Why I'll Never Be Rich.

[TBWG]

Hi

Perhaps someone can explain to me why some financial banker types should be paid mega salaries for making such dumb financial decisions.

After all do you really need a BA in business studies to dream up a sub prime scheme. As I understand it this involves loaning money to people who are considered bad credit risks. Oh dear, what's gone wrong these people have started defaulting, surprise, surprise.

If your going to make a balls of it then think big and loose a couple of hundred billion. The worrying thing is to make such a horrendous loss is surely not down to just one person but must require a concerted effort by an entire industry.

It would appear that greed, fear and stupidity is not limited geographically as these astute financial players on far flung continents decide they want a share of the action and buy blocks of debt, presumably at even worse terms.

I'd like to think that those responsible for such dumb decisions will pay the price, but somehow it doesn't seem to work like that, they just go on to bigger superannuated salaries and leave the tab to be picked up by the pension schemes and investors worldwide who suffer in the market collapse.

I still can't get my head round the fact that I'm to stupid to recognise that lending cash to bad debtors is an astute financial business decision.

H'mm if they really are that dumb maybe they will lend me a few hundred million, worth a try!!

TBWG

[Solosiam]

Risk/Reward

Do you think these people paid the same amount of interest as people who were more credit worthy?

If the amount of extra interest you charge these people is greater than the money lost from the extra defaulters, then it is obviously a good investment. However its a high risk one and the riskier the investment and the higher the profit then obviously there is a chance it all goes belly up.

[wasabi]

Another thing I find amusing about the money management industry is the alternative asset class known as Absolute Return. This is most often made of Hedge funds employing strategies known as Equity Arbitrage, market neutral, long - short. The point of it all, they claim, is to make money in all markets be they down or up. Now wouldn't that be nice turn on the cash making machine! The hilarious thing is they underperformed many managers while the market was trending up while assuaging investors concerns that the lower return was justified by the hedge they would provide when a down market emerged. Now that the down trend is in tact these up in all market gunslingers are tanking just as hard if not harder then the traditional long position only 40/60 bond/equity managers. When asked why they aren't delivering the market neutral returns promised they claim the market has changed too much leverage and fancy new derivatives they couldn't properly assess the risk for. It's all a huge house of cards that's collapsing with increasing momentum. Meanwhile these guys drive off in their Ferrari's in pursuit of the next fool. Through it all I have really come to respect more conservative investors like Warren Buffett over these Quant guys.

[JimsKnight]

Yup the stockmarkets are rockin' and rolling down to skid row!

Like many people I wasn't even aware of this huge, wide-ranging 'investment' done by the loan sharks by loaning cash to poor folk. Sure I knew it was out there but had no inkling that ten years ago the dodgy US creditors went rolling the dice in this way. Now ten years on the piper wants paying and its fcking up the whole stockmarket. Cheers for that USA!

[TBWG]

Risk/Reward

Do you think these people paid the same amount of interest as people who were more credit worthy?

If the amount of extra interest you charge these people is greater than the money lost from the extra defaulters, then it is obviously a good investment. However its a high risk one and the riskier the investment and the higher the profit then obviously there is a chance it all goes belly up.

Hi

I take your point but IMHO in this instance it was a real dumb idea to start with, these people have a poor record with good reason and the losses are so horrendous that no matter what rate of interest is charged if nobody pays it then disaster is guaranteed.

TBWG

PS: God bless Warren Buffet, he's finally got me off the hook with Lloyd's of London.

Edited August 11, 2007 by TBWG

[Solosiam]

Risk/Reward

Do you think these people paid the same amount of interest as people who were more credit worthy?

If the amount of extra interest you charge these people is greater than the money lost from the extra defaulters, then it is obviously a good investment. However its a high risk one and the riskier the investment and the higher the profit then obviously there is a chance it all goes belly up.

Hi

I take your point but IMHO in this instance it was a real dumb idea to start with, these people have a poor record with good reason and the losses are so horrendous that no matter what rate of interest is charged if nobody pays it then disaster is guaranteed.

TBWG

PS: God bless Warren Buffet, he's finally got me off the hook with Lloyd's of London.

Its obviously paid off well enough till now.

If you charge double the interest rate you can easily afford for twice as many people to default. Funny you should mention Lloyds, its not so different a market than insurance, you are insuring the bad credit guy wont default on average over the difference you charge them in interest.

[Carmine6]

Hi

Perhaps someone can explain to me why some financial banker types should be paid mega salaries for making such dumb financial decisions.

After all do you really need a BA in business studies to dream up a sub prime scheme. As I understand it this involves loaning money to people who are considered bad credit risks. Oh dear, what's gone wrong these people have started defaulting, surprise, surprise.

If your going to make a balls of it then think big and loose a couple of hundred billion. The worrying thing is to make such a horrendous loss is surely not down to just one person but must require a concerted effort by an entire industry.

It would appear that greed, fear and stupidity is not limited geographically as these astute financial players on far flung continents decide they want a share of the action and buy blocks of debt, presumably at even worse terms.

I'd like to think that those responsible for such dumb decisions will pay the price, but somehow it doesn't seem to work like that, they just go on to bigger superannuated salaries and leave the tab to be picked up by the pension schemes and investors worldwide who suffer in the market collapse.

I still can't get my head round the fact that I'm to stupid to recognise that lending cash to bad debtors is an astute financial business decision.

H'mm if they really are that dumb maybe they will lend me a few hundred million, worth a try!!

TBWG

Subprime has been around for a long time so it's not new. The loans are backed by real estate which is why they're justifiable.

What got out of whack is that lenders started loaning very high percetages (sometimes over 100%) of the real estate values, and really lowered lending standards. i.e. you could walk in and say you were earning $60,000/year without documenting it. Not a problem when housing prices are going up because the banks would just force defaulting borrowers to sell it.

But what's causing the real headline problems is the way the loans were securitized. Basically tens or hundreds of thousands of loans are lumped together and the rights to the proceeds of the those loans sold off as bonds (sometimes called tranches for securitzations). So when borrowers make monthly payments or pay off the loan, the proceeds go to the bondholders. Proceeds from selling the bonds then is available to make new home loans.

But not all bonds have to have the same rights. To turn a pool of subprime loans into high quality bonds, some creative folks made some tranches very low grade. For example, one tranche can take all loan losses up to 50% of the value of the tranche, and this would give the other tranches a higher rating since they're less likely to take losses. The lower quality tranches of course have higher yields. The hedge funds that went under had to have been holding lots of these low grade bonds, and they had to have borrowed money to buy them.

Subprime bonds have of course lost value recently since defaults are a growing reality. On top of that, since no one is really buying the new bond issues, the lenders don't have funds available to make new loans. So defaulting borrowers can't find buyers, plus the underlying real estate is getting softer.

No one knows what the bonds are worth now because potential defaults are hard to estimate. This is why that BNP Paribas fund, which says it holds mostly AA and AAA rated bonds, cut off redemptions. Those bonds haven't come close to taking a loss, but they're not trading. If they hold them they'll likely get full value, but if they sell now they'll take a big loss.

But the complicity of the whole industry is a big issue. The only ones in the whole real estate chain that have a big interest in the borrowers not defaulting is the bond holders (and loan servicers). Other than that, everyone else's revenue is transaction based.

[Aujuba]

Didn't Clinton's gov't bail out a hedge fund for the sake of the markets? Sometimes it seems the US gov't is willing to do things for the wealthy people who create these schemes. How often does the gov't do anything for the little guy?

[sonicdragon]

Another thing I find amusing about the money management industry is the alternative asset class known as Absolute Return. This is most often made of Hedge funds employing strategies known as Equity Arbitrage, market neutral, long - short. The point of it all, they claim, is to make money in all markets be they down or up. Now wouldn't that be nice turn on the cash making machine! The hilarious thing is they underperformed many managers while the market was trending up while assuaging investors concerns that the lower return was justified by the hedge they would provide when a down market emerged. Now that the down trend is in tact these up in all market gunslingers are tanking just as hard if not harder then the traditional long position only 40/60 bond/equity managers. When asked why they aren't delivering the market neutral returns promised they claim the market has changed too much leverage and fancy new derivatives they couldn't properly assess the risk for. It's all a huge house of cards that's collapsing with increasing momentum. Meanwhile these guys drive off in their Ferrari's in pursuit of the next fool. Through it all I have really come to respect more conservative investors like Warren Buffett over these Quant guys.

Opinion such as that is tainted by the fact that you only see headlines about funds that have made large losses, not those that have made large gains. The absolute return funds that I am invested in have done quite well in the last few months.

Many hedge funds managers have their own money invested alongside exsternal investors. This is one reason why hedge funds have managed to remain largely unregulated, something that will surely change after the dust of the current storm settles, and not before time IMHO.

[sonicdragon]

Didn't Clinton's gov't bail out a hedge fund for the sake of the markets? Sometimes it seems the US gov't is willing to do things for the wealthy people who create these schemes. How often does the gov't do anything for the little guy?

I believe you are talking about LTCM in 1998 ? Well, the New York Fed organised a bail out by the investment banks who had provided financing to (and benefitted from large trading comissions from) LTCM (GS, BT, JPM, ML and many others) in order to avoid much wider ramifications (there was a fear of contagion). The Fed increased open market operations to stabilise the money market in similar ways to what hapened on thursday and friday last week, and the Fed Funds rate was cut 3 times in the 2 months that followed. Both of the latter 2 points were arguably not related solely to LTCM, but rather to the factors that, in part, caused the collapse of LTCM (ie the russian debt crisis amongst other things).

Edit: typo

Edited August 12, 2007 by sonicdragon

[wasabi]

Another thing I find amusing about the money management industry is the alternative asset class known as Absolute Return. This is most often made of Hedge funds employing strategies known as Equity Arbitrage, market neutral, long - short. The point of it all, they claim, is to make money in all markets be they down or up. Now wouldn't that be nice turn on the cash making machine! The hilarious thing is they underperformed many managers while the market was trending up while assuaging investors concerns that the lower return was justified by the hedge they would provide when a down market emerged. Now that the down trend is in tact these up in all market gunslingers are tanking just as hard if not harder then the traditional long position only 40/60 bond/equity managers. When asked why they aren't delivering the market neutral returns promised they claim the market has changed too much leverage and fancy new derivatives they couldn't properly assess the risk for. It's all a huge house of cards that's collapsing with increasing momentum. Meanwhile these guys drive off in their Ferrari's in pursuit of the next fool. Through it all I have really come to respect more conservative investors like Warren Buffett over these Quant guys.

Opinion such as that is tainted by the fact that you only see headlines about funds that have made large losses, not those that have made large gains. The absolute return funds that I am invested in have done quite well in the last few months.

Many hedge funds managers have their own money invested alongside exsternal investors. This is one reason why hedge funds have managed to remain largely unregulated, something that will surely change after the dust of the current storm settles, and not before time IMHO.

You're right my opinion is based on Wall Street Journal articles which could be biased. However I still doubt you can master the market with computer models indefinitely. Fooled by Randomness.

Edited August 12, 2007 by wasabi

[Edonista]

I still can't get my head round the fact that I'm to stupid to recognise that lending cash to bad debtors is an astute financial business decision.

It is if you lend other's people money and you cash in fat commissions and salaries to do it.

That's what these guys did, and they are far from being dumb, they are treacherously smart.

[palm]

I still can't get my head round the fact that I'm to stupid to recognise that lending cash to bad debtors is an astute financial business decision.

It is if you lend other's people money and you cash in fat commissions and salaries to do it.

That's what these guys did, and they are far from being dumb, they are treacherously smart.

Exactly.

[JimsKnight]

This is one reason bankers and the banks themselves are so reveiled.

Been going to my RBS business bank to transfer money from it.

First six times they tried using unbelievably crazy moves to block my money:

"You need to call the original account creators before we issue the money."

"We're not giving you the money due to computer differences"

"We're not giving you the money full stop!"

Etc Etc.

I saw through the BS straight away and demanded they haul the managers ass down to see me every time! I'd hear a little voice in the background say "It's alright I'll clear it now (to get the money ready)". All because they were seeing how far they could push me to the edge before relenting. All to hang on to the money a few more days!

Absolute fcking shylocks!

Complained about it to customer services and amazingly got six bottles of wine as a 'Sorry for the staff' excuse.

Sorry for being a *unt and playing the Bank of Shylock more like!

No offence meant to the Jewish folk out there BTW.

Edited August 13, 2007 by JimsKnight

[Sateev]

Do you think these people paid the same amount of interest as people who were more credit worthy?

Yep, and in some cases, less - at least for a while.

My last domicile in the US was in San Diego, and we could see this coming a mile away. The hills were festooned with $1 million+ tract homes, bought up by people who should have been living in the southeastern smog-burbs of LA, with variable-rate mortgages, some carrying huge future balloon payments, and all destined to increase the interest rate to usurious levels.

These were households where two people worked and barely made the mortgage while the interest rate was low. Often, the speculative desire to cash in on the appreciation was the motivator; other times,it was betting on the come line (unrealistic optimism about future fortunes).

Whatever the reason, any small emergency, or the loss of one or both jobs, along with the softening real estate market, making it impossible to 'turn' the property before the interest rate rose, had the predictable result: default.

The mortgage lending business had a feeding frenzy, and many were indicted for pushing loans on people who couldn't possibly service them. Malfeasance included falsifying documents, fabricating references, etc.

Combination of human weakness, and human greed. And any financial institution that invested in the subprime market should have been able to see it coming as well. However, if certain Thai banks lose their shirts, it will be the 'farangs' fault, just as surely as we are taking all the good businesses for ourselves in the LOS.

Sateev

[Kf6vci]

On Bloomberg TV and other news channels, they reported the exposure of German banks. In a way as if thetotal investment would be a total write-off. Okay, so home values decline and non-performing loans lead to forclosures whichmay take another 90 days plus the time to sell the underlying collateral at lower prices. But what I'm trying to say is, even though this hurts, it won't be a total meltdown. As the subprime lenders tended to sell on most mortgages... And in other countries, most folks would have been denied mortgages. Would that be the solution??