The ten month mortgage orgy

[BoberFett]

Originally posted by: Jhhnn
It makes me wonder when the banks will once again be healthy enough to stand on their own, if ever...

At this point, why would banks care if they could stand on their own? They know they'll get bailed out because people like LK think we have to keep them alive at any cost.

Banks are going to change from becoming low risk investors to high risk, we already saw that start with subprime mortgages. Hell, bet the whole bank on a risky venture with huge potential payback. Why wouldn't you? The feds will come to the rescue with taxpayer money. Either way they win.

 

[Billb2]

Originally posted by: LegendKiller

Originally posted by: Billb2
The worldwide capitalization of the derivatives market is currently about equal to the total, combined GDP of all the nations on the planet. The "bet" isn't on whether humankind will continue to prosper, but on whether some particular investment will fare better than others.

You have to believe (unless history is not a lesson) that some of those risks are too great.

The question is whether those taking the risk are acting "prudently". That's a very hard question to answer without knowing the future. What Bernake is asking for is the power (from the politicians) to control those risks, since obviously the risk takers are depending on
1.)They'll will have lived rich and prosperous lives, and be dead before they loose the bet.
2.) Some entity will bail them out if they loose ...for the good of society.

It's kind of like the Cubs game i went to. I bet on the Cubs. The guys behind me were betting on, after the third out, and the catcher threw the ball back onto the field, would it stop on the dirt around the mound, or on the grass. There is a great difference in the "psyche" of those bets. The Cubs could win or loose (the economy flourish or collapse), but they would either make or loose money irrespective of the win or loss.

I am putting together a total of 5 derivatives for a transaction I am working on. One to swap principal and interest from an 18-month 200MM euro bond which pays quarterly interest, to 1 month paying $200MM USD LIBOR. That requires 2 components for a total of $400MM in notional value. I am then swapping that amount to Canadian LIBOR (CDOR). That's another $200MM in notional, $600MM total.

Since I don't take positions directly in that type of swap, I am offsetting my risk to two different counterparties. That's another $400MM.

So, for a $200MM loan, I get $1BN in notional value.

Do you know how much money will ever change hands during this whole thing, even in the extreme case of EUR/USD or CAD/USD movements?

Probably less than $20MM. Wow!


People speaking of the "global derivatives" risk really need to educate themselves.

I understand what you are doing, but my question is:
In order for you to profit, does the general condition of mankind have to improve? No, you are not betting on new/improver/more efficient products or services. Yes, you could argue that changes in the value of currencies are affected by the the former, but with the current size of the derivatives market, at the very least, the effects of the former are minimized.

Understand, I'm not anti risk management. I just feel that the "tools" have gotten to the point where they are so esoteric that using them has the potential to cause greater harm than good. In the narrow view, risk managers can tell their clients a lot of good news. In a wider view, risk managers may not be seeing potential downsides.

 

[soccerballtux]

Originally posted by: LegendKiller

Originally posted by: soccerballtux
An alternative I've heard of is that BSC fails and gets vultured on the free market with someone with the capital to take the temporary writedowns. Then the vulture reaps huge profits down the road. Those of us paying attention, investing in the vulture that took up BSC, profit as well.

The alternative is you shield the investors that pressured BSC to push their leverage, from the market. Not that they haven't already been hurt, but if BSC were instead bought up at 25c/share, pretty much all the investors would have lost their money. Which they should, considering everybody saw this whole thing coming from a mile away, but everybody thought they could ride the bubble and get out before everybody else. Even if they didn't get out, why should they care? They knew the government would save them.

This notion that we need to protect the bankers in the way we're doing now has got to go. Let them walk away with 0.25% of the value they invested. They knew it was coming. Let them get burned. And nobody will ever do it again, because they'll know they can't get away with it. They were too busy making money hand over fist to care. Obviously, the potential consequence wasn't great enough to suppress their enthusiasm.

If you can provide an alternative force to keep them from making poor investment decisions, situations like this, where they knew it was coming, then we can talk about bailing them out. But as it stands they can't be allowed to run our economy into the ground like this. Leveraging too much, knowing they'll get away with it if it fails.

Who is going to be able to take down over a all of BSC's assets? I'd love for you to show who has the scratch to do that, especially in an uncertain and downward trending market. Your viewpoint lacks the knowledge that *nobody* would take that. There were maybe 5 people who looked, two who could actually do it, and one who really wanted to.

BSC wasn't worth .25 per share. Isn't enough that most people lost 90% of their investment? If you had given them .25, then they'd have said "no" and fucked the market. You can't just *FORCE* them to take the money. Yet again, a very simplistic viewpoint on the market that has no grounding in reality.

Who knew it was coming? Certainly 99% of them didn't. If they did then there wouldn't have been many people putting in a hundred million bucks. It's stupid to say they knew it was coming.

I admit that you're creating a moral hazard when you bail out banks. However, that moral hazard can be countered through increased surveillence, proper regulatory oversight (which obviously failed here in many obvious ways), and quick movements to counter what appears to be problem areas.

Exactly how are they going to refuse to take 25c/share? Fine, then let them ride it down to .01c/share.

Market vultures would have scavenged just like the American firms did in the 90s over asian markets.

 

[LegendKiller]

Originally posted by: BoberFett

Originally posted by: Jhhnn
It makes me wonder when the banks will once again be healthy enough to stand on their own, if ever...

At this point, why would banks care if they could stand on their own? They know they'll get bailed out because people like LK think we have to keep them alive at any cost.

Banks are going to change from becoming low risk investors to high risk, we already saw that start with subprime mortgages. Hell, bet the whole bank on a risky venture with huge potential payback. Why wouldn't you? The feds will come to the rescue with taxpayer money. Either way they win.

I never said they had to be kept alive at all costs. I merely said it's a very difficult quandry, one which if looked at simply, requires a simplistic answer, such as, you're an ignorant fool for thinking so simplistically.

Now, if you had come to me and agreed this isn't a decision with a binary decision, I'd agree with you and debate.

I guess that's the reason why I am where I am and you are where you are.

 

[LegendKiller]

Originally posted by: soccerballtux
Exactly how are they going to refuse to take 25c/share? Fine, then let them ride it down to .01c/share.

Market vultures would have scavenged just like the American firms did in the 90s over asian markets.

The company is worth more than .25 in the minds fo shareholders. They'd just let the company go down at that point and recover what they could, which would more than likely be more than .25.

 

[LegendKiller]

Originally posted by: Billb2
I understand what you are doing, but my question is:
In order for you to profit, does the general condition of mankind have to improve? No, you are not betting on new/improver/more efficient products or services. Yes, you could argue that changes in the value of currencies are affected by the the former, but with the current size of the derivatives market, at the very least, the effects of the former are minimized.

Understand, I'm not anti risk management. I just feel that the "tools" have gotten to the point where they are so esoteric that using them has the potential to cause greater harm than good. In the narrow view, risk managers can tell their clients a lot of good news. In a wider view, risk managers may not be seeing potential downsides.

does $1BN of derivatives, guaranteeing the risk of a $200MM bond, help people out? Absolutely, the company I am funding certainly loves not taking currency or interest rate risk. They aren't in the business to take it, so they lay it off.

Now, I would agree, that rampant speculation in this market doesn't help.

 

[HeXploiT]

Originally posted by: LegendKiller

Originally posted by: Perry404
I'll argue when there is something worth arguing. "Everybody knows" is hardly enough to convince the masses.

That's because the masses already know. You're behind the curve.

I'm afraid you are the one who can't see the forest through the trees.
Credit has the ability to create debt every bit as much as it does wealth.
This idea that credit is always the answer regardless of assets to back it is a fallacy. Before blaming lack of credit you must go further back and ask how the nation got itself into that position to begin with. I assure you removing the banks ability to print bills is no solution.
Thinking in such narrow terms means we are doomed to relive the mistakes of the past.

 

[LegendKiller]

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404
I'll argue when there is something worth arguing. "Everybody knows" is hardly enough to convince the masses.

That's because the masses already know. You're behind the curve.

I'm afraid you are the one who can't see the forest through the trees.
Credit has the ability to create debt every bit as much as it does wealth.
This idea that credit is always the answer regardless of assets to back it is a fallacy. Before blaming lack of credit you must go further back and ask how the nation got itself into that position to begin with. I assure you removing the banks ability to print bills is no solution.
Thinking in such narrow terms means we are doomed to relive the mistakes of the past.

In order for banks to create loans they have to have money invested to fund them. Where do they get the money? Ohh, I am sure you're going to come back and say "THE FED!", but sorry, that hasn't applied before recently when banks were in trouble.

Or does A = L + E just not apply in your world?

 

[HeXploiT]

Originally posted by: LegendKiller

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404
I'll argue when there is something worth arguing. "Everybody knows" is hardly enough to convince the masses.

That's because the masses already know. You're behind the curve.

I'm afraid you are the one who can't see the forest through the trees.
Credit has the ability to create debt every bit as much as it does wealth.
This idea that credit is always the answer regardless of assets to back it is a fallacy. Before blaming lack of credit you must go further back and ask how the nation got itself into that position to begin with. I assure you removing the banks ability to print bills is no solution.
Thinking in such narrow terms means we are doomed to relive the mistakes of the past.

In order for banks to create loans they have to have money invested to fund them. Where do they get the money? Ohh, I am sure you're going to come back and say "THE FED!", but sorry, that hasn't applied before recently when banks were in trouble.

Or does A = L + E just not apply in your world?

I don't know what A = L + E means.

 

[LegendKiller]

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404
I'll argue when there is something worth arguing. "Everybody knows" is hardly enough to convince the masses.

That's because the masses already know. You're behind the curve.

I'm afraid you are the one who can't see the forest through the trees.
Credit has the ability to create debt every bit as much as it does wealth.
This idea that credit is always the answer regardless of assets to back it is a fallacy. Before blaming lack of credit you must go further back and ask how the nation got itself into that position to begin with. I assure you removing the banks ability to print bills is no solution.
Thinking in such narrow terms means we are doomed to relive the mistakes of the past.

In order for banks to create loans they have to have money invested to fund them. Where do they get the money? Ohh, I am sure you're going to come back and say "THE FED!", but sorry, that hasn't applied before recently when banks were in trouble.

Or does A = L + E just not apply in your world?

I don't know what A = L + E means.

Exactly.

 

[GoingUp]

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404
I'll argue when there is something worth arguing. "Everybody knows" is hardly enough to convince the masses.

That's because the masses already know. You're behind the curve.

I'm afraid you are the one who can't see the forest through the trees.
Credit has the ability to create debt every bit as much as it does wealth.
This idea that credit is always the answer regardless of assets to back it is a fallacy. Before blaming lack of credit you must go further back and ask how the nation got itself into that position to begin with. I assure you removing the banks ability to print bills is no solution.
Thinking in such narrow terms means we are doomed to relive the mistakes of the past.

In order for banks to create loans they have to have money invested to fund them. Where do they get the money? Ohh, I am sure you're going to come back and say "THE FED!", but sorry, that hasn't applied before recently when banks were in trouble.

Or does A = L + E just not apply in your world?

I don't know what A = L + E means.

Assets = Liabilities + Equity

 

[LegendKiller]

Originally posted by: Gobadgrs

Assets = Liabilities + Equity

Ohhh come on now. These idiots have to learn something sometime. They're so used to listening to YouTube videos and ignorant websites, being spoonfed trash, that they can't even think or learn on their own. I was trying to get him to actually learn something and also make a fool of his ignorance, because he needs it.

You just spoiled an important lesson and a good joke. Thanks .

Well, I guess it's not completely spoiled because he probably still doesn't get the significance of what he's saying in relation to what A=L+E means. What's funny is that any 1st year accounting student could own his ass. This doesn't even take a fraction of my knowledge to counter his pathetic YouTube existence.

 

[HeXploiT]

Ohhh come on now. These idiots have to learn something sometime. They're so used to listening to YouTube videos and ignorant websites, being spoonfed trash, that they can't even think or learn on their own. I was trying to get him to actually learn something and also make a fool of his ignorance, because he needs it.

You just spoiled an important lesson and a good joke. Thanks .

Well, I guess it's not completely spoiled because he probably still doesn't get the significance of what he's saying in relation to what A=L+E means. What's funny is that any 1st year accounting student could own his ass. This doesn't even take a fraction of my knowledge to counter his pathetic YouTube existence.

I know you understand the markets & economy so well. If I'd been following your investment advice over the past couple years I'd probably be out an entire portfolio. Maybe I should do some digging into our post histories and to some comparative DD?

Originally posted by: Gobadgrs

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404

Originally posted by: LegendKiller

Originally posted by: Perry404
I'll argue when there is something worth arguing. "Everybody knows" is hardly enough to convince the masses.

That's because the masses already know. You're behind the curve.

I'm afraid you are the one who can't see the forest through the trees.
Credit has the ability to create debt every bit as much as it does wealth.
This idea that credit is always the answer regardless of assets to back it is a fallacy. Before blaming lack of credit you must go further back and ask how the nation got itself into that position to begin with. I assure you removing the banks ability to print bills is no solution.
Thinking in such narrow terms means we are doomed to relive the mistakes of the past.

In order for banks to create loans they have to have money invested to fund them. Where do they get the money? Ohh, I am sure you're going to come back and say "THE FED!", but sorry, that hasn't applied before recently when banks were in trouble.

Or does A = L + E just not apply in your world?

I don't know what A = L + E means.

Assets = Liabilities + Equity

Thanks.

 

[LegendKiller]

Originally posted by: Perry404
I know you understand the markets & economy so well. If I'd been following your investment advice over the past couple years I'd probably be out an entire portfolio. Maybe I should do some digging into our post histories and to some comparative DD?

What's funny is that I don't give investment advice. I have opined on the housing market, in which I said not to partake in it unless you had specific horizons and locations.

But if you really want to compare knowledge, sources, and uses, I am more than willing to throw down over PM. My first question would be, how do you actually fund your investments and how will you fund them going forward? My primary source is my 7 years of undergrad and grad education, plus 3 more years of CFA studies and tests. In addition, 5 years of investment/banking experience.

Since this is a primary source of income and is an investment in and of itself, my returns of have been spectacular. I have increased my returns on base compensation by 400% in 5 years. What about you?

 

[BoberFett]

Originally posted by: LegendKiller

Originally posted by: BoberFett

Originally posted by: Jhhnn
It makes me wonder when the banks will once again be healthy enough to stand on their own, if ever...

At this point, why would banks care if they could stand on their own? They know they'll get bailed out because people like LK think we have to keep them alive at any cost.

Banks are going to change from becoming low risk investors to high risk, we already saw that start with subprime mortgages. Hell, bet the whole bank on a risky venture with huge potential payback. Why wouldn't you? The feds will come to the rescue with taxpayer money. Either way they win.

I never said they had to be kept alive at all costs. I merely said it's a very difficult quandry, one which if looked at simply, requires a simplistic answer, such as, you're an ignorant fool for thinking so simplistically.

Now, if you had come to me and agreed this isn't a decision with a binary decision, I'd agree with you and debate.

I guess that's the reason why I am where I am and you are where you are.

You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

 

[LegendKiller]

Originally posted by: BoberFett
You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

Yes, I am a pompous ass, for good reason. You prove, time and again, on here, that you really don't have a great well-rounded viewpoint.

 

[BoberFett]

Originally posted by: LegendKiller

Originally posted by: BoberFett
You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

Yes, I am a pompous ass, for good reason. You prove, time and again, on here, that you really don't have a great well-rounded viewpoint.

Link?

Edit: And please, tell me where I am. Clearly I don't know.

Edit2: If intelligence or knowledge had anything to do with where people are, Bush wouldn't be president, so forgive me if I don't bow in silent reverence to your position as a measure of your wisdom. People routinely end up where they shouldn't be, you could be one of them.

 

[LegendKiller]

Originally posted by: BoberFett

Originally posted by: LegendKiller

Originally posted by: BoberFett
You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

Yes, I am a pompous ass, for good reason. You prove, time and again, on here, that you really don't have a great well-rounded viewpoint.

Link?

Edit: And please, tell me where I am. Clearly I don't know.

It's clear where you are at, otherwise you wouldn't be posting what you do. Link?

Here.

http://forums.anandtech.com/search.aspx.

Parameters: Search for Author: BoberFett. Forum Categories: Politics and News.

Everything.

 

[BoberFett]

Originally posted by: LegendKiller

Originally posted by: BoberFett

Originally posted by: LegendKiller

Originally posted by: BoberFett
You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

Yes, I am a pompous ass, for good reason. You prove, time and again, on here, that you really don't have a great well-rounded viewpoint.

Link?

Edit: And please, tell me where I am. Clearly I don't know.

It's clear where you are at, otherwise you wouldn't be posting what you do. Link?

Here.

http://forums.anandtech.com/search.aspx.

Parameters: Search for Author: BoberFett. Forum Categories: Politics and News.

Everything.

If it's so clear, then tell me where I am jackass.

 

[LegendKiller]

Originally posted by: BoberFett

Originally posted by: LegendKiller

Originally posted by: BoberFett

Originally posted by: LegendKiller

Originally posted by: BoberFett
You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

Yes, I am a pompous ass, for good reason. You prove, time and again, on here, that you really don't have a great well-rounded viewpoint.

Link?

Edit: And please, tell me where I am. Clearly I don't know.

It's clear where you are at, otherwise you wouldn't be posting what you do. Link?

Here.

http://forums.anandtech.com/search.aspx.

Parameters: Search for Author: BoberFett. Forum Categories: Politics and News.

Everything.

If it's so clear, then tell me where I am jackass.

I can tell where you're not. Not here, not in the capital markets, not in any important sector of finance.

 

[BoberFett]

Originally posted by: LegendKiller

Originally posted by: BoberFett

Originally posted by: LegendKiller

Originally posted by: BoberFett

Originally posted by: LegendKiller

Originally posted by: BoberFett
You think you know where I am? You sure can be a pompous ass, maybe that's why you are where you are?

Yes, I am a pompous ass, for good reason. You prove, time and again, on here, that you really don't have a great well-rounded viewpoint.

Link?

Edit: And please, tell me where I am. Clearly I don't know.

It's clear where you are at, otherwise you wouldn't be posting what you do. Link?

Here.

http://forums.anandtech.com/search.aspx.

Parameters: Search for Author: BoberFett. Forum Categories: Politics and News.

Everything.

If it's so clear, then tell me where I am jackass.

I can tell where you're not. Not here, not in the capital markets, not in any important sector of finance.

Which means jack. It's the people in "important sectors of finance" who have fucked everything up. Why should we listen to them now?

 

[LegendKiller]

Originally posted by: BoberFett
Which means jack. It's the people in "important sectors of finance" who have fucked everything up. Why should we listen to them now?

No, it's people in specific areas. This is one of the huge problems with people like you. You apply a broad brush because you're ignorant to the details. You allow this ignorance to carry over to your analysis of the situation, coloring your ability to reason as to how to resolve or prevent the situation in the future.

People fear what they don't know and never attempt to find out what they fear. It's an easy scapegoat for ignorance (notice, I don't say stupidity).

 

[Jhhnn]

Originally posted by: LegendKiller

Originally posted by: Jhhnn

LOL, I like the simplistic explanation of fractional lending, it shows you really don't know what you're talking about. You don't get to "bend the rules". I know, because I deal with this all of the time. You wouldn't believe how anal they are about capital treatment of different assets.

You do get to bend the rules, just not on the bank's books. You create a hedge fund or a private equity firm, lend it money, use it as a vehicle to bring others in on the deal. Leverage ratios of 30 or 40 to 1 have been quite common in such scenarios... reference LTCM and the 2 failed Bear Stearns funds...

Plausible deniability doesn't work the same way in banking as it does in politics...

But the investment in the hedge fund must be reported also. Provided the fund isn't a direct obligation of the bank, then the bank isn't on the hook for all of it. What they are on the hook for is covered under the capital ratios, provided they are modeled and accounted for correctly.

Using 3 failures as an example isn't even accounting for the successes. LTCM wasn't supported by the banks directly and failed for completely different reasons.

Of course the investment in the hedge fund must be reported. The actual operations of the hedge fund do not. As we've seen, the banks are often big players in each others' hedge funds, establishing huge systemic risk by using such funds as leverage magnifiers. Not to mention that banks have used essentially overvalued MBS holdings as the basis for fractional reserve lending practices, and still have huge inventories of unsold MBS they had underwritten, securities they never intended to hold. When the hedge funds crumple, the value of the securities used to support lending go with them, same with the unsold inventory. Banks are the first to realize this, and since they don't know what kind of shape the other guy is in, interbank lending locks up, ceases to exist, exacerbating the situation. When forced to mark to market, the banks no longer have the required reserves to meet federal standards and are essentially insolvent. They'd have to call huge numbers of good loans to meet reserve requirements, pulling the rug out from under many going concerns. The situation could easily snowball. So the Fed, who doesn't have to mark to market, steps in, accepts those securities at face value as collateral against loans to keep the banks afloat.

When/if the going price of those securities recover or when/if the banks can absorb the losses w/o going broke or radically reducing lending, the Fed won't have to continue the loan program.

That's reasonably accurate, isn't it?

All of this occurred against a backdrop of explosive real estate prices and lending practices that even financial naifs, guys who just fell off the turnip truck, recognized as absurd and insupportable... Bankers knew, or should have known, that somebody would be left holding the bag, they just hadn't counted on investors getting wise all at once and all of a sudden... It's what can happen when throwing caution to the winds, believing that the potential for big returns completely offsets the risk involved.

Which is not to say that I'm opposed to fractional reserve lending per se, or the essentially imaginary money created. The value of money in the marketplace is faith-based, anyway, and the total amount of it extant thru modern banking practices far exceeds the amount of currency in circulation, so there have to be rules governing that relationship. When monetary policy and banking regulation fail to contain upswings in economic activity to reasonable and supportable levels, huge and sudden contractions are inevitable. The crash of '29 didn't cause the Depression, but both were the consequence of the policies and practices leading up to them...

I didn't use the example of LTCM in reference to real estate, at all, but rather in terms of how the downside of extreme leverage can be very dangerous...

What many fail to perceive in the current situation is that while the Fed's actions may soften the decline rate and prevent some of the usual overshoot, that decline is inevitable, simply because the conditions for it have already been created... Can't change the past...

One of the things that I don't understand about the current situation is the role of mortgage insurors in all of this. I'd think it would be them getting the hammer rather than the banks, which apparently isn't happening, or if it is, nobody's talking about it...

 

[BoberFett]

Originally posted by: LegendKiller
No, it's people in specific areas. This is one of the huge problems with people like you. You apply a broad brush because you're ignorant to the details. You allow this ignorance to carry over to your analysis of the situation, coloring your ability to reason as to how to resolve or prevent the situation in the future.

People fear what they don't know and never attempt to find out what they fear. It's an easy scapegoat for ignorance (notice, I don't say stupidity).

Funny, that exact same thing could be applied when discussing libertarians.

 

[LegendKiller]

Originally posted by: BoberFett

Originally posted by: LegendKiller
No, it's people in specific areas. This is one of the huge problems with people like you. You apply a broad brush because you're ignorant to the details. You allow this ignorance to carry over to your analysis of the situation, coloring your ability to reason as to how to resolve or prevent the situation in the future.

People fear what they don't know and never attempt to find out what they fear. It's an easy scapegoat for ignorance (notice, I don't say stupidity).

Funny, that exact same thing could be applied when discussing libertarians.

too bad 90% of the libertarians I have ever met don't know dick about economics in the real world. THey have all of these fluffy feel-good 1800's era ideas, but no practical application.