Hillary Clinton under investigation!

[fredtoast]

(03-05-2016, 07:22 PM)JustWinBaby Wrote: Technically deposits are insured up to $250k - banks pay for that insurance.  And Lehman and Bear weren't retail banks (I don't think), so they didn't have retail deposits.

Brokerages actually hold your certificate of ownership in stocks or bonds, so even if they go belly-up you still own that asset.

It's fair to say millions of retirees were hurt, directly, when their pensions or mutual funds took a hit on the CDS (not to mention indirectly with the entire markets tanking).  But those pension and mutual fund managers were not unsophisticiated, pedigrees from elite universities, blue chip funds and usually Wall Street - they knew exactly what they were buying...and part of the scam with credit ratings was so they could chase yield while skirting requirements they can't hold below certain rated paper.

Any decent Investment manager doesn't pay much attention to ratings from agencies - they do their own analysis and don't use ratings for much more than filtering their investable universe.

You're absolutely right that we had to 'bail out" Wall Street.  But it's not quite the same as, say, Chrysler in the 80's which was an actual failing business (that rebounded very nicely for some 15 years after).  Lehman and Bear may have been actually insolvent, but for the others it was mostly a technical default stemming from mark-to-market and not an actual shortage of cash.  But that's not to say the paper wouldn't have continued spiraling down if the Fed hadn't stepped in as a buyer of last resort.

I am not talking about deposits in banks.  I am talking about investors holding derivative investments backed by mortgages these banks secured.  If the banks go under then the people (or retirement accounts) holding all these investments take the hit.  

Basically credit default swaps are insurance against a stock crashing.  Except there are not government regulations on credit default swaps like there are on insurance companies.  Lehman Brothers was basically allowed to write insurance policies on billions of dollars of stocks without having the resources on deposit to back them.

[*michaelsean*]

From a novice's point of view, and I am willing to be corrected, you stop what happened by putting people like those in charge of Goldman Sachs in prison. They foisted these crap mortgage packages on their customers as AAA investments. They then bet on these investments to fail by taking out insurance on them, so they made money both ways. I understand it's way more complex, but it sure looked like fraud to me.

[fredtoast]

(03-07-2016, 11:21 AM)michaelsean Wrote: From a novice's point of view, and I am willing to be corrected, you stop what happened by putting people like those in charge of Goldman Sachs in prison.  They foisted these crap mortgage packages on their customers as AAA investments.  They then bet on these investments to fail by taking out insurance on them, so they made money both ways.  I understand it's way more complex, but it sure looked like fraud to me.

You are correct.

People should have paid for what they did.

[JustWinBaby]

(03-07-2016, 11:21 AM)michaelsean Wrote: They foisted these crap mortgage packages on their customers as AAA investments. 

The banks are not in charge of ratings.  The big buyers of these investments were not duped - they are very sophisticated and experienced investors.

To understand how it got to this point, you have to understand the basics of risk models, hedging, VaR and cross-default risk.  It's happened before and it will happen again, and no one individual is responsible for the systemic risk that caused the crisis.  More hubris and model failure than outright fraud and greed.

Lehman was alllowed to fail - are we going to start throwing people in jail for failed businesses?  Or only when they are indirectly responsible for other businesses failing they didn't control?  And if you're going to throw them in jail, there are politicians in Washington and at least a few people at the Fed that should go along with them.

[*michaelsean*]

(03-07-2016, 12:11 PM)JustWinBaby Wrote: The banks are not in charge of ratings.  The big buyers of these investments were not duped - they are very sophisticated and experienced investors.

To understand how it got to this point, you have to understand the basics of risk models, hedging, VaR and cross-default risk.  It's happened before and it will happen again, and no one individual is responsible for the systemic risk that caused the crisis.  More hubris and model failure than outright fraud and greed.

Lehman was alllowed to fail - are we going to start throwing people in jail for failed businesses?  Or only when they are indirectly responsible for other businesses failing they didn't control?  And if you're going to throw them in jail, there are politicians in Washington and at least a few people at the Fed that should go along with them.

I don't have anything against any investment as long as it's revealed what the investment is.  From the best of my understanding it seemed Goldman somehow hid or I'm sure there is a better word, exactly what they were selling, and it somehow involved them classifying and reclassifying.  

[JustWinBaby]

(03-07-2016, 12:22 PM)michaelsean Wrote: I don't have anything against any investment as long as it's revealed what the investment is.  From the best of my understanding it seemed Goldman somehow hid or I'm sure there is a better word, exactly what they were selling, and it somehow involved them classifying and reclassifying.  

Again, it can be tough to sift through the BS of finger-pointing politicians and lawyers looking for a payday.

Basically how CMO worked was the loans were pooled (which is supposed to reduce risk), and then sliced up into various tranches with a sort of pecking order of repayment.  The last tranch was the equity tranch, which was essentially a zero-coupon bond.

That makes the last tranch the riskiest, and also the highest potential return.  It's been said this was the garbage that couldn't be sold, but it was what banks typically held chasing yield and what really was the base of the crisis.

That's where risk-management comes in.  Mortgages are long-term, and in the US we had never seen even a 5-year decline in average home prices nation-wide.  So the risk-adjusted return looks excellent, especially when you buy additional insurance in the form of CDO's.  But those pesky technical valuation and mark-to-market rules!

So the market hiccups in a major way, an extreme "outlier" event (which happens far too frequently in risk modeling, the old fat-tail bias that keeps happening again and again), and paper losses create a technical default with no real risk of actual default.  That paper is going to end-up worth in the ballpark of what you think it's worth, but TODAY it's worth a lot less based on dubious mark-to-market estimates and now you have a technical liquidity issue.  You're going to be fine in a few months or few years if you can ride it out, but rules are forcing liquidity action TODAY and everyone is trying to squeeze through the door at the same time.

There are probably dozens of factors that all contributed to that mess providing the fuel for the meltdown.  And the solution is probably as simple as greater leverage restrictions on notional value, and maybe something the Fed should manage as actively as it does interest rates.  But that would have meant putting the brakes on the housing market, something a few in Washington (including George W) mumbled about but nobody was willing to take real action.

Everyone was loving lower interest rates and increased home ownership and "affordability".  Washington and Fannie/Freddie kept yelling "MOAR!!!"...but that can only keep expanding with Wall Street taking on greater leverage and risk.