i also agree with rrp, i.e., asset back securitization makes a lot of sense and will be around and that one of the big flaws was the de-linking of risk from asset selection/orgination. in fact, that same flaw (de-link of cost to risk/benefit) is the same problem with health care -- but that is another endless debate.
i really like the credit suisse solution -- at least what i read from your post. thanks.
however, i strongly disagree that it is the american (or other) consumer as THE problem. certainly part of the problem. but i think it is more central than that. i think easy money facilitates all of the group of problems that came together to make the problem so big and so global. i mean, you can't blame someone for making a reasonable investment. if the cost of money is zero -- take it! banks did it, consumers did it, nearly all entities did (excepting myself and tr, clearly -- and i believe rrp from some earlier posts).
and regarding nnja's comment about the models, i dont think anyone gives a turd about the models. that's just a fig leaf anyway. people wanted mortgages, brokers wanted to write mortgages, banks wanted to issue mortgages, ibanks wanted to issue securities backed by mortgages and then issue derivatives on those, and investors (of various sorts) wanted the fat carry. i don't think anyone ever cared about the model. i mean, really cared. there was too much money flowing for anyone to care; the model was just a means to an end. of course, not being in that market, i could be wrong. but that is my take on it from a more macro basis.
what is the source of this catastrophe? easy money and greed. same as the last time. and the time before that. and the next time.
p.s. - and thanks for the compliment tr.
Confessions of a risk manager
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apine
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Confessions of a risk manager
Too many people make decisions based on outcomes rather than process. -- Paul DePodesta
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aaron
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- Joined: Thu Jan 01, 2004 12:00 am
Confessions of a risk manager
>
But it wasn't a metaphor, it's what makes the cartoon funny. Substitute "high quality commerical real estate loans" and there's no joke. A lot of people think the problem was the "subprime" in subprime mortgages. That's what I object to. We can have discussions about models, securitization, leverage, agency problems and so forth, but if we stop at the idea that it was stupid to even try to work with flawed assets we miss the point by lightyears.
>
Not borrowers, they knew or should have known that individual house prices and regional values often fall. Moreover in subprime we have seen national price declines, for example in 1997-2000. Then there were well-publicized analyses showing that housing prices were unsustainably high.
In some sense, however, you're right. Stocks went up from 1997-2000 (while subprime loans were collapsing) because a lot of people built the implicit assumption that stock prices always go up into their strategies. It's one thing to say "sure, stocks can go down," it's another thing to stress your business model rigorously with a sharp equity decline and the logical follow-ons.
>
There's always a lot of lender fraud, and it doesn't hurt as much as people think (that is, good underwriting doesn't help as much as people think). I remember a major lender fraud scandal in 2004 that didn't slow anything down.
Moreover, consider an appraiser. Sure there were appraisers who put higher prices on properties than other appraisers did. But the appraisers job is not to opine on the value of the house if the lender repossesses it tomorrow. It's to guess what some other person would pay for it today. So even a non-fraudulent appraisal is worthless as a guide to the foreclosure proceeds. Fraud is not really the issue.
>
Yes. A lot of securitization, including CDO^2's were rating agency arbitrage. But the flaws of the rating agencies have been well-known for many years. Blaming the rating agencies for not preventing the crisis is like blaming Congress for not passing campaign finance reform.
>
I don't know of rating agency fraud in the legal sense. I agree they didn't earn their fees, and people relied on them and lost money. But people were looking for leverage, the rating agencies just helped people feel better about themselves in the process. I think we would have been overlevered without the rating agencies.
>
I agree, it's just that diseased cows and "subprime" is the wrong target. And who puts quotation marks around right? The ideas are simple, and they are right. Period. They don't explain or excuse the crisis, but that doesn't diminish their rightosity.
>
The same thing as if you had bought non-diseased cow securities.
>
I get tired of the idea that the world gets along fine unless Wall Street screws it up. Without finance there is stagnation and misery. People grumble about how much money Wall Street people make in the good times, and how much harm Wall Street inflicts on them in the bad times. People like to complain.
The last 15 years, including the crisis, have been among the best in human history in terms of progress toward freedom, peace, prosperity and culture. We've never seen a modern economy that doesn't have it's ups and downs. This may be as good as it gets, or as good as we know how to make it. If you know how to make it better, do it.
>
I think the origin was in the $5 trillion of short-term cash recycled to developed economies. That fueled the housing bubble, and a lot of other stuff. Without housing, it would have cause some other bubble.
But the leverage in housing is a problem, and it's higher than the stated values because housing expenditures are almost all consumption, there is very little investment. The leverage is close to infinite.
Another big problem is you can't short housing. When prices get high, owners of existing houses should sell off some of their equity to pay down their mortgages. That would moderate price increases and reduce leverage. But you can't do it. The only moderation to price increases in new construction, and that has proved to be too slow and inefficient to work.
But it wasn't a metaphor, it's what makes the cartoon funny. Substitute "high quality commerical real estate loans" and there's no joke. A lot of people think the problem was the "subprime" in subprime mortgages. That's what I object to. We can have discussions about models, securitization, leverage, agency problems and so forth, but if we stop at the idea that it was stupid to even try to work with flawed assets we miss the point by lightyears.
>
Not borrowers, they knew or should have known that individual house prices and regional values often fall. Moreover in subprime we have seen national price declines, for example in 1997-2000. Then there were well-publicized analyses showing that housing prices were unsustainably high.
In some sense, however, you're right. Stocks went up from 1997-2000 (while subprime loans were collapsing) because a lot of people built the implicit assumption that stock prices always go up into their strategies. It's one thing to say "sure, stocks can go down," it's another thing to stress your business model rigorously with a sharp equity decline and the logical follow-ons.
>
There's always a lot of lender fraud, and it doesn't hurt as much as people think (that is, good underwriting doesn't help as much as people think). I remember a major lender fraud scandal in 2004 that didn't slow anything down.
Moreover, consider an appraiser. Sure there were appraisers who put higher prices on properties than other appraisers did. But the appraisers job is not to opine on the value of the house if the lender repossesses it tomorrow. It's to guess what some other person would pay for it today. So even a non-fraudulent appraisal is worthless as a guide to the foreclosure proceeds. Fraud is not really the issue.
>
Yes. A lot of securitization, including CDO^2's were rating agency arbitrage. But the flaws of the rating agencies have been well-known for many years. Blaming the rating agencies for not preventing the crisis is like blaming Congress for not passing campaign finance reform.
>
I don't know of rating agency fraud in the legal sense. I agree they didn't earn their fees, and people relied on them and lost money. But people were looking for leverage, the rating agencies just helped people feel better about themselves in the process. I think we would have been overlevered without the rating agencies.
>
I agree, it's just that diseased cows and "subprime" is the wrong target. And who puts quotation marks around right? The ideas are simple, and they are right. Period. They don't explain or excuse the crisis, but that doesn't diminish their rightosity.
>
The same thing as if you had bought non-diseased cow securities.
>
I get tired of the idea that the world gets along fine unless Wall Street screws it up. Without finance there is stagnation and misery. People grumble about how much money Wall Street people make in the good times, and how much harm Wall Street inflicts on them in the bad times. People like to complain.
The last 15 years, including the crisis, have been among the best in human history in terms of progress toward freedom, peace, prosperity and culture. We've never seen a modern economy that doesn't have it's ups and downs. This may be as good as it gets, or as good as we know how to make it. If you know how to make it better, do it.
>
I think the origin was in the $5 trillion of short-term cash recycled to developed economies. That fueled the housing bubble, and a lot of other stuff. Without housing, it would have cause some other bubble.
But the leverage in housing is a problem, and it's higher than the stated values because housing expenditures are almost all consumption, there is very little investment. The leverage is close to infinite.
Another big problem is you can't short housing. When prices get high, owners of existing houses should sell off some of their equity to pay down their mortgages. That would moderate price increases and reduce leverage. But you can't do it. The only moderation to price increases in new construction, and that has proved to be too slow and inefficient to work.
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apine
- Posts: 0
- Joined: Thu Jan 01, 2004 12:00 am
Confessions of a risk manager
part of the problem with your logic in this case, and the math is that you assumed a 90% sick cow recovery rate. our cows are just not getting healthier at that rate. AND we levered up on that assumption. and that in levering up, we didnt set ourselves up to take a loss, we set ourselves up for a catastrophic losss -- and not just for us, but for all farmers. healthy cows are now getting sick -- CONTAGION!
and regarding wall street pay, you are correct that people like to grumble. and that's fine as you say during the good times. but it seems reasonable for people to expect that wall street have a bad pay year, all things considered. at least for those firms on the dole. half of epic bonuses doesn't really seem too bad to most of the nation/world. that is what is being, i believe, rightly complained about. i don't hear much about non-beggar firms who made money paying bucks out. i hear about bail out $ going into the pockets of the executives that pointed the airplane nose down.
finally, i think you are letting the rating agencies off too easily. sure, they have screwing up for eternity. and they are but one piece in the puzzle. agreed. but that doesn't let them off the hook either. it would be much better if there were more competition. and that should be their true penalty. i don't know really how to enforce such a thing. but oligopoly status is no good on either a theoretical or empirical basis.
and regarding wall street pay, you are correct that people like to grumble. and that's fine as you say during the good times. but it seems reasonable for people to expect that wall street have a bad pay year, all things considered. at least for those firms on the dole. half of epic bonuses doesn't really seem too bad to most of the nation/world. that is what is being, i believe, rightly complained about. i don't hear much about non-beggar firms who made money paying bucks out. i hear about bail out $ going into the pockets of the executives that pointed the airplane nose down.
finally, i think you are letting the rating agencies off too easily. sure, they have screwing up for eternity. and they are but one piece in the puzzle. agreed. but that doesn't let them off the hook either. it would be much better if there were more competition. and that should be their true penalty. i don't know really how to enforce such a thing. but oligopoly status is no good on either a theoretical or empirical basis.
Too many people make decisions based on outcomes rather than process. -- Paul DePodesta
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aaron
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- Joined: Thu Jan 01, 2004 12:00 am
Confessions of a risk manager
But then the people who bought healthy cows are in trouble as well.
I just get annoyed at people who assume the problem is that subprime loans were not solid credit, or that it's impossible to manufacture a AAA credit out of a senior interest in a pool of B assets. People made mistakes trying to do these things, but it wasn't a mistake to try. People lost just as much money starting with high-quality assets.
People on Wall Street will have a bad pay year, especially if you average in the laid-off workers and the losses taken holding employer stock. But it won't be as bad as a lot of non-Wall Street pay years. However, my point was that editorialists seem to assume Wall Street does nothing for its money in good times, but when things go wrong, that Wall Street was all-powerful. Wall Street contibutes to both good and bad economic times. Without finance, there are no good economic times.
It depends on what you mean by "the hook." I agree rating agencies should not have legal monopolies, and that reliance on a rating should not be automatic legal protection. The agencies had conflicts of interest. They didn't have the resources to do the job most people thought they were doing, and that they charged issuers as if they were doing.
But I don't think they were the heart of the problem. Issuers wanted to issue and investors wanted to invest. Rating agencies made them feel better about those things. Maybe with better rating agencies, or no rating agencies, we would have had less issuance and higher quality products. But I'm not sure about that. It might have been worse.
Compare them to the Food and Drug Administration. It has simliar conflicts and inadequacies. It does prevent some useless or harmful drugs from being marketed, but it also impedes some useful innovation and allws some bad drugs through. Those bad drugs do more damage than they otherwise would because people figure the FDA wouldn't let drug companies sell it if it weren't safe and effective.
I just get annoyed at people who assume the problem is that subprime loans were not solid credit, or that it's impossible to manufacture a AAA credit out of a senior interest in a pool of B assets. People made mistakes trying to do these things, but it wasn't a mistake to try. People lost just as much money starting with high-quality assets.
People on Wall Street will have a bad pay year, especially if you average in the laid-off workers and the losses taken holding employer stock. But it won't be as bad as a lot of non-Wall Street pay years. However, my point was that editorialists seem to assume Wall Street does nothing for its money in good times, but when things go wrong, that Wall Street was all-powerful. Wall Street contibutes to both good and bad economic times. Without finance, there are no good economic times.
It depends on what you mean by "the hook." I agree rating agencies should not have legal monopolies, and that reliance on a rating should not be automatic legal protection. The agencies had conflicts of interest. They didn't have the resources to do the job most people thought they were doing, and that they charged issuers as if they were doing.
But I don't think they were the heart of the problem. Issuers wanted to issue and investors wanted to invest. Rating agencies made them feel better about those things. Maybe with better rating agencies, or no rating agencies, we would have had less issuance and higher quality products. But I'm not sure about that. It might have been worse.
Compare them to the Food and Drug Administration. It has simliar conflicts and inadequacies. It does prevent some useless or harmful drugs from being marketed, but it also impedes some useful innovation and allws some bad drugs through. Those bad drugs do more damage than they otherwise would because people figure the FDA wouldn't let drug companies sell it if it weren't safe and effective.
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apine
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- Joined: Thu Jan 01, 2004 12:00 am
Confessions of a risk manager
ok. i agree with you except with the fda comparison. the rating agencies made fat dough and the fda is a govt agency.
and as for heart of the problem, i still believe that to be overall easy money with many things contributing to that: central banks, certain facets of globalization (i.e., government intervention causing misallocation of capital), rating agencies, govt programs encouraging borrowing, corrupt and/or incompetent regulators (it is obvious by now the sec is not only incapable of policing, it actually gets in the way), various regulatory arbitrage, certain structured products, and i'm sure i'm missing some other items. so i think we are on the same page on this. it is just more of a concern for you that too much blame ends up in one place. and it is more of a concern for me that irresponsibility is not being punished enough.
and as for heart of the problem, i still believe that to be overall easy money with many things contributing to that: central banks, certain facets of globalization (i.e., government intervention causing misallocation of capital), rating agencies, govt programs encouraging borrowing, corrupt and/or incompetent regulators (it is obvious by now the sec is not only incapable of policing, it actually gets in the way), various regulatory arbitrage, certain structured products, and i'm sure i'm missing some other items. so i think we are on the same page on this. it is just more of a concern for you that too much blame ends up in one place. and it is more of a concern for me that irresponsibility is not being punished enough.
Too many people make decisions based on outcomes rather than process. -- Paul DePodesta
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aaron
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- Joined: Thu Jan 01, 2004 12:00 am
Confessions of a risk manager
I'm a University of Chicago guy. There is no distinction between the public and private sector, just entities with economic interests.
I'm not worried that too much blame is going to Wall Street, for the money we make we can take a few harsh words.
I see the problem as everyone running around trying to fix things without perspective or clear understanding. The next crisis is far more likely to result from hasty reform efforts than a failure to find and fix the underlying causes of this one.
There are systematic flaws in the reaction to crisis. Some of the usual logical errors are:
Since the crisis is unique, it must have been caused by recent innovations. Therefore, regard all innovation with suspicion and exonerate traditional practices. Flaw: All crises are unique. Unexamined traditional practices cause a lot more harm than innovation.
It's frightening to live in a fundamentally unpredictable world. Therefore the crisis must have been predictable, as it seems in retrospect. People who failed to predict it were incompetent, people who predicted it and didn't prevent it were criminal. Flaw: The world is unpredictable. Get over it. Don't judge by outcome, judge by the quality of the decision at the time it was made.
The better the explanation of the crisis someone has, the more we can trust him. Therefore, the academics and consultants who rush in afterwards with highly specific postdictions of precisely what happened are the most qualified to give advice. People who predicted aspects of the crisis are not to be trusted because (a) they made money from our problems and are therefore criminal suspects and (b) their predictions were not as precise and detailed as the postdictions. Flaw: Obvious.
I'm not worried that too much blame is going to Wall Street, for the money we make we can take a few harsh words.
I see the problem as everyone running around trying to fix things without perspective or clear understanding. The next crisis is far more likely to result from hasty reform efforts than a failure to find and fix the underlying causes of this one.
There are systematic flaws in the reaction to crisis. Some of the usual logical errors are:
Since the crisis is unique, it must have been caused by recent innovations. Therefore, regard all innovation with suspicion and exonerate traditional practices. Flaw: All crises are unique. Unexamined traditional practices cause a lot more harm than innovation.
It's frightening to live in a fundamentally unpredictable world. Therefore the crisis must have been predictable, as it seems in retrospect. People who failed to predict it were incompetent, people who predicted it and didn't prevent it were criminal. Flaw: The world is unpredictable. Get over it. Don't judge by outcome, judge by the quality of the decision at the time it was made.
The better the explanation of the crisis someone has, the more we can trust him. Therefore, the academics and consultants who rush in afterwards with highly specific postdictions of precisely what happened are the most qualified to give advice. People who predicted aspects of the crisis are not to be trusted because (a) they made money from our problems and are therefore criminal suspects and (b) their predictions were not as precise and detailed as the postdictions. Flaw: Obvious.