03-07-2016, 01:46 PM
(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.
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