M-LEC to die on Christmas Eve?

[aaron]

'Twas the night before Christmas, and all of that day,

No CP was rolling, not even trip-A;

SIV assets were hung by the chimney with care,

In hopes that M-LEC soon would be there;



When out on the lawn there arose such a clatter,

I sprang from the bed to see what was the matter.

Away to the window I flew like a flash,

Tore open the shutters and threw up the sash.



The moon through the clouds on the new-fallen snow,

Gave luster of mid-day to something below;

Shifting cloud shadows made objects surreal,

I thought I saw Paulson, and Prince, and O’Neal.

With a little old doctor, clearly a quack,

I knew in a moment it must be M-LEC.



Less rapid than turtles his coursers they came,

And he whistled, and shouted, and called them by name;

"Now, Beta! now, Sigma! Tango and Orion!

On, Axon! on Cheyne! on, Kestrel and White Pine!

Downratings by Moody’s, Fitch and S&P!

Now dash away! dash away! M-LEC must flee!"



As dry leaves obey any wind in the night,

When we meet an obstacle, we run, never fight,

So up to the house-top the coursers they climbed,

With the sleigh full of cash, SIV assets behind.

[tristanreid]

On a similar note, some Dr.Suess:



[url=/User%20Files/802/xmas_200.pdf]Attached File: xmas_200.pdf[/url]



-t.

[kr]

btw aaron I wonder if you've been following the FT letters re: Monopoly and subprime parallels



I am curious who exactly was behind the supersiv as there were claims up until the last minute that 'we are almost ready', 'funding possibly early next year', etc.



Also the art in the FT today about MS chief risk officer maybe getting the bullet is interesting and deserves further debate.

[aaron]

I think Harry Kawaguchi at Press the Third Button Twice was the first to come up with this parallel.



To be technical, these analysts are highlighting the old and general problem of leverage inflating asset prices, making loans seem safely overcollateralized and profitable, leading to more loans and more inflation; until the crash. Subprime was part of this problem, and this problem was one of the causes of bad subprime loans. But there's nothing specific about subprime in these criticisms, they are using "subprime" in its newly-acquired general sense of "the cause of current market turmoil."



All Monopoly loans have always been subprime: the bank lends on the same terms to everyone, regardless of credit history, ability to pay or other assets. Not only is asset cash flow ignored, the bank insists that cash flow be minimized before lending (all houses and hotels must be sold) and prohibits collection of rent on its collatera. The one positive credit standard is the bank will not lend to a player who is actually insolvent.



It's true that the Monopoly winner is generally overleveraged and lucky, but its not true that the most overleveraged player usually wins. The trick is to be the most aggressive survivor. I don't think that's a bad life lesson, even at a time when prudent people seem better off than overaggressive ones. In the long run, prudence and reckless end up in the same place, but reckless has more fun along the way.

[dimsdale]

There is a conflation here of "traditional bank lending" concepts and securitization standards - and it is not appropriate, so does not lend itself to analysis.  Of course lenders didn't scrutinize borrowers or collateral, why would they - originate to distribute was the rage.  But why did the buyers of the securitized paper not scrutinize the mortgagors?  Unsophisticated, presumably, relying on a AAA rating which may have been attached in good faith, but all buyers need to do their own legwork.  Michael Lewis (of Liars' Poker fame) had a great tongue in cheek article about how sophisticated investors lending money to poor people might not get their money back, ah yes, here it is:  http://www.bloomberg.com/apps/news?pid=20601039&sid=a5lhZkEauCu8&refer=home 



This is just the most recent "derivatives" crisis, no different than any preceding "crisis", except that the labels on the instruments have been changed; good thing no one does call CDOs etc. "derivatives," else the regulators would be on that warpath instead.  Same old, same old.  Banks are writing off billions, yes, but their liquidity is sound, many are too big to fail, blah, blah, blah....the pain is there, and its real, but it is widespread.  The worst that is happening is that homeowners are facing the music, moving into rentals (or with friends, parents, etc.)....there's no talk of the growing homeless problem in the US (but with Election 2008 close by, that may be coming).  So the system worked, basically, the risk was broadly diversified, bank stocks are down, but we all move on from here. History repeats.

[kr]

I don't really agree with much of the below - if you are an equityholder and you got diluted, then I'd say the system failed you. That is, risk management was not sufficient for you to avoid locking in a loss. As for the regulators, they WILL be on the warpath once the politicians figure out who they are all going to blame. I'd say it's too early to be sure that a systemic event hasn't been avoided.



Anyhow, I'm looking forward to Monopoly days in a few years, when I can think about all these things again. I think that's right though - once you own enough of the board, it's pretty hard to lose b/c your cashflow is so reliable, and the only thing delaying that is the ability to borrow against the portfolio flows of your construction plan. Also, why would the bank sell at fixed prices at the outset? Nobody pays the bank if they land on the bank's properties. Anyhow what I'd really like is the complete financial ecosystem, you can play equity, debt or assets, portfolio or first-loss, and for every trade there is a counterparty who makes a market.

[aaron]

I have tried my hand at doing this a few times in computer simulations for finance class. Even in highly simplified worlds it gets complicated quickly.



What's interesting is most people play Monopoly by adding rules for more financial flexibility, which has the result that games go on forever. In real life, it's that flexibility that causes bankruptcies.

[nnja]

The best financial ecosystem game I have ever played was M.U.L.E. for the C64 (and I'm sure other systems). It was a great introduction to the laws of supply and demand for a kid, and when I picked it up again a few months ago I was pleasantly surprised that it holds up well. I wish someone would update it to allow for leverage (going into debt) and commodities derivatives - Futures on Smithore! Gotta check if there's an open source project in the works...



Hmm...slightly off topic - maybe this should have gone into this [url=/Show%20Post.aspx?PostIDKey=40201]this thread[/url]. Anyways, everyone should play it at least once.