Interesting read on how this guy shorted the mortgage meltdown -Vanity Fair

[LeeLau]

Not to put you on the spot mtnwriter but it's always good to hear the other side of pessimism

@OldLArry. I don't think its their lack of financial knowledge that hurts the SEC staff. I've worked with some who are inquisitive, willing to learn and are keen to do their job. It's their culture which destroys them and turns them into drones going through the motions. A wholesale cleansing is needed. Maybe an entirely new organization.

For that matter the whole subject matter of securities law is so form and not substance. SOX in particular and accounting rules - fasb, reg sho, rev rec, - sets up bright line rules that are fairly easy for creative fraudsters to defeat. Look at Reg 105 & how Ernst & Young (who i predict will also burn in hell for this) formalisticly defended their audit. Or look at how telco's reported sales of boxes/switches and packed their quarter ends back in the old days circa 2000s. All those were strategies explicitly designed to formalisticly comply with accounting and securities laws; gray-zone legal but had a single purpose - to commit fraud with numbers.

Try explaining that kind of shit to a SEC drone who's not particularly motivated. The miracle is that Markopolous kept at it for so long; was that particular rare obsessive person with integrity; and didn't end up in cement blocks on the feet in the Hudson

[retirwntm]

i'll think about it and try to limit the polemics. in the meantime, vis-a-vis the SEC, CFTC, OCC, FED, etc. my experience has been that its more of a personality trait that often is as much of a limiter than anything else. some of the people i've known and worked with were highly motivated and creative problem solvers who were at best rule guided, whereas many regulators are rule bound and therefore simply cannot think in the same creative ways to "catch a thief" so to speak, or think creatively enough to anticipate potential systemic problems. its a constant chess match.

[Stu Gotz]

The Epicurean Dealmaker has a nice post about the staffing of the Fed and the SEC. It won't happen, but it makes sense. "Hire the poacher.."

http://epicureandealmaker.blogspot.c...mekeepers.html

As for the CDS - if you don't believe in the investment, don't own it. But I am guessing that 95% of the written CDS contracts in the last decade were for speculative purposes with no underlying exposure whatsoever.

[retirwntm]

Not to put you on the spot mtnwriter but it's always good to hear the other side of pessimism

first off, as far as finance, mad scientists and the big bad bankers - the era of "beware geeks bearing formulas" has only begun, yet the absolute certainty and blind faith with which phd's created their models then based so many complex real world decisions without robust debate is over.

the lesson learned was that common sense needs to live harmoniously within the decision making process along with models and must exist in risk management especially if that means shit gets messy or it means pulling the plug on trading vehicles because they can't pass common sense tests. this critical self sustainability check will ensure some of those esoteric products that were only created to confuse and were only bought by those that had too much money to speculate won't be recreated. out of self preservation, many of the exotica that were cooked up won't be unleashed upon the greater world for some time (at least).

second off, regarding the massive overhang of quants - they can and are going back to math, science, and engineering...i.e. something more useful than mental masturbation in C++ code to serve their managing director masters. this helps to redirect a powerful resource to (hopefully) a greater purpose - perhaps solving the clean energy dilemma. i still think that though we aren't the legion of engineers china and india are, we are a more creative society and are better at solving highly complex tasks in creative ways (as a society). plus, with all those geeks not pulling down mid six figures out of sloan and wharton (phd not mba ) perhaps less money will be chasing houses & consumer goods and inflation will continue to relax.

regarding the banks, i think (the smarter ones) realize they got a one time pardon - that will not be proffered next time they blow up the world. again, with self preservation as a primary directive, i think most of the financials got the message to evolve or die...despite what many people think about financial reform (which is being mishandled, but volcker is not the right guy for the job IMO). if the system works properly, the incentives should be realigned so banks and their shareholders and consumers all have similar, if not common, goals or at least not zero sum or mutually assured destruction scenarios.

this may be more cynically interpreted, but the banks have already helped to blow up the US (and real estate and unemployment may well be a generational noose around our neck) but the banks are:

a. using their energy & $ to get healthy, which makes them & us (we, people) safer
b. spending most of their time drooling at their new ho - asia!
c. because of b. and the need to cater to emerging markets, banks are spending more time and effort banking in conventional means as opposed to creating derivatives, SPVs, SPEs, off balance sheet leverage, etc.

finally, i think younger americans (under 30) are in my experience more considerate, more centered, more committed to causes, more willing to help others, less manic than my mid 30's model. in short, most of them i've spent time with are less selfish and perhaps that bodes well for our future.

the US government is fucked though, since it took on the sins of the banks & the people, and we will all be paying higher taxes for those sins over the last few decades for decades to come.

[LeeLau]

The Epicurean Dealmaker has a nice post about the staffing of the Fed and the SEC. It won't happen, but it makes sense. "Hire the poacher.."

http://epicureandealmaker.blogspot.c...mekeepers.html

Stu - that's a really nice article. But i've got to agree with the cynics. It'll never happen. Makes way too much sense.

Here's a good piece written by chancellor - author of Devil take the Hindmost - this article has a link to his article in gmo.com (needs free reg)
http://www.nakedcapitalism.com/2010/...ked+capitalism)

[Stu Gotz]

Here's a post at Naked Capitalism that disputes Lewis' "good guy/bad guy" narrative. As with most things in life - shades of grey.

http://www.nakedcapitalism.com/2010/...giography.html

[retirwntm]

both good articles. i'll post this one, because, a. i worked with david & its interesting to see his legacy & b. felix salmon & gillian tett have consistently been ahead of the curve, have made the effort to understand the complexities and have written well about the industry, and c. how can you not want to read an article where taleb is quoted as saying "correlation is charlatanism":

http://www.wired.com/techbiz/it/maga...urrentPage=all

[LeeLau]

Here's a post at Naked Capitalism that disputes Lewis' "good guy/bad guy" narrative. As with most things in life - shades of grey.

http://www.nakedcapitalism.com/2010/...giography.html

Stu - keep the interesting reading going. It's good stuff

I like this snippet

By implication, the entire mortgage industry ignored the housing bubble and the frothiness of the subprime market. This is simply false (although with Bernanke and the persistently cheerleading US business media largely missing this story at the time, the “whocouldanode” defense is treated more seriously than it should be). Many people in the credit markets were aware that the risks were increasing in the subprime and residential real estate markets. Every mortgage industry conference during this period had panels on this topic, every credit committee considered it throughout 2005-07.

This begs the question. Why then did investors in those assets not reduce exposure or do something about it? It's ludicrous to think that all those guys in ML, MS, GS, CFC became bagholders. Think about it; these guys were in the business of creating bags of shit, putting lipstick on the bags & selling the bags. I wasn't in the structured finance side so I simply don't have insight into it - so its a question more then anything.

and Stu, here's the paragraph I think you're keying on (correct me if I'm wrong) - i posted to Yves's article btw as a question

"Eisman recognizes that the subprime market is a disaster waiting to happen, a monstrous fire hazard that, once lit, will engulf the housing market and financial firms. Yet he continues to throw Molotov cocktails at it. Eisman is no noble outsider. He is a willing, knowing co-conspirator. Even worse, he and the other shorts Lewis lionizes didn’t simply set off the global debt conflagration, they made the severity of the crisis vastly worse.

So it wasn’t just that these speculators were harmful, and Lewis gave them a free pass. He failed to clue in his readers that the actions of his chosen heroes drove the demand for the worst sort of mortgages and turned what would otherwise have been a “contained” problem into a systemic crisis."

I'm asking this question as someone from the equity/option side & without much experience on structured debt.

EDIT - just realized that Richard Smith may have answered my question.

I think I know what you're saying. ie Without the selling demand for the CDOs (created by guys like Eisman synthetically short-selling) the buy side demand for these CDO's wouldn't have been as great. Therefor in some way the short-sellers perpetuated the market?

I'm a bit surprised Yves would write this as she's no airy-fairy academic. In almost all macro/large trades like this there's a much bigger supply of longs then shorts on a dollar basis. It happens with OTC BB pump and dump scams, Bre-X mining deposit scams, telco toxic finance etc etc does it not? Yves is writing about a world where buyers and sellers are relatively just as aggressive. A world that doesn't exist except in rare circumstances of bear market panic. If Eisman or short sellers dropped out of the picture, wouldn't there would still have been CDO buyers (like the market for stupid longs/lemming fund managers would have run dry - yeah right) but the CDO's would have been mispriced even higher?


Fuk - frustrating when you read about the leverage you could get on CDS. 533 to 1x. Problem is small timers can't buy even the smallest CDS tranches. What a blown opportunity

[LeeLau]

both good articles. i'll post this one, because, a. i worked with david & its interesting to see his legacy & b. felix salmon & gillian tett have consistently been ahead of the curve, have made the effort to understand the complexities and have written well about the industry, and c. how can you not want to read an article where taleb is quoted as saying "correlation is charlatanism":

http://www.wired.com/techbiz/it/maga...urrentPage=all

Thx for that - read that one a while back & at the time interesting to see that the formula was predicated on the same correlation = causation & bell curve bullshit that Merton/Scholes advocated. I totally agree that David's formula was mis-used. There's no excuse for that. By the time the people on the risk-management side and those programming VAR models knew about behavioral finance studies like Kahneman/Tversky (not trying to throw out fancy words - they're Nobel prize winners and if a chump like me knows of them then people in the industry should definitely know about them). I'll submit that it shows a lemming-like intellectual laziness and desire in the industry for certainty where there can be none to use adopt all the good in David's gaussian formula without recognizing the danger.

and that segues in the next

[LeeLau]

first off, as far as finance, mad scientists and the big bad bankers - the era of "beware geeks bearing formulas" has only begun, yet the absolute certainty and blind faith with which phd's created their models then based so many complex real world decisions without robust debate is over.

I hope you don't think is bashing. The optimist in me wants to believe you're right. I stepped away from the industry wholesale about 2 years ago so I'm now totally out of touch

Insofar as I'm out touch and this is more about industry culture then anything take my comments with a grain of salt.

IMO, the industry is driven by greed. Why is another discussion entirely. Greed is slaked by profits. Profits are maximized by leverage. Leverage can be rationalized by nice tidy models (Gaussian curves, VAR, Black-scholes calculations extended to entire portfolios). While I think there's currently a recognition that over-reliance on quant models was a mistake I think its a generational recognition. Whoever survives this will remember getting burned and resist oversimplified quant models.

But there's already movement in academic journals to integrating black swan and Tversky/Kahneman self-reinforcing behavioural economics effects into models. Self-defeating I think because, by definition, these are dependent on predicting human behaviour and unless some science-fiction Isaac Asimov style Foundation arises, we're stuck with human beings as a collective whole being a mass rabble of neuroses.

Anyway, I think that in a generation (maybe less) if the financial system survives this shitshow in its present way, shape, form - we're going to have the same eggheads affect the show. they'll hopefull be more articulate eggheads but they'll still project that same sense of all-knowing security.

the lesson learned was that common sense needs to live harmoniously within the decision making process along with models and must exist in risk management especially if that means shit gets messy or it means pulling the plug on trading vehicles because they can't pass common sense tests. this critical self sustainability check will ensure some of those esoteric products that were only created to confuse and were only bought by those that had too much money to speculate won't be recreated. out of self preservation, many of the exotica that were cooked up won't be unleashed upon the greater world for some time (at least).

Yeah - but for how long. How long did it take after LTCM blew up for SSB to spin out its structured deriv divisions and for multiple managers from that bank to start over-subscribed hedge funds (easy to check - just google their names, they're all listed in the When Genius Failed. Meriweather has raised more then one fund for example. I'm sorry but I don't have much faith in Wall Street's collective common sense. If exotic products create profits they'll be created and used. All justified in the name of liquidity of course.

second off, regarding the massive overhang of quants - they can and are going back to math, science, and engineering...i.e. something more useful than mental masturbation in C++ code to serve their managing director masters. this helps to redirect a powerful resource to (hopefully) a greater purpose - perhaps solving the clean energy dilemma. i still think that though we aren't the legion of engineers china and india are, we are a more creative society and are better at solving highly complex tasks in creative ways (as a society). plus, with all those geeks not pulling down mid six figures out of sloan and wharton (phd not mba ) perhaps less money will be chasing houses & consumer goods and inflation will continue to relax.

I don't have any insight into that. Never worked with many quants.

regarding the banks, i think (the smarter ones) realize they got a one time pardon - that will not be proffered next time they blow up the world. again, with self preservation as a primary directive, i think most of the financials got the message to evolve or die...despite what many people think about financial reform (which is being mishandled, but volcker is not the right guy for the job IMO). if the system works properly, the incentives should be realigned so banks and their shareholders and consumers all have similar, if not common, goals or at least not zero sum or mutually assured destruction scenarios.

this may be more cynically interpreted, but the banks have already helped to blow up the US (and real estate and unemployment may well be a generational noose around our neck) but the banks are:

a. using their energy & $ to get healthy, which makes them & us (we, people) safer
b. spending most of their time drooling at their new ho - asia!
c. because of b. and the need to cater to emerging markets, banks are spending more time and effort banking in conventional means as opposed to creating derivatives, SPVs, SPEs, off balance sheet leverage, etc.

This is where we'll have to agree to disagree. I really don't think that the banks (at least the one's in the US) have begun to feel the pain. Take the example of BAC which is rated Stable by all three agencies. The numbers of unhedged swaps on balance sheet (lots of them legacies of MER btw) is still huge (30% of port or so at last quarter) & still carried at pretty high valuations. The amount of commercial re on their books also pretty high (not sure of the number off hand but close to the retail RE). Their argument that they don't have to mark-to-market because htey can carry those assets to term is imo also laughable - as a high percentage will default. That's just one example.

I think the banks should have been broken up. Too big to fail indeed. Break up one big giant turd into smaller turds but at least they are turds that won't make the sphincter bleed when they're expunged. I don't know if there's appetite for that now - your government has clearly shown no desire to do that. Instead you've now got zombie banks

re a. Maybe. I never worked directly with the surviving retail banks. My only experience was with BSC and they were populated by self-serving assholes.

re b. I think Asia - particularly China is in big trouble.

re c. I hope so. One way to track that is the number of people creating retail accounts but i haven't checked

finally, i think younger americans (under 30) are in my experience more considerate, more centered, more committed to causes, more willing to help others, less manic than my mid 30's model. in short, most of them i've spent time with are less selfish and perhaps that bodes well for our future.

I hope so, but you are still going to be outnumbered by middle-aged and seniors who are rightfully panicked, bitter and pissed off at the wholesale abrogation of any trust they might have had in financial institutions. and that group will be exploring any means to safeguard what's left of their retirement. So i don't think your generation's feelings are worth too much in that hill of beans.

the US government is fucked though, since it took on the sins of the banks & the people, and we will all be paying higher taxes for those sins over the last few decades for decades to come.

Yes i agree.

[woodstocksez]

Here's a post at Naked Capitalism that disputes Lewis' "good guy/bad guy" narrative. As with most things in life - shades of grey.

http://www.nakedcapitalism.com/2010/...giography.html

Thanks everyone for posting these articles.

Not being in the finance industry, some of that was hard for me to follow. In (partial?) answer to the question I asked above regarding why would the (obvious) eventual losers accept the position of being the losers, here's what I understood. Monolines (whatever and whoever the hell that is) were the eventual losers (maybe not the only ones, but big ones, anyway), but knew they could legally stall the obligation to pay dealers (big investment banks, others?) long enough to avoid that obligation by starving dealers of cash. The dealers eventually succumbed to their cash crunch and went down; their obligations got pushed off, in part, on the taxpayer.

But still, was someone stupid here, evil, lucky, some combination? Did the dealers not appreciate the possibility of monolines stalling them? If so, why? Is it because in a normal environment, with relatively small losses by monolines, the monolines pay right away, but here, with a bunch of losses coming all at once, the monolines were forced to act more "strategically," and the dealers didn't anticipate that, perhaps not appreciating the size of market or the potential problem? Did the dealers bank on government help if things got too bad? Did the guys driving this activity at the dealers not give a shit because, hey, they were getting paid now and who cares what happens to the larger entity on down the road?

Also, why could the monolines stall paying, but not the dealers? Though I guess that wouldn't have changed things, but only pushed being the loser further down the line. Still, even then, same question.

Edit to add ...

Started reading through the comments on that article and definitely worth it. It's a slog for me, but it looks like it'll really enhance understanding. Of course I could just read her book, which would probably be even better. Not that any of this will really help me in any way.

[LeeLau]

Monolines by definition are the businesses only in one area. i think this article is talking about businesses that insure debt.

Here's a wiki about them fwiw - [ame]http://en.wikipedia.org/wiki/Monoline_insurance[/ame]

I scanned it and its generally accurate.

The terms of the debt insurance usually obligate payment of that insurance at a specific date far in the future. Usually you buy insurance with different date payouts to be prudent. I'm speculating that maybe dealers just bought one tranche of insurance with one date payout - thats not uncommon. I mean your risk management procedure asks you the broker/dealer prop desk who's bought all these AAA rated corporate bonds of LEH what they've done to hedge the risk. You tell them you buy insurance from Ambac. That should be good enought. I mean who would think LEH bonds would get 16 on the dollar?


EDIT - and without being a smartass. Really who would think bonds (not stock) of LEH, AIG etc would be in default? Not many people were that bearish

Thanks everyone for posting these articles.

Not being in the finance industry, some of that was hard for me to follow. In (partial?) answer to the question I asked above regarding why would the (obvious) eventual losers accept the position of being the losers, here's what I understood. Monolines (whatever and whoever the hell that is) were the eventual losers (maybe not the only ones, but big ones, anyway), but knew they could legally stall the obligation to pay dealers (big investment banks, others?) long enough to avoid that obligation by starving dealers of cash. The dealers eventually succumbed to their cash crunch and went down; their obligations got pushed off, in part, on the taxpayer.

But still, was someone stupid here, evil, lucky, some combination? Did the dealers not appreciate the possibility of monolines stalling them? If so, why? Is it because in a normal environment, with relatively small losses by monolines, the monolines pay right away, but here, with a bunch of losses coming all at once, the monolines were forced to act more "strategically," and the dealers didn't anticipate that, perhaps not appreciating the size of market or the potential problem? Did the dealers bank on government help if things got too bad? Did the guys driving this activity at the dealers not give a shit because, hey, they were getting paid now and who cares what happens to the larger entity on down the road?

Also, why could the monolines stall paying, but not the dealers? Though I guess that wouldn't have changed things, but only pushed being the loser further down the line. Still, even then, same question.

[retirwntm]

I hope you don't think is bashing. The optimist in me wants to believe you're right.

not at all. i appreciate the discourse. busy day today so i'm just re-engaging.

first, you were asking stu a question above. we had this same discussion a few months ago, and i think i answered your question then:

[ame="http://www.tetongravity.com/forums/showthread.php?p=2093817#post2093817"]Good Wall Street article by Michael Lewis ("The End") - Teton Gravity Research Forums[/ame]

if not, let me know. there are definitely more layers of complexity.

IMO, the industry is driven by greed. Why is another discussion entirely. Greed is slaked by profits. Profits are maximized by leverage. Leverage can be rationalized by nice tidy models (Gaussian curves, VAR, Black-scholes calculations extended to entire portfolios). While I think there's currently a recognition that over-reliance on quant models was a mistake I think its a generational recognition. Whoever survives this will remember getting burned and resist oversimplified quant models.

yep. the greed will always exist. i don't even see that as "institutional" as hugh mentioned so much as cultural, in the sense that i bankers are people who are driven by greed and i banks are a conglomeration of said individuals. re: leverage...i believe that was a confluence of events. a period of interest rates being kept artificially low (first by the FED then perhaps by China), a lack of historical defaults, which led to tight spreads which led to the reach for yield which all comingled and led to the willingness for so many institutions to take excessive risks on the buy and sell side. finally, derivatives, modeling, quants, etc. who thought they could model away all risk in a completely antiseptic and clean way without getting their hands dirty on the streets - totally white castled and lacking any common sense. for me this was the most frustrating component because i worked with said phd's like david and he could not be convinced of even the simplest realities IF his models told him something otherwise. my hope now is that that blind worship at the alter of math will be questioned in the future. note, JPM and GS and the hedge funds that survived did so for the most part because they questioned the models when the VAR and other RWA data started to conflict with what some experts could intuit. read fools gold.

[ame="http://www.amazon.com/Fools-Gold-Corrupted-Unleashed-Catastrophe/dp/141659857X"]Amazon.com: Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe (9781416598572): Gillian Tett: Books[/ame]

i'll post more later.

[LeeLau]

fuk - now i get it - from that Michael Lewis article -

Oi now I see why Yves is pissed in the naked capitalism rant. She's got a point. Ironic that the (short) sellers were necessary for the buyside to create the toxic CDOs

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”


EDIT - just realized i cited the same passage from the thread you posted. I got distracted from that thread by the Benny rant.

[retirwntm]

yep, benny has the ability to get you completely discombobulated - but like a big slobbering dog, though misguided, i think he means well.

i'm drunk and just got smoked on xavier & laphroaig so can't add value. i'll post later. btw, thanks for all the gear whore analysis - good to see your 2 years haven't been wasted. have you communicated with jonathan? he's a good source and a good man especially on dynafit. lou is reaping the benefits of some deep knowledge.

[retirwntm]

Yeah - but for how long. How long did it take after LTCM blew up for SSB to spin out its structured deriv divisions and for multiple managers from that bank to start over-subscribed hedge funds (easy to check - just google their names, they're all listed in the When Genius Failed. Meriweather has raised more then one fund for example. I'm sorry but I don't have much faith in Wall Street's collective common sense. If exotic products create profits they'll be created and used. All justified in the name of liquidity of course.

maybe i'm a bit pollyanish about the industry, but this is the learning curve. shit gets created. some shit gets broken. shit gets fixed. course correction. as long as its not systemic and doesn't effect others, this should be biz as usual. instead, in the most recent epoch, everyone got some on them. what to say about that that hasn't already been expressed ad infinitum... i'll add that merriwether was smart until he wasn't - no one is perfect. you could wait around like taleb & roubini (and benny on TGR) do shouting "the sky is falling" and 5% of the time you'll be right. i'll play the numbers...

i would never put faith in a "wall street collective" anything that just sounds plain dumb. however, i think if you were trying to make money, you could bet with the trend and against it and profit on both sides if timed well. the argument you stipulate for liquidity (in jest) is still in tact IMO. look at the history of finance. it will survive even despite this major fubar blow up.

This is where we'll have to agree to disagree. I really don't think that the banks (at least the one's in the US) have begun to feel the pain. Take the example of BAC which is rated Stable by all three agencies. The numbers of unhedged swaps on balance sheet (lots of them legacies of MER btw) is still huge (30% of port or so at last quarter) & still carried at pretty high valuations. The amount of commercial re on their books also pretty high (not sure of the number off hand but close to the retail RE). Their argument that they don't have to mark-to-market because htey can carry those assets to term is imo also laughable - as a high percentage will default.

really? you are going to start your proof with the given that the rating agencies have rated BAC at whatever? REALLY? i have two words for you that made my career: ratings arbitrage. since when did you ever trust what those dumbfucks had to spew?

as for unhedged swap #'s i can only speculate because i don't know the #, but that # can be total bullshit. to wit, are we talking about unhedged interest rate swaps? if so, i say bully for BAC because if they are long float v. fixed - brilliant! are we talking about unhedged CDO swaps? i doubt it because that's a VAR # and is hard to parse out and report. in short, without more information, its a canard. further, though the laws have changed with MTM regarding *loans* held to maturity anything on trading books including swaps must be carried at market, so these #'s you talk about have already been marked to market, monthly, period, up or down. SEC style. booyashocka. end of story.

commercial and residential portfolios not marked to market but HTM - i.e. held to maturity and therefore marked at face value unless they are in various stages of distress or workout is a valid concern and will definitely be a drag on bank's earnings. but i submit a partial remedy for that, NIMM (and the brainchild of bernanke, which is to solidify the banks and let them dig out of the hole in a virtuous cycle):

http://www.bloomberg.com/apps/news?p...v3cFw5cs&pos=4

I think the banks should have been broken up. Too big to fail indeed. Break up one big giant turd into smaller turds but at least they are turds that won't make the sphincter bleed when they're expunged. I don't know if there's appetite for that now - your government has clearly shown no desire to do that. Instead you've now got zombie banks

this is debatable. i think the bb article makes a salient argument for why not to break them up, plus, my tingly sense still thinks that the US govt. is afraid, not capable or unwilling to unravel international corporations which they may still view as the next keystone to international geoeconomic/political battlegrounds. add to it strong & well funded lobbies that are fending for the banks right or wrong...

[retirwntm]

sorry, scotch makes me aggressive. some points still valid though.

[Stu Gotz]

really? you are going to start your proof with the given that the rating agencies have rated BAC at whatever? REALLY? i have two words for you that made my career: ratings arbitrage. since when did you ever trust what those dumbfucks had to spew?

Ratings arbitrage? Oh, sweet jakers. The scoundrel is one of us!

[retirwntm]

ha ha! in its least offensive sense, ratings arbitrage simply means you often have several weeks, even months where the CDS spreads reflected the downgrade before the agencies ever reported it, so active fixed income desks could take advantage of those that actually waited for the ratings agencies to finally place their edicts from on high. i liken it to needing your mommy to dress you in the morning - when you're 30. if i was a scoundrel for taking advantage of people that were lazy & stupid but didn't have a disability - i guess its another conversation piece with me and my maker.

my point was (in SNL skit form) to joust lee into thinking about the rationale of trusting the rating agencies - for anything.

[Stu Gotz]

Here's another interesting read for any of you still interested. It is just a bit, ummm, unsavory.

http://www.propublica.org/feature/al...housing-bubble

[Hugh Conway]

Here's another interesting read for any of you still interested. It is just a bit, ummm, unsavory.

http://www.propublica.org/feature/al...housing-bubble

Best name ever for a hedge fund - Magnetar:

Little is known about the physical structure of a magnetar........ but are more massive than our Sun. Magnetars also rotate rapidly, with most magnetars completing a rotation once every one to ten seconds.[3] The active life of a magnetar is short.

[LeeLau]

thx for the thread bump. I picked up Yves Smith's book about the debacle. To be clear, I lost faith in the rating agencies during the telco bubble times.

This is awesome in a terrifying way

Rekeda and Magnetar came up with a remarkable CDO. They took their risky portions of 18 CDOs they had helped created -- and repackaged them to sell them to others. Bundling up the dregs of a CDO was rare, if not unprecedented.

This deal, Tigris, which closed in March 2007, tied together $902 million of Magnetar's risky assets. Rekeda convinced two rating agencies, Standard & Poor's and Fitch, to rate it. Fitch designated $259 million of it as triple A, the highest rating. S&P rated nearly $501 million as triple A. (When contacted for this article, S&P said it was comfortable rating Tigris; Fitch didn't respond to questions about the deal.)

[retirwntm]

"Two sets of bonds rated AA could have very different levels of risk. Most investors chose not to dig too deeply." i.e....ratings arbitrage

[retirwntm]

hey lee, speaking of books:

i've read the greatest trade (john paulson), hank paulson and gillian tett book fool's gold reccently. i doubt i'll go back to them for anything but an occasional sourcing. anyone interested in a book swap? i'm definitely interested in the yves smith book. also have the taleb book and various others i'd need to look at the bookshelf.

p.s. not to out myself completely because i've seen others get caught blabbing on blogs or the web and paid the price with the minimum being a scarlet letter, but our desk squared and cubed their synthetic cdo's and it wasn't nor is it uncommon practice. it is a death spiral for anyone who invests in those tranches stuffed with cdo's of cdo's though (usually) since they tend to be rehashed mezz a la megatard, err, magnetar.

[LeeLau]

sorry mtnwriter, I'd probably get those from the library or something as they seemed a bit rehashed. I like to keep good books and Lewis's and Yves's books are keepers for sure. Thx for helping me understand how synthetics are created. I actually dug up the offering memoranda & standard forms to look through them - they are interesting but thick reading - very technical documents./