The missing piece to understanding credit default swaps and obligations-- the risk formula used

[Deleted member 4644]

http://www.wired.com/techbiz/i..._quant?currentPage=all

Stunning. These banks used the PRICE OF THE CDS (INSURANCE) TO PRICE THE CDOs (ASSET BACKED SECURITIES)!

They assumed the CDS market accurately and efficiently priced in the risk represented in the underlying CDO assets. FUCKING RETARDED.

Fuck me, no wonder it all failed. The market is NOT perfectly efficient. At the very least, there is lag.


Oh.. and PS, since this is P&N. No, this entire meltdown is NOT because stupid people bought houses they could not afford. Was that part of it, sure. But without manipulations like the above noted article, a few foreclosures would not have been a major global crisis.

 

[chess9]

Originally posted by: Deleted member 4644
http://www.wired.com/techbiz/i..._quant?currentPage=all

Stunning. These banks used the PRICE OF THE CDS (INSURANCE) TO PRICE THE CDOs (ASSET BACKED SECURITIES)!

They assumed the CDS market accurately and efficiently priced in the risk represented in the underlying CDO assets. FUCKING RETARDED.

Fuck me, no wonder it all failed. The market is NOT perfectly efficient. At the very least, there is lag.


Oh.. and PS, since this is P&N. No, this entire meltdown is NOT because stupid people bought houses they could not afford. Was that part of it, sure. But without manipulations like the above noted article, a few foreclosures would not have been a major global crisis.

Yes, anyone who thinks some black family in Kernersville, N.C. brought down the American banking system is totally whacked and needs major meds.

Between the CDS, the MBS, and all the other derivatives, we have trillions of dollars of potentially worthless paper in our system. Some estimates are as high as 60 trillion!

The first thing Obama should have done was halt trading in these instruments, passed regulatory reform, then restarted their trading. Tossing around trillions of dollars to banks that can still issue this shit is crazy. (Fortunately, the market has all but dried up, but we still need the regulatory reform.)

-Robert

 

[BoberFett]

Originally posted by: chess9
Yes, anyone who thinks some black family in Kernersville, N.C. brought down the American banking system is totally whacked and needs major meds.

Why bring race into it? Feeling guilty?

And if you deny that subprime mortgages in an overheated market have NOTHING to do with, then you need those same meds.

 

[Zebo]

I don't even pretend to understand these but I do remember years ago Warren Buffet calling them a scam and had potential to wreck economy looks like he was right.

 

[Craig234]

Originally posted by: chess9

Originally posted by: Deleted member 4644
http://www.wired.com/techbiz/i..._quant?currentPage=all

Stunning. These banks used the PRICE OF THE CDS (INSURANCE) TO PRICE THE CDOs (ASSET BACKED SECURITIES)!

They assumed the CDS market accurately and efficiently priced in the risk represented in the underlying CDO assets. FUCKING RETARDED.

Fuck me, no wonder it all failed. The market is NOT perfectly efficient. At the very least, there is lag.


Oh.. and PS, since this is P&N. No, this entire meltdown is NOT because stupid people bought houses they could not afford. Was that part of it, sure. But without manipulations like the above noted article, a few foreclosures would not have been a major global crisis.

Yes, anyone who thinks some black family in Kernersville, N.C. brought down the American banking system is totally whacked and needs major meds.

Between the CDS, the MBS, and all the other derivatives, we have trillions of dollars of potentially worthless paper in our system. Some estimates are as high as 60 trillion!

The first thing Obama should have done was halt trading in these instruments, passed regulatory reform, then restarted their trading. Tossing around trillions of dollars to banks that can still issue this shit is crazy. (Fortunately, the market has all but dried up, but we still need the regulatory reform.)

-Robert

As much as I'd like to get my torch and march with you for 'immediate halts' to the practices, I lack the expertise to know if that would actually be the best plan.

But I obviiously from my other posts agree with you that we need to get this whole lousy system changed, most importantly the issue of the government representing *the public*.

 

[Craig234]

Originally posted by: Zebo
I don't even pretend to understand these but I do remember years ago Warren Buffet calling them a scam and had potential to wreck economy looks like he was right.

Which the right pooh-pooh'd like they do any warning not consistent with the ideology. It's not sexy selling caution to members of the 'leave us alone to get rich' cult.

 

[chess9]

Thanks for that article, btw. It's a very good one.

-Robert

 

[chess9]

Originally posted by: BoberFett

Originally posted by: chess9
Yes, anyone who thinks some black family in Kernersville, N.C. brought down the American banking system is totally whacked and needs major meds.

Why bring race into it? Feeling guilty?

And if you deny that subprime mortgages in an overheated market have NOTHING to do with, then you need those same meds.

I didn't bring race into it, but the right wingers here did by claiming this was all caused by CRA. You have a very short, and convenient, memory.

Yes, the sub-prime market has had a substantial impact. But ALL US mortgages are about 11 Trillion Dollars. All Derivatives are over 600 Trillion dollars. I'll guess the derivatives market is more important by a factor of 10 at least in this failure.

-Robert

 

[chess9]

Originally posted by: Craig234

Originally posted by: chess9

Originally posted by: Deleted member 4644
http://www.wired.com/techbiz/i..._quant?currentPage=all

Stunning. These banks used the PRICE OF THE CDS (INSURANCE) TO PRICE THE CDOs (ASSET BACKED SECURITIES)!

They assumed the CDS market accurately and efficiently priced in the risk represented in the underlying CDO assets. FUCKING RETARDED.

Fuck me, no wonder it all failed. The market is NOT perfectly efficient. At the very least, there is lag.


Oh.. and PS, since this is P&N. No, this entire meltdown is NOT because stupid people bought houses they could not afford. Was that part of it, sure. But without manipulations like the above noted article, a few foreclosures would not have been a major global crisis.

Yes, anyone who thinks some black family in Kernersville, N.C. brought down the American banking system is totally whacked and needs major meds.

Between the CDS, the MBS, and all the other derivatives, we have trillions of dollars of potentially worthless paper in our system. Some estimates are as high as 60 trillion!

The first thing Obama should have done was halt trading in these instruments, passed regulatory reform, then restarted their trading. Tossing around trillions of dollars to banks that can still issue this shit is crazy. (Fortunately, the market has all but dried up, but we still need the regulatory reform.)

-Robert

As much as I'd like to get my torch and march with you for 'immediate halts' to the practices, I lack the expertise to know if that would actually be the best plan.

But I obviiously from my other posts agree with you that we need to get this whole lousy system changed, most importantly the issue of the government representing *the public*.

Derivatives are still very active, but the riskier practices are being curtailed, so the danger of this problem continuing to multiply are low. Nonetheless, the prudent thing to do, IMHO (I'm just guessing like everyone else.), would have been to halt trading in these instruments.

-Robert

 

[BoomerD]

Thanks for the link. I forwarded it to my MIS professor. We're about to start a project about the meltdown. It should come in handy.

 

[chess9]

BANZAI7 NEWS: The following document has been obtained from a confidential source by the BANZAI7 NEWS SERVICE.


CONFIDENTIAL: FOR YOUR EYES ONLY

AIG: THE RISK IS SYSTEMATIC

TIME: DOOMSDAY MINUS 72 hours

TO: MEMBERS OF CONGRESS, BEN BERNANKE, TIMMY GEITHNER

CC: Lloyd Blankfein, Goldman Sachs & Co.

AS YOU ARE AWARE THERE HAVE BEEN NUMEROUS PRESS REPORTS THAT A.I.G. (hereinafter branded the "Outfit") will be reporting a combined quarterly loss somewhere North of $60 Billion (yes SIXTY BILLION). This is a rough cut number. It could easily be higher should we decide it to be. In addition our current burn rate for legal expenses, public relations advisers, clandestine junkets and cash retention bonuses has been estimated to exceed $400,000 per second. We have a black hole that is getting bigger by the second. Moreover, our massive global financial services flea market has not delivered the proceeds we projected to you during the immediately preceding TARP crisis.

Rumors have been circulating that the Outfit has amassed enough weapons grade
credit default SWAP material to build a financial doomsday device. Make no mistake, these rumours are not unfounded. Our handler's led by Gabathon Kekst et al have been quietly disseminating this information on our behalf.

We have indeed amassed enough financial WMD to take out (i) Goldman Sachs, (ii) the entire European Banking System, (iii) the entire United States insurance industry, (iv) each and every one of your Congressional and government pensions,(v) the entire Chinese gaming economy and (vi) all Federation economic activity in this galactic quadrant. The risk we are talking about is not systemic, it is truly intergalactic.

Attached to this cover are 30 more pages of detailed schedules outlining (i) all of the terrible things that can happen and (ii) all of the embarrassing bi-partisan information we have amassed during the course of our extensive political intelligence activities to date.

We respectfully submit that it will be better for all concerned parties if each of you will pull up your socks and/or pantie hose before Monday AM, bite the bailout bullet and provide the Outfit with not less than $30 billion of additional TARP loot.

How these monies are to be provided is not a matter of great concern to us, since as we all know, in our system, contracts are only valid and enforceable when expedient and when our high priced lawyers Sullivan & Crumble so decide.

If the Outfit does not hear from you before the open of business Monday AM, God help all of us.

We Mean Business

http://fray.slate.com/discuss/...ms/thread/2522183.aspx



-Robert

 

[Deleted member 4644]

Originally posted by: BoomerD
Thanks for the link. I forwarded it to my MIS professor. We're about to start a project about the meltdown. It should come in handy.

Sweet. Looking forward to that.

 

[zephyrprime]

Wallstreet invented some mathematical tricks that supposed reduced risks down to a manageable level. Trouble is, they reduced some small scale stochastic risk but created a large scale system risk instead. Whoops. The CDS market had the blinders on and totally failed to see this problem.

 

[DealMonkey]

Originally posted by: Deleted member 4644
http://www.wired.com/techbiz/i..._quant?currentPage=all

Stunning. These banks used the PRICE OF THE CDS (INSURANCE) TO PRICE THE CDOs (ASSET BACKED SECURITIES)!

They assumed the CDS market accurately and efficiently priced in the risk represented in the underlying CDO assets. FUCKING RETARDED.

Stunning indeed. Not only was their formula for determining risk hopelessly flawed, they only fed in data from recent years, when the RE bubble was still growing. No one thought to feed in meaningful historic data and include, oh I don't know, data from down markets?

Wall Street = Epic fail.

 

[Trianon]

awesome article... science is double-edged sword most of the time, in history there were many instances when seemingly good theories were widely accepted, only to be completely de-based later on.

 

[jman19]

Originally posted by: zephyrprime
Wallstreet invented some mathematical tricks that supposed reduced risks down to a manageable level. Trouble is, they reduced some small scale stochastic risk but created a large scale system risk instead. Whoops. The CDS market had the blinders on and totally failed to see this problem.

Yeah, the systemic risk because extremely high as you mentioned. It is easy to say you've hedged out risk on a particular position, but the truth is that your position and your derivatives hedging those positions do not exist in a vacuum.

 

[0marTheZealot]

Originally posted by: Trianon
awesome article... science is double-edged sword most of the time, in history there were many instances when seemingly good theories were widely accepted, only to be completely de-based later on.

This isn't science though because it doesn't ask a question and it isn't falsifiable. It's more curve-fitting than anything else.

 

[frostedflakes]

Originally posted by: DealMonkey

Originally posted by: Deleted member 4644
http://www.wired.com/techbiz/i..._quant?currentPage=all

Stunning. These banks used the PRICE OF THE CDS (INSURANCE) TO PRICE THE CDOs (ASSET BACKED SECURITIES)!

They assumed the CDS market accurately and efficiently priced in the risk represented in the underlying CDO assets. FUCKING RETARDED.

Stunning indeed. Not only was their formula for determining risk hopelessly flawed, they only fed in data from recent years, when the RE bubble was still growing. No one thought to feed in meaningful historic data and include, oh I don't know, data from down markets?

Wall Street = Epic fail.

The same mistake also brought down Long-Term Capital Management back in the late 90s. Risk models were based on only a handful of years worth of data from a healthy market. Well, uh.. what happens if the market goes sour? Just ignore the possibility and hope it doesn't happen?

 

[GeezerMan]

Link1
Link2
Link3

Link4
Data from the Mortgage Bankers Association also showed that a stunning 48 percent of homeowners who have subprime, adjustable-rate mortgages are behind on their payments or in foreclosure.


Yes, the CDS are the biggest part pf the problem. But, one should not ignore the problems in the CRA either. Is it possible that the CRA was just a cost of doing business that the banks paid in order to get bigger? Tack on some greed on the part of those making commissions and now you have 48% of subprime mortgages are behind or in foreclosure. True, the CRA is just a sprained ankle in comparison to the knife in the jugular vein that the CDS are. The CRA needs changing too, but can wait until we see what can be done with CDS.

 

[LegendKiller]

CRA had almost nothing to do with this Geezer, as has been discussed many times. The mortgages originated in the subprime area were NOT from CRA regulated entities. The mortgages were originated voluntarily by the brokers and their entities.

What needs to change is the idea that you can have a broker who has no vested interest, capital, or responsibility for underwriting mortgages, underwriting those mortgages. Additionally, banks cannot be without the same vested interest, as they are now, due to FAS140, CDOs, and SIVs. All-in, SOMEBODY has to be responsible to the purchasers of RMBS.

At every level nobody who was directly involved in the process was responsible. The broker didn't give a shit because they originated trash and that was it, they took no risk. The broker's company simply sold the shit to a bank, or just securitized it directly. The bank (or broker's company) then packaged it up, but they had an equity tranche left over. Naturally, the banks who underwrote the bonds didn't risk any capital. However, what to do with the equity tranche? Ohh, that's right, let's sell that off too, so we take NO risk in the entire capital structure. They CDO'd it. Then, since the CDO had an equity tranche and they couldn't have that 3% of the 3% left around, they CDO'd that into CDO squared it it, then since the CDO had some left over, they CDO cubed it. Then, with the CDO cubed or any other trash they couldn't sell, they stuck it in off balance sheet entities funded by short-term paper.

Once those blew up, the SIVs left the ABCP market fucked. So, nobody but the capital markets took risk. Then, since the banks didn't even want to take SIV risk, they simply took out CDS' to offload even more risk. However, the other investors in the trash knew they were taking risks too, so they CDS'd their trash too.

So what do you have left? Investors and the capital markets get fucked for trusting the banks (and rating agencies). Since trust is undermined NOBODY wants to invest, thus, we get a stand-still, as we have now.

You see, you blame CRA but that's nothing more than a convenient scapegoat for people who don't want to place blame where it belongs. This allows the guilty parties to prevent regulation and change from stopping them from doing this shit again.

You're part of the problem, not part of the solution.

 

[Hacp]

Guess who came up with the formula? A Chinese born communist. This once again proves that Marxist ideals wrecked our economy.

 

[LegendKiller]

Originally posted by: Hacp
Guess who came up with the formula? A Chinese born communist. This once again proves that Marxist ideals wrecked our economy.

You can't be serious.

 

[JSt0rm]

Originally posted by: LegendKiller

Originally posted by: Hacp
Guess who came up with the formula? A Chinese born communist. This once again proves that Marxist ideals wrecked our economy.

You can't be serious.

ohh but he can. lol.

 

[Deleted member 4644]

Originally posted by: LegendKiller
CRA had almost nothing to do with this Geezer, as has been discussed many times. The mortgages originated in the subprime area were NOT from CRA regulated entities. The mortgages were originated voluntarily by the brokers and their entities.

What needs to change is the idea that you can have a broker who has no vested interest, capital, or responsibility for underwriting mortgages, underwriting those mortgages. Additionally, banks cannot be without the same vested interest, as they are now, due to FAS140, CDOs, and SIVs. All-in, SOMEBODY has to be responsible to the purchasers of RMBS.

At every level nobody who was directly involved in the process was responsible. The broker didn't give a shit because they originated trash and that was it, they took no risk. The broker's company simply sold the shit to a bank, or just securitized it directly. The bank (or broker's company) then packaged it up, but they had an equity tranche left over. Naturally, the banks who underwrote the bonds didn't risk any capital. However, what to do with the equity tranche? Ohh, that's right, let's sell that off too, so we take NO risk in the entire capital structure. They CDO'd it. Then, since the CDO had an equity tranche and they couldn't have that 3% of the 3% left around, they CDO'd that into CDO squared it it, then since the CDO had some left over, they CDO cubed it. Then, with the CDO cubed or any other trash they couldn't sell, they stuck it in off balance sheet entities funded by short-term paper.

Once those blew up, the SIVs left the ABCP market fucked. So, nobody but the capital markets took risk. Then, since the banks didn't even want to take SIV risk, they simply took out CDS' to offload even more risk. However, the other investors in the trash knew they were taking risks too, so they CDS'd their trash too.

So what do you have left? Investors and the capital markets get fucked for trusting the banks (and rating agencies). Since trust is undermined NOBODY wants to invest, thus, we get a stand-still, as we have now.

You see, you blame CRA but that's nothing more than a convenient scapegoat for people who don't want to place blame where it belongs. This allows the guilty parties to prevent regulation and change from stopping them from doing this shit again.

You're part of the problem, not part of the solution.

I don't understand 100% of what you just wrote, more like 80% but it sounds damn right.

Although, I will agree with conservatives that the lending encouraged by the Dem congress and Clinton did not *help* anything.

 

[chess9]

Originally posted by: LegendKiller
CRA had almost nothing to do with this Geezer, as has been discussed many times. The mortgages originated in the subprime area were NOT from CRA regulated entities. The mortgages were originated voluntarily by the brokers and their entities.

What needs to change is the idea that you can have a broker who has no vested interest, capital, or responsibility for underwriting mortgages, underwriting those mortgages. Additionally, banks cannot be without the same vested interest, as they are now, due to FAS140, CDOs, and SIVs. All-in, SOMEBODY has to be responsible to the purchasers of RMBS.

At every level nobody who was directly involved in the process was responsible. The broker didn't give a shit because they originated trash and that was it, they took no risk. The broker's company simply sold the shit to a bank, or just securitized it directly. The bank (or broker's company) then packaged it up, but they had an equity tranche left over. Naturally, the banks who underwrote the bonds didn't risk any capital. However, what to do with the equity tranche? Ohh, that's right, let's sell that off too, so we take NO risk in the entire capital structure. They CDO'd it. Then, since the CDO had an equity tranche and they couldn't have that 3% of the 3% left around, they CDO'd that into CDO squared it it, then since the CDO had some left over, they CDO cubed it. Then, with the CDO cubed or any other trash they couldn't sell, they stuck it in off balance sheet entities funded by short-term paper.

Once those blew up, the SIVs left the ABCP market fucked. So, nobody but the capital markets took risk. Then, since the banks didn't even want to take SIV risk, they simply took out CDS' to offload even more risk. However, the other investors in the trash knew they were taking risks too, so they CDS'd their trash too.

So what do you have left? Investors and the capital markets get fucked for trusting the banks (and rating agencies). Since trust is undermined NOBODY wants to invest, thus, we get a stand-still, as we have now.

You see, you blame CRA but that's nothing more than a convenient scapegoat for people who don't want to place blame where it belongs. This allows the guilty parties to prevent regulation and change from stopping them from doing this shit again.

You're part of the problem, not part of the solution.

That's a very good explanation, LK. Stop that! Clarity will kill your reputation.

Don't blame Geezer, as his position is really fairly rational compared to the views of the right wing racists who want to blame that black family in Decatur, Georgia that got a sub-prime $70K loan and brought down the world's banking system thanks to the commies who pushed CRA.

Anyway, ABCP hasn't been ABCP for 10 years! or more. It's more like SAMBCP. (Smoke and Mirrors Backed Commercial Paper.)

-Robert