The true story behind the financial crisis.

[Row6]

Originally Posted by Matthanuf06

Increased demand overall was a factor in the bubble. Subprime demand a major factor in that. Securitization though, was only a small part of the increased subprime demand.

And pardon me laughing, but do you really think we didn't realize markets go "up and down". Come on? This market decline and default increase was unprecedented.

When I say "normal" I mean in the statistical sense that is incorporating typical market swings. What we went through in the 00s was certainly not statistically normal within any standard confidence level.

Models have been updated, and the risk field has grown to focus more on the tail risk. But we weren't there in the 00s.

And I'm not one to resume pump but I'm not some newbie to the financial and risk space.

The primary cause of the bubble was speculation, and much of that was through sub-primes. After the market crash of 200-2001 capital went looking for a safe haven and thought it had found it in real estate. Big and small investors got in, and in 2005 about 30% of homes being built were for speculation by the buyer and that was and is a record. Demand from poor people was not driving this.

[dangolegators]

Originally Posted by Matthanuf06

In the case of slavery that is definition the fault of the government. Free markets require protection of property rights. The most important property we all have is ourselves.

Yes, it is the fault of the government for doing nothing about it. In other words, the government should have stepped in and outlawed slavery.

[wgbgator]

Actually WRT to slavery, the government was protecting property rights, because slaves are property. It was written into the Constitution. Later, the Confederacy formed to continue to protect those property rights once the expansion of slavery was halted and put the institution in danger. People not viewing other people as property had to happen organically, though the abolitionist movement and cultural change, culminating in the 13th Amendment.

[Matthanuf06]

Originally Posted by dangolegators

Yes, it is the fault of the government for doing nothing about it. In other words, the government should have stepped in and outlawed slavery.

Correct. Free market proponents are not anarchists. Protecting property rights and contracts are essential roles of government.

[dangolegators]

Originally Posted by wgbgator

Actually WRT to slavery, the government was protecting property rights, because slaves are property. It was written into the Constitution. Later, the Confederacy formed to continue to protect those property rights once the expansion of slavery was halted and put the institution in danger. People not viewing other people as property had to happen organically, though the abolitionist movement and cultural change, culminating in the 13th Amendment.

Yes, but slavery predated the constitution and the US government. In this case the government was just allowing a market that already existed to continue essentially unregulated.

[wgbgator]

Originally Posted by dangolegators

Yes, but slavery predated the constitution and the US government. In this case the government was just allowing a market that already existed to continue essentially unregulated.

Slavery was regulated, as much as it could be. The ban on importation, the fugitive slave laws, the slave codes, policing of black market activity, etc.

[Matthanuf06]

Originally Posted by wgbgator

Actually WRT to slavery, the government was protecting property rights, because slaves are property. It was written into the Constitution. Later, the Confederacy formed to continue to protect those property rights once the expansion of slavery was halted and put the institution in danger. People not viewing other people as property had to happen organically, though the abolitionist movement and cultural change, culminating in the 13th Amendment.

I understand the history but a person cannot be the property of others. We were just wrong.

Either way you cannot blame the free market and the protection of property rights for that. A fallible society defined property incorrectly, that is where the blame is.

[Matthanuf06]

Originally Posted by Row6

The primary cause of the bubble was speculation, and much of that was through sub-primes. After the market crash of 200-2001 capital went looking for a safe haven and thought it had found it in real estate. Big and small investors got in, and in 2005 about 30% of homes being built were for speculation by the buyer and that was and is a record. Demand from poor people was not driving this.

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.

[wgbgator]

Originally Posted by Matthanuf06

I understand the history but a person cannot be the property of others. We were just wrong.

Either way you cannot blame the free market and the protection of property rights for that. A fallible society defined property incorrectly, that is where the blame is.

Seems like the protection of property rights was a big cause of the Civil War. Obviously, no one today thinks humans are property (a result of the outcome of the war), but in 1861 a lot of people quite clearly did. Anytime someone today says "state's rights" that's pretty much the right they are talking about - the right of the states to keep defining humans as chattle property as the nation at large slowly adopted free labor as an ideal.

[dangolegators]

Originally Posted by wgbgator

Slavery was regulated, as much as it could be. The ban on importation, the fugitive slave laws, the slave codes, policing of black market activity, etc.

Those came later. Yes, slavery was regulated.

[Matthanuf06]

Originally Posted by wgbgator

Seems like the protection of property rights was a big cause of the Civil War. Obviously, no one today thinks humans are property (a result of the outcome of the war), but in 1861 a lot of people quite clearly did. Anytime someone today says "state's rights" that's pretty much the right they are talking about - the right of the states to keep defining humans as chattle property as the nation at large slowly adopted free labor as an ideal.

And they were wrong. That doesn't mean the philosophy and ideology failed. Property rights were not protected whether they 'thought' they were or not.

[wgbgator]

Originally Posted by Matthanuf06

And they were wrong. That doesn't mean the philosophy and ideology failed. Property rights were not protected whether they 'thought' they were or not.

I'm not sure why you would view it as a failure. Slaves were valued as commodities, so the free market & government treated them as such. People decide what has value, the market just facilitates exchange, gov't protects the property. The $ to be made in the new world created a vast demand for labor, it was filled by slave traders. If anything, that's successful capitalism, not failed capitalism.

[gator996]

Originally Posted by Matthanuf06

And I understand and agree that securitization increased the demand for riskier loans. But why is that a bad thing? If the market behaved normally then there would have been no issue.

Because the retail arm of the business was originating more crap loans because they were easier to close when your basically ignoring the underwriting process...


...and there was a more than eager buyer for these crap loans called Wall St. who turned crap into gold through securitization and fraudulent rating agency opinions.


Bonds that should never have been rated AAA were sold as such...

That's why your increased demand occured....


And you are standing here in 2013 saying there wasn't any problem with the securitization market?

You think any of the banks would have driven the business if they didn't have a securitization market to unload the crap to?

And then re-sell over and over and over again? CDO, CDO squared, CDO cubed...

And Moody's, S&P, & Fitch played right along with the game...


Was all of that the government's fault also?

[dangolegators]

Originally Posted by wgbgator

I'm not sure why you would view it as a failure. Slaves were valued as commodities, so the free market & government treated them as such. People decide what has value, the market just facilitates exchange. The $ to be made in the new world created a vast demand for labor, it was filled by slave traders. If anything, that's successful capitalism, not failed capitalism.

It's a failure if you believe that taking away a person's freedom and forcing them to work under brutal conditions is a bad thing and costly to society. In markets, that is called an externality. Child labor is an externality. Pollution is an externality. These are things where the true cost of a good or service is not fully recognized by the sale price. When a factory pollutes a river and sells its product for a price that doesn't generate enough revenue to clean the river, that is an unrecognized cost, or externality.

You could say that one of the externalities of slavery was the Civil War and the huge cost that went with it. But then we'll get people who will actually say that slavery didn't cause the division in this country that lead to the Civil War.

[wgbgator]

Originally Posted by dangolegators

It's a failure if you believe that taking away a person's freedom and forcing them to work under brutal conditions is a bad thing and costly to society. In markets, that is called an externality. Child labor is an externality. Pollution is an externality. These are things where the true cost of a good or service is not fully recognized by the sale price. When a factory pollutes a river and sells its product for a price that doesn't generate enough revenue to clean the river, that is an unrecognized cost, or externality.

You could say that one of the externalities of slavery was the Civil War and the huge cost that went with it. But then we'll get people who will actually say that slavery didn't cause the division in this country that lead to the Civil War.

Yes, the capitalist free-market doesnt fit neatly with any existing or historical human institution or social order or morality. That's why Ayn Rand had to invent one. Also why many conservatives hated Rand, because there has long been a conservative critique of what the free market does (the uprooting of families from established communities, women/children having to work, commoditizing social ills and sex, etc - not to mention slavery).

[108]

lets just pretend Matthanuf06 is correct and this lays at the feet of Government relaxing standards.....how does this make the case for less regulation?

[Row6]

Originally Posted by Matthanuf06

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.

The speculation was a self fulfilling frenzy. Looked like a sure thing to too many people, who had forgotten that yes, real estate values could fall. It has been noted that this bubble was accompanied by a massive tax cut to the top income brackets which also became excess capital looking for an investment.

[gator996]

Originally Posted by Matthanuf06

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.

Not only do you not understand what I'm saying but I highly doubt you understand macro side of the business all that well...

Should I take a guess that you worked on the retail side of the business?


This is like the guy who worked on the assembly line at GM saying he knows the auto industry like management.


And I'm not saying that in a condescending manner ...seriously.


The start of the financial crisis & the mortgage meltdown was the inability for Soc Gen to value the MBS securities in two specific funds.

They announced they couldn't value them (not good, very public)
There were liqudity rumours circling (by that afternoon)
There was a run on those funds by investors (the next morning)

And quickly Soc Gen stopped redemptions... (how could they they couldn't value them)


Investor confidence was shaken and the rest is history...


If you think this has been caused by crap going on at the retail level then GM went under because "Rosie the Riveter" didn't bolt the door on well enough...


The individual loan collateral was a problem but that alone didn't cause this....

The amplification through securitization multiplied the positive & negative effect well beyond anything that could be contained...

The amount of times that crappy individual loan was sliced diced resold & repackaged caused this meltdown...


...not some appraiser or loan officer in Orange county.



Its a very complex issue that had sources all over the "business"...retail, financial markets, government, rating agencies, investors...

Trying to assign all of the blame to one entity is kinda futile but if I had to say who was repsonsible for magnitude of the problem I would start with Wall St.

[gator996]

Originally Posted by 108

lets just pretend Matthanuf06 is correct and this lays at the feet of Government relaxing standards.....how does this make the case for less regulation?

It doesn't.

[Matthanuf06]

Originally Posted by gator996

Because the retail arm of the business was originating more crap loans because they were easier to close when your basically ignoring the underwriting process...

...and there was a more than eager buyer for these crap loans called Wall St. who turned crap into gold through securitization and fraudulent rating agency opinions.

Bonds that should never have been rated AAA were sold as such...

That's why your increased demand occured....

And you are standing here in 2013 saying there wasn't any problem with the securitization market?

You think any of the banks would have driven the business if they didn't have a securitization market to unload the crap to?

And then re-sell over and over and over again? CDO, CDO squared, CDO cubed...

And Moody's, S&P, & Fitch played right along with the game...

Was all of that the government's fault also?

Yes, they didn't realize all of the risks, correlations, and sensitivities to other factors. That was a major failure. But as a whole, do I see anything wrong with securitization? Heck no. It's great.

Again, if the market acted "normally" then those products would have performed as "normally" expected.

I'm certainly not saying risky borrowers should get the same terms as less risky borrowers.

But securitizing those loans isn't a problem, and is without a doubt an investment grade option.

The key point you are all missing: if the market was normal (typical cycle) then those securitized products would have performed fine and you'd have never heard of them. The market crashed which caused the loans to default.

An extreme analogy would be if Iran nuked Israel causing a major market decline, and then blaming the decline on anything other than the nuke.