checks on each tank truck of milk before
accepting delivery. So the coop is vigilant about what it accepts
from the dairy farmer.
Post by me
That purchaser
wants to bundle them and sell them and he of course
is interested in representing them as lucrative as possible.
They ultimately find their way into a CDO, or worse
a CDO-squared and the investor has little ability to see
the magnitude of the lies down the chain.
I don't buy that. Certainly they DIDN'T look in enough depth at the
make-up of the CDO's. But they certainly could, or could walk away if
they couldn't. We're not talking about John Q. Public making a $50,000
investment. If an investor is going to put $50 million or $500 million
into one of these funds, they can afford to spend a few hundred
thousand if necessary to fully understand their investment. And this
experience will certainly make buyers much more vigilant, as we are
seeing already with the tightened purse strings when private equity
firms have tried recently to sell debt to fund buyouts.
Post by me
Truth is,
was anyone aware of the magnitude of the lies? I wonder
if anyone realizes, even the initial arranger, the magnitude
of the distortion across the market. It's not until the bottom
starts to fall out that anyone knows, and by then it's too
late.
Actually, "it's too late" once the loan is made to the homeowner. All
the rest of it is just distributing the risk. The only losses are from
defaults. Now when Joe Blow defaults on his loan, it affects the P&L
and balance sheet of Merrill Lynch instead of Main Street S&L, but the
loss is the same.
Post by me
Companies fail, names change, products get
altered, and soon the cycle starts anew with no ability to
detect the magintude of the distortion.
I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
I'm curious what solution you think would be appropriate. It seems
pretty clear to me that the problem is credit being extended to people
who cannot afford it, often on terms that unfairly induce them to take
on that debt. While I suspect that we disagree on the magnitude, I am
willing to stipulate that the ability for loans to be resold and
packaged as CDOs contributed to the availability of funds for these
loans, But what is the solution? I suggest that a targeted approach,
attacking the problem at its source--the loan origination--is the
right course, and is less likely to have undesirable consequences than
a shotgun approach. What would you suggest?
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
me
2007-08-12 20:46:50 UTC
Permalink
[snip]
Post by alexy
Post by me
I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
I'm curious what solution you think would be appropriate. It seems
pretty clear to me that the problem is credit being extended to people
who cannot afford it, often on terms that unfairly induce them to take
on that debt.
Really, I think what we are beginning to see is that the borrower
isn't as "qualified" as the paper work he was generating and signing
implied. The broker may have been complicit because they knew
that the risk was down stream and therefore they aren't exposed to it.
Post by alexy
While I suspect that we disagree on the magnitude, I am
willing to stipulate that the ability for loans to be resold and
packaged as CDOs contributed to the availability of funds for these
loans, But what is the solution? I suggest that a targeted approach,
attacking the problem at its source--the loan origination--is the
right course, and is less likely to have undesirable consequences than
a shotgun approach. What would you suggest?
I have to admit most of the "solutions" don't particularly appeal
to
me but somewhere it would seem we need the initiator of the loans
to maintain some connected risks.
Blash
2007-08-12 21:43:56 UTC
Permalink
Post by me
[snip]
Post by alexy
Post by me
I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
I'm curious what solution you think would be appropriate. It seems
pretty clear to me that the problem is credit being extended to people
who cannot afford it, often on terms that unfairly induce them to take
on that debt.
Really, I think what we are beginning to see is that the borrower
isn't as "qualified" as the paper work he was generating and signing
implied. The broker may have been complicit because they knew
that the risk was down stream and therefore they aren't exposed to it.
Post by alexy
While I suspect that we disagree on the magnitude, I am
willing to stipulate that the ability for loans to be resold and
packaged as CDOs contributed to the availability of funds for these
loans, But what is the solution? I suggest that a targeted approach,
attacking the problem at its source--the loan origination--is the
right course, and is less likely to have undesirable consequences than
a shotgun approach. What would you suggest?
I have to admit most of the "solutions" don't particularly appeal
to
me but somewhere it would seem we need the initiator of the loans
to maintain some connected risks.
I suggested something like this once many moons back, not just on
mortgages, but on all forms of debt, equity, etc. I suggested that the
initiator, underwriter, banker, attorneys, etc. take a small % of their fee
in the form of 144 type paper which would not free up for X number of
years....
Boy, oh boy, did I get pooh-poohed!!!
me
2007-08-13 14:25:43 UTC
Permalink
Post by Blash
Post by me
[snip]
Post by alexy
Post by me
I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
I'm curious what solution you think would be appropriate. It seems
pretty clear to me that the problem is credit being extended to people
who cannot afford it, often on terms that unfairly induce them to take
on that debt.
Really, I think what we are beginning to see is that the borrower
isn't as "qualified" as the paper work he was generating and signing
implied. The broker may have been complicit because they knew
that the risk was down stream and therefore they aren't exposed to it.
Post by alexy
While I suspect that we disagree on the magnitude, I am
willing to stipulate that the ability for loans to be resold and
packaged as CDOs contributed to the availability of funds for these
loans, But what is the solution? I suggest that a targeted approach,
attacking the problem at its source--the loan origination--is the
right course, and is less likely to have undesirable consequences than
a shotgun approach. What would you suggest?
I have to admit most of the "solutions" don't particularly appeal
to
me but somewhere it would seem we need the initiator of the loans
to maintain some connected risks.
I suggested something like this once many moons back, not just on
mortgages, but on all forms of debt, equity, etc. I suggested that the
initiator, underwriter, banker, attorneys, etc. take a small % of their fee
in the form of 144 type paper which would not free up for X number of
years....
Boy, oh boy, did I get pooh-poohed!!!-
Well, you potentially are undermining a fundamental principal of
capitalism. You're forcing people to tie up capital in unalterable
investments.
Blash
2007-08-13 15:04:33 UTC
Permalink
Post by me
Post by Blash
Post by me
[snip]
Post by alexy
Post by me
I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
I'm curious what solution you think would be appropriate. It seems
pretty clear to me that the problem is credit being extended to people
who cannot afford it, often on terms that unfairly induce them to take
on that debt.
Really, I think what we are beginning to see is that the borrower
isn't as "qualified" as the paper work he was generating and signing
implied. The broker may have been complicit because they knew
that the risk was down stream and therefore they aren't exposed to it.
Post by alexy
While I suspect that we disagree on the magnitude, I am
willing to stipulate that the ability for loans to be resold and
packaged as CDOs contributed to the availability of funds for these
loans, But what is the solution? I suggest that a targeted approach,
attacking the problem at its source--the loan origination--is the
right course, and is less likely to have undesirable consequences than
a shotgun approach. What would you suggest?
I have to admit most of the "solutions" don't particularly appeal
to
me but somewhere it would seem we need the initiator of the loans
to maintain some connected risks.
I suggested something like this once many moons back, not just on
mortgages, but on all forms of debt, equity, etc. I suggested that the
initiator, underwriter, banker, attorneys, etc. take a small % of their fee
in the form of 144 type paper which would not free up for X number of
years....
Boy, oh boy, did I get pooh-poohed!!!-
Well, you potentially are undermining a fundamental principal of
capitalism. You're forcing people to tie up capital in unalterable
investments.
NONE of those people have set fees.....they are all negotiable........
they could turn down the deal if they didn't like that type of
structuring.........(if you notice, I said "a small % of their fee")......
Look at the take home checks of some of them......it wouldn't put them
in the soup-line......
U***@THE-DOMAIN-IN.SIG
2007-08-14 06:10:30 UTC
Permalink
In article
Post by me
[snip]
Post by alexy
Post by me
I guess you can make the case that the market assumes
a general level of distortion and adjusts accordingly. But that
gets back to the concept that the market adjusts
its lies faster than it accounts for the distortions. The liar
knows the adjustments being made to their value, so
they know the amount of distortion they have to achieve.
The evaluator on the other hand has no way to measure
the magnitude of the distortions until after the fact.
I'm curious what solution you think would be appropriate. It seems
pretty clear to me that the problem is credit being extended to people
who cannot afford it, often on terms that unfairly induce them to take
on that debt.
Really, I think what we are beginning to see is that the borrower
isn't as "qualified" as the paper work he was generating and signing
implied. The broker may have been complicit because they knew
that the risk was down stream and therefore they aren't exposed to it.
I would ask two main questions...

1. Who Lied? Some of these bad subprime mortgages apparently
were initiated by fraud on the part of whoever wrote it up, or
subsequently sold it. Like a broker who changed the "Yearly
Income" field on the application. OTOH, there are also
consumers/borrowers who lie about their income.

2. Who was inexcusably stupid? Some brokers might have glossed
over lies by applicants. And some applicants may have failed to
understand that their lies would catch up to them at ARM reset
time.
--
Get Credit Where Credit Is Due
http://www.cardreport.com/
Credit Tools, Reference, and Forum
me
2007-08-14 12:10:24 UTC
Permalink
Post by U***@THE-DOMAIN-IN.SIG
In article
[snip]
Post by U***@THE-DOMAIN-IN.SIG
Post by me
Really, I think what we are beginning to see is that the borrower
isn't as "qualified" as the paper work he was generating and signing
implied. The broker may have been complicit because they knew
that the risk was down stream and therefore they aren't exposed to it.
I would ask two main questions...
1. Who Lied? Some of these bad subprime mortgages apparently
were initiated by fraud on the part of whoever wrote it up, or
subsequently sold it. Like a broker who changed the "Yearly
Income" field on the application. OTOH, there are also
consumers/borrowers who lie about their income.
I think predominately it is the borrower who does the lying,
the brokers involvment is either to guide them towards where
the best lies are told, or to ignore evidence that the applications
are fraudulent.

Some of the "lies" I've heard of are:

1) Misrepresenting current income levels. Maybe they
just came through a good year and have the documentation
to prove it, or the household has one wage earner that
will soon stop working. But at the time of the application
none of this is revealed. However, the borrower knows
that if their future income was known, they wouldn't get
the loan.

2) Skewed/false savings/cash on hand representation.
They have some large quantity of cash that is already
obligated to some other need, but it still will show as
an asset or available cash. In the worst situation I
ever heard of, someones parents placed a large
quantity of money in an account with the childrens
name on it. That money only stayed in place during
the loan application/housing purchase.

3) Hidden debts. The loan is sought in a single name
only. However, there is a nameless partner who has
significant debt (potentially having taken on all of the
debt of the applicant) and these debt obligations
still will affect the total household income.
Post by U***@THE-DOMAIN-IN.SIG
2. Who was inexcusably stupid? Some brokers might have glossed
over lies by applicants. And some applicants may have failed to
understand that their lies would catch up to them at ARM reset
time.
The reason someone gets caught up in ARM's are widely varied.
I suspect however much of it starts with the product being targeted
at consumers for whom they are very high risk options. Even
folks who may understand to some extent at the time the risks
they are taking on, get a "whistling past the graveyard" mentality as
time goes on and never make the necessary adjustments. But
in the end the ARM's, zero equity, or 125% loans are sold by
brokers, to applicants, that the products aren't really intended for
and that very fact would influence the apparent risk of the product
if this was exposed.

alexy
2007-08-06 14:37:00 UTC
Permalink
Post by Lisa Lisa
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LOAN_GRAPHIC.html
Good overview in very simple terms. Wonder how long it will take Henny
Penny to say that he reads this to say they are using those mortgages
to finance LBOs?
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.
rick++
2007-08-08 17:25:26 UTC
Permalink
The idea of CDOs has merit.
But becauses there are flaws in the system they have to be improved.
Unfortunately nearly a trillion dollars worth this decade will have to
absorbed by the economic system somehow.

The biggest flaw is that it reduces risk for those doing the immediate
lending - the mortgage broker, bank, and appraiser. Then they
arre motivated by volume instead of quality. They cut corners at
best or are fraudulant at worst.
Loading...