Village Voice: What Cooked the World's Economy

[AsburySkinsFan]

Well in detective work I've heard it said that all you have to do is follow the money. You want to know what happened to the world economy and where all that bailout money went, think derivatives owned by hedge funds; insurance policies on mortgage securities, when the securities fail, the derivatives pay out; is it any wonder why AIG (an insurance company) got nailed so hard...hint they sold mortgage securities derivatives to hedge funds, then all the sudden the mortgage securities failed because they were loaded with subprime loans whose interest rates jumped through the roof. At that point the securities were rated as junk and the securities failed...and like any good insurance policy the derivatives had to pay out. Think this thing is over? Think again there are still some $600 Trillion in securities derivatives out there...so much for the 600 pound gorilla, as the article says its pretty much a tyrannasaurus rex in the room.

Here ya go; its 6 pages long, but trust me well worth the read.

What Cooked the World's Economy?

p.s. I did a search on the forum found nothing.

[AsburySkinsFan]

Yeah, I didn't figure anyone would want to read the 6 pages. Oh well.

[GibbsFactor]

This was discussed pretty thoroughly 6 months ago when all this started happening.

I think most here have finally realized that the doom predictions some have made on here aren't far off.

I think most of us also realize this is a 10 year problem.

[AsburySkinsFan]

This was discussed pretty thoroughly 6 months ago when all this started happening.

I think most here have finally realized that the doom predictions some have made on here aren't far off.

I think most of us also realize this is a 10 year problem.

What really honks me off about this is the fact that the fix was in, and was in early, from my understanding this was a complete manipulation of the system. I mean why are people allowed to buy insurance on mortgage securities that they don't own? They are betting on someone else's failure, and then all they had to do was sit back and wait for the securities to be downgraded and all the sudden they are getting paid...for nothing. What's more is that the more this problem goes on the more money those "investors" are due to receive through their derivative "investments".

[DjTj]

This was probably the best thread on it: http://www.extremeskins.com/showthread.php?t=263578

...although somehow I remember that thread having more responses than it actually did. Maybe nobody really cares that much about the underlying mechanics of the crash.

I do think it's important to point out, for those who like to blame Fannie and Freddie for the crash, that while the government did encourage more homeownership and helped fund loans to higher-risk borrowers, and the government participated in the the market for collateralizing those loans and selling to investors, the government never told anyone to sell insurance on those loans.

What AIG and others did with CDS's occurred basically without any government intervention. The free market, acting on its own, multiplied the crisis many times.

[AsburySkinsFan]

This was probably the best thread on it: http://www.extremeskins.com/showthread.php?t=263578

...although somehow I remember that thread having more responses than it actually did. Maybe nobody really cares that much about the underlying mechanics of the crash.

This is what kinda puzzles me, because without understanding what created the problem how do we know how best to fix it?

I do think it's important to point out, for those who like to blame Fannie and Freddie for the crash, that while the government did encourage more homeownership and helped fund loans to higher-risk borrowers, and the government participated in the the market for collateralizing those loans and selling to investors, the government never told anyone to sell insurance on those loans.

What AIG and others did with CDS's occurred basically without any government intervention. The free market, acting on its own, multiplied the crisis many times.

Exactly right DjTj, and according to the article there are 600 trillion dollars worth of those insurance derivatives left out there, if those things hit...well...God help us.

[GibbsFactor]

I don't think a crisis of this magnitude can have blame placed on one group or one symptom.

The mechanics of this crash are really just symptoms of a greater problem that allowed our internal human instincts (greed) get out of hand with securities so complex, no one understood them.

All the poor guy with 0 down and a 500 credit rating knew is that he was getting approved for a home. That's all he needed to know.

It's a big sham and really shows where we are as a society. We aren't nearly as sophisticated and enlightened as a whole as some would think.

Fact is, we live in a world of debt, it's inevitiable that one day that debt would reach heights that are unpayable. Don't blame the government. Blame your society. It's all of our faults. Sucks doesn't it.

[AsburySkinsFan]

You nailed it here DjTj:

It's really all about preventing defaults. We know that a lot of mortgages will default, but if those losses can be spread throughout many securities, and you can keep those securities relatively liquid, you can prevent the cascading effects we have seen recently.

[AsburySkinsFan]

Fact is, we live in a world of debt, it's inevitiable that one day that debt would reach heights that are unpayable. Don't blame the government. Blame your society. It's all of our faults. Sucks doesn't it.

The problem Gibbs is that the system of debt actually works pretty well as long as the majority of people continue to pay on their debt, what hurt us is the people who bet that the securities would fail; i.e. those who bought the derivative policies and then waited for them to fail or as the more skeptical part of me would thing manipulated the system so they would fail through the devaluing of securities that included subprime loans. and thus reap huge profits off the failure of things that they did not own, thereby compounding the problem 1) defaulting loans=no income for banks and securities investors 2) huge insurance payouts for the derivatives holders. All of the sudden the banks and companies like AIG are in a two front war with no money coming in on one side and huge bills to pay out on the other. It is no wonder everything ground to a halt.

[GibbsFactor]

The problem Gibbs is that the system of debt actually works pretty well as long as the majority of people continue to pay on their debt, what hurt us is the people who bet that the securities would fail; i.e. those who bought the derivative policies and then waited for them to fail or as the more skeptical part of me would thing manipulated the system so they would fail and thus reap huge profits off the failure of things that they did not own, thereby compounding the problem 1) defaulting loans=no income for banks and securities investors 2) huge insurance payouts for the derivatives holders. All of the sudden the banks and companies like AIG are in a two front war with no money coming in on one side and huge bills to pay out on the other. It is no wonder everything ground to a halt.

Eh...

You're still talking about symptoms.

[HOF44]

This would be like being able to take out a life insurance policy on Patrick Swayze for anyone who wanted one. The entities that did this should be given back their premiums and told to * off!

If however you owned the product you bought insurance on, it should be paid out.

[AsburySkinsFan]

Eh...

You're still talking about symptoms.

No, I'm talking about the potential tidal wave of 600 Trillion dollars in derivative payouts that are looming over the world economy if the foreclosures continue to drag down the securities investments. If that happens then what you've seen so far is but a drop in the bucket.

And that is why we need to understand what caused this and how that cause continues to threaten the world economic system.

[AsburySkinsFan]

This would be like being able to take out a life insurance policy on Patrick Swayze for anyone who wanted one. The entities that did this should be given back their premiums and told to * off!

If however you owned the product you bought insurance on, it should be paid out.

Exactly right HOF44 and I think I might actually use the expletive to their face as I handed them their premium refund. The thing that really nags at me is that I can't help shake the feeling (borrowing your analogy) that they took out a life insurance policy on Patrick Swayze and then gave him cancer. Like I said, the fix was in and in early.

*edit*

What's interesting is that refunding their policy premiums would seem to be infinitely less expensive than paying out the policies. Also like you said if they owned the product that they insured then they should receive payment because they lost money that they had paid in.

[PeterMP]

What really honks me off about this is the fact that the fix was in, and was in early, from my understanding this was a complete manipulation of the system. I mean why are people allowed to buy insurance on mortgage securities that they don't own? They are betting on someone else's failure, and then all they had to do was sit back and wait for the securities to be downgraded and all the sudden they are getting paid...for nothing. What's more is that the more this problem goes on the more money those "investors" are due to receive through their derivative "investments".

I believe that most of the companies that were buying the insurances were also buying the mortgages. Mortgages were being bundled and sold to companies that had nothing directly related to the issuing or managing the insurance. When they bought those bundled mortgages, they also could buy insurance from companies like AIG in case people did default (making the value of what they had bought worth less and therefore covering their investment).

AIG badly underestimated their exposure and when people started defaulting they didn't have the money to cover the insurance they had sold (but the people that were trying to collect were the entities that held the mortgage and therefore were damaged by the default).

There was one story where a guy got rich essentially betting against the system (i.e. he bet that people would default when essentially everybody else was betting the wouldn't), but I don't think by any means the fix was in. The vast majority of the insurance, financial, and other industries made the wrong bet here and have (or nearly have) lost their shirts.

I don't believe buying of insurance (or credit swaps) involving parties where nobody held the mortgage w/ the idea that people would default was common.

[AsburySkinsFan]

I believe that most of the companies that were buying the insurances were also buying the mortgages.

I don't believe buying of insurance (or credit swaps) involving parties where nobody held the mortgage w/ the idea that people would default was common.

Well, according to the article you're mistaken, because that's what the hedge funds were doing all over the place, and one of the main reasons why so many of them opened up in London (in order to escape US regulations). Read the article from the Village Voice, it lays it out very clearly, its worth your time and after you read it and the instant desire to punch someone in the face passes we'll be here.

[PeterMP]

Well, according to the article you're mistaken, because that's what the hedge funds were doing all over the place, and one of the main reasons why so many of them opened up in London (in order to escape US regulations). Read the article from the Village Voice, it lays it out very clearly, its worth your time and after you read it and the instant desire to punch someone in the face passes we'll be here.

I read it. It passes a lot innuendo around and not much else.

It certainly doesn't indicate that the people buying the swaps weren't also buying a piece of the mortgage security in most cases.

My understanding is not just England, but a lot of this ended up in China, and there was pressure from them for us to step in and back stop Fannie and Freddie, but that doesn't mean a fix was in. It means they are holding mortgages that are pretty worthless right now and the companies they bought the insurances from are likely to or have gone out of business so they could lose a lot.

[AsburySkinsFan]

I read it. It passes a lot innuendo around and not much else.

It certainly doesn't indicate that the people buying the swaps weren't also buying a piece of the mortgage security in most cases.

Then I believe you misread it, because when he talks about the hedge funds closing their doors to hide what they were doing and operating in a "dark market" I think its pretty clear what was going on.

[zoony]

This is what de-regulated markets do. Not surprising.

Millions of individuals acting only in their personal interst for short term gain at the expense of the collective good.

.....

[AsburySkinsFan]

This is what de-regulated markets do. Not surprising.

Millions of individuals acting only in their personal interst for short term gain at the expense of the collective good.

.....

QFTruthiness

[PeterMP]

Then I believe you misread it, because when he talks about the hedge funds closing their doors to hide what they were doing and operating in a "dark market" I think its pretty clear what was going on.

Or how about they were turning around and selling mortgages and insurance to others and lost their shirts and are trying to avoid the people they now owe money to.

Or about we just don't have enough info to draw a conclusion.

[AsburySkinsFan]

Or how about they were turning around and selling mortgages and insurance to others and lost their shirts and are trying to avoid the people they now owe money to.

Or about we just don't have enough info to draw a conclusion.

Yeah, give them the benefit of the doubt if you wish, but there is enough information to draw conclusions even if they are uncomfortable ones to draw. Everyone wants to know where the bailout money went...well we do know, AIG and others paid it out in the form of derivatives to those who bought insurance on securities they didn't own. Congrats boys, you got rich...are ya happy now?

[Hubbs]

This is what de-regulated markets do. Not surprising.

Millions of individuals acting only in their personal interst for short term gain at the expense of the collective good.

.....

Strange, then, that this happened despite the number of federal regulations increasing over the course of every administration since Bush I.

The deregulation story behind this crisis is a myth.

[PeterMP]

Yeah, give them the benefit of the doubt if you wish, but there is enough information to draw conclusions even if they are uncomfortable ones to draw. Everyone wants to know where the bailout money went...well we do know, AIG and others paid it out in the form of derivatives to those who bought insurance on securities they didn't own. Congrats boys, you got rich...are ya happy now?

What information (from your link):

"Shamefully, neither Washington nor AIG will explain where the billions went. But the answer is increasingly clear: It went to counterparties who bought derivatives from Cassano's shop in London."

How is the answer becoming increasingly clear? What information is making it increasingly clear?

They also aren't even saying that it went to people that didn't own the security in the first (which is your claim).

I'd love to see a substantial piece on this, but this one isn't it.

[PeterMP]

Strange, then, that this happened despite the number of federal regulations increasing over the course of every administration since Bush I.

The deregulation story behind this crisis is a myth.

Increasing regulations are irrelevant if they aren't regulating the right thing.

You don't think mortgage swaps had anything to do with this?

Please, explain (as his piece does accurately point out) that a housing decline of not even a few trillion can't be bailed out by about an equal bailout of money from the government.

[zoony]

Strange, then, that this happened despite the number of federal regulations increasing over the course of every administration since Bush I.

The deregulation story behind this crisis is a myth.

Wish I had the graph showing the inverse relationships to pirates and global warming.

Nice try but your post is just wrong. The credit default swaps market that sunk the major financial players were deregulated under Bush. End of subject, end of conversation. So call in to Hannity tonight and ask him for more ammo, this one doesn't work on the informed.

Oh and Hank Paulson allowing Merril/Sterns to leverage 30:1 also didn't help :doh: More de-regulation. If you allow them to act like irresponsible douchebags, they will.

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