panzerchic’s last blog post: A Great Big Mess.

I’m a cat lover and have had dozens of pet cats, but never once did I see any of the toms masturbate. One peed in my hair once. I just thought he was marking me as his territory. Well, you learn something everyday.

panzerchic’s last blog post: A Great Big Mess.

A MBS is an instrument peddled to investors by mortgage companies, and other companies, that held mortgages. The MBS paid an attractive rate of return, were backed by assets, (eg a pool of mortgages), and the yields of the MBS were serviced from the payment of interest and principle from the mortgage borrowers, (eg the hone owners). MBS were brought, sold and traded in various markets, and their values depended on the underlying value of the pool of mortgages.

The MBS were popular investments internationally; because, MBS provided a relatively high rate of return, and were suppose to be safe, LOL; since, they were backed by mortgage assets.

Below are a couple of links for more information:

http://en.wikipedia.org/wiki/United_States_housing_bubble

http://en.wikipedia.org/wiki/Mortgage-backed_security

Regards,

LelandJ

http://www.gold-eagle.com/editorials_00/ci091500.html

Regards,

LelandJ

Another swap occurs if the mortgage borrower default on the loan. Big Bank will pay First Mortgage the spread between the face value of the mortgage and the real value of the mortgage in default, and First Mortgage will swap, (eg sign over) the toxic mortgage to Big Bank.

The original intent of the CDS was to create an instrument that would facilitate the financing of housing by having a third parties assume the risk of loan defaults, like a default on a mortgages, but what seems to have really happened is mortgage companies and other mortgage lenders started writing risky loans; because, they had their backs covered by third parties who had assumed the risk of mortgage defaults.

The housing market went through a wonderful boom, but eventually a bubble began to appear. Everyone in the housing market wanted the boom to go on forever, including builders, real estate agents, mortgage companies and banks; because, everyone was making tons of money. Towards the end of the housing bubble, mortgages were created with interest rates even below sub-prime, which is the rate banks charge each other for funds. Initial low interest rates were necessary in the mortgages to get payments down to a point where the borrower would qualify for the loan. The Federal Reserve Chairman assured congress and the American people that the housing bobble was contained, even as the building industry continued to crank out houses. The sub-prime mortgage were variable rate with an interest rate time bomb that adjusted the interest rate back to normal. When the interest rate time bomb went off, the borrower’s monthly mortgage payment doubled or tripled driving many into default on their mortgages.

The Housing bobble eventually burst, and borrowers began defaulting on mortgages in droves, which depressed housing values causing even more defaults in a kind of domino effect, and the housing industry had way over built even before the bubble burst. I’m sure the CDS problem was aggravated by others who really didn’t have any mortgage loan risk to swap to third parties, but only wanted to gamble on a housing market bust, but to what extent these kind of mortgage CDS(s) were leveraged, I’m not sure.

Regards,

LelandJ

Regards,

LelandJ

That is indeed the really interesting question.

If the CDS market is threatening to destroy the world economy governments could and should just make the things illegal and unenforceable retroactively.

Arjewtino’s last blog post: Douchebag: How an otherwise perfect word became overexposed.

You know what, you’re adding to my point. If you blame finance MBAs for this mess then be weary that they had advanced knowledge and still got us into this predicament. You don’t know the difference between an asset and a liability and yet you presume to be knowledgeable enough to teach others. What you should know is that most derivatives were, and continue to be, developed by PhDs. Its the MBAs selling what they don’t truly understand and that is dangerous. Like I said, I respect what you were trying to do here but this is not an easy subject.

Pedro Vera’s last blog post: Credit Default Swaps For Dummies.

You mean the finance MBA’s with “market discipline” who are begging for 700 billion?

There is still much to be concerned about. What’s disturbing to me is that when you look at many joint default models, the probability that an obligor as well as the credit protection provider will default on the obligation is less than any one default but is this really true? Not necessarily. The PD (probability of default) is typically less for an FI, from whom you purchase a swap, UNDER NORMAL CONDITIONS. PDs usually have a 1 year time horizon. As you rightly stated the FI is dependent upon its rating for many of its activities and making sure certain things remain off balance sheet is key. If an FI suddenly is saddled with lots of off balance sheet committments then it looks over leveraged and that’s when the trouble starts.

If the rating agencies can’t do their job, the federal government needs to step in and say a 10-1 leverage positon is way to much.

You can only leverage at 5-1.

This whole CDS market is a bunch of bullshit if you don’t go out and borrow a slew fuck of money. If you are a solid, balance sheet solvent company, you don’t have a f-ing thing ot worry about. But when you go out and borrow leverage at 25-1 position and then the people you lend to are at a 25-1 one position, it just becomes a big shit fuck.

Its debt that his ruining this country. This theory of “managable debt.” Its fucking non-sense. If companies didn’t borrown out the f-ing ass, they wouldn’t be in this situation.

Fulfilling the role of government. Hence why any government intervention in this will make things worse.

Actually not quite. AIG is organized in the following way. There is the company, AIG, which is basically an investment bank. AIG owns various subsidiaries which insure different things. Each subsidiary is (by law) solvent, and fully capable of meeting their obligations.

The investment bank part of AIG got screwed, however. So what should happen is it dies, the subsidiaries are spun off, meet their obligations, and AIG shareholders/executives/employees get hurt.

Only one problem: the Governor of NY allowed AIG’s investment banking arm to “borrow” from the subsidiaries (presumably to protect jobs in NY). Basically, he made a small problem into a big one, in the hopes that the fed will save AIG, the banking sector, and NYC.

Yeah. My other finance professor was saying that they were trading such complex securities that next to no one understood them, not even the ratings agencies.