Riskiest Lenders Were Also Fiercest Lobbyists

[halik]

You just endorsed fraud, Halik.

Explain how that is fraud.

If I'm an ibank with a research dept and brokerage, should the brokerage not let you go long on IBM if the research dept has it on the sell list?

 

[halik]

You assume, Halik, that there's no counterparty risk wrt your put option scenario, precisely the assumption that locked up the financial markets. What good would such an option do you if the counterparty couldn't pay up when required?

Derivatives are the finaglers' dreams come true. They don't need actual reserves, they just need to be "properly hedged" so as to look good on paper, and need to tuck their true risk away in "Special Purpose Vehicles" and other such ploys. Playing the hedge game in both directions benefits them, as well. A hedges B, who hedges C who hedges D and so forth, until it comes back around with Z hedging A... All of which is hidden from view, even to the players, because of the nature of OTC derivatives.

All I need to do to collect money on your proposed hedge, Halik, is claim to be able to pay off when and if the time comes. When I don't, my company goes broke but I stay rich, having chumped you and others into paying me for fantasy "insurance". Perfectly legal, too...

1) Options are exchange traded

2) If you hold an option for hedging purposes, you'll have no incentive to walk away from the property because the value of the house is less than what you mortgaged. It reduces the systematic risk and you DON'T have to exercise it.

I buy a house for $300K and a put on it @$300K. House value drops to $200K, but the intrinsic value of the option is now $100K (i can buy a house for $200K to exercise the option that will get me $300K). I'm not underwater on my hedged RE investment and as such I don't have an incentive to walk away from the property.

This doesn't solve the issue of idiots doing interest only / neg am mortgages, but it will stop the issue of "reflexivity" (idiots foreclose -> lower RE prices -> some people strategically foreclose -> even lower RE prices -> more people foreclose ...)

 

[Ausm]

Goddamn Republicans!


Edit: Oh, and your link doesn't work. http://www.bloomberg.com/apps/news?pid=20601039&sid=a48c8UpUMxKQ

Never claimed that you fucking moron..

 

[Jhhnn]

1) Options are exchange traded

2) If you hold an option for hedging purposes, you'll have no incentive to walk away from the property because the value of the house is less than what you mortgaged. It reduces the systematic risk and you DON'T have to exercise it.

I buy a house for $300K and a put on it @$300K. House value drops to $200K, but the intrinsic value of the option is now $100K (i can buy a house for $200K to exercise the option that will get me $300K). I'm not underwater on my hedged RE investment and as such I don't have an incentive to walk away from the property.

This doesn't solve the issue of idiots doing interest only / neg am mortgages, but it will stop the issue of "reflexivity" (idiots foreclose -> lower RE prices -> some people strategically foreclose -> even lower RE prices -> more people foreclose ...)

Your scenario very much encourages you to force the seller of the put to take possession of the property, Halik. Whatever your equity, you come out ahead, keep your credit intact, buy another at a lower price, reduce your payment.

The risk and loss remain the same, it's just not on you. And it in no way encourages the put seller to keep the property- they're likely to sell it for $200K to cut their losses, leading to the downward cascading price scenario you describe. I also suspect that the price of buying such a put would be prohibitive in the first place.

Lots of people hitched themselves to a star during the crazed runup to the speculative peak in housing. Those who sold at the peak did extremely well, as did those whose cut came in the form of corporate salaries, commissions and bonuses. They're the winners, untouchable, leaving a host of others to suffer the losses, which can only be moved around, not eliminated...

Hedging on huge issues of mortgage bonds doesn't occur as a put, anyway, but rather as CDS, which are not regulated, strictly OTC.

As far as GS is concerned, we need to remember that they had to set 'em up before they could knock 'em down- part and parcel of the grifters' craft. It's what's wrong with giant financial conglomerates- they exploit what really are glaring conflicts of interest to serve their own ends.