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Sunday, October 5, 2008
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starting October 7, 2008
A blog for expressing thoughts, information and jokes of ACSians around the world about the current Financial crises, what it is, why it happened, and how to survive. Believe at your own risk - the information and opinions there may or may not reflect those of the blog, the authors, or of the contributors themselves!
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starting October 7, 2008
4 comments:
Its the insurance on deals...thats what hit AIG...trouble is these insurance companies who had does the "credit default" insurance now themselves got into trouble, triggered all the way back. Some of these insurance was "guarantee" on "guarantee"..Mortgage loans for instance might have had 3 catergories when they were packaged into CDOs, the good, the not-so-good and the ugly. The good would have had very good credit risk for insurance premiums. The ugly would have had to pay alot so they take the insurance from the "good" to pad the "ugly" and made the "ugly" into triple-A or equivalent rating! When the ugly failed, well, that pulled down the original good ones too so like a domino we all fall down
tell me if if i'm on the right track...
a package of loans - a mix of good, bad, ugly....someone has them originally...let's say the yield is 9%
he sells them on like a sub-contract at face value....but the next guy only gets 8% yield...
whether the insurance comes in to insure the package....
the next guy gets 7%
the next gets 6%....
then they discover, 1/3 of the loan stinks !
but ultimately, only one guy gets caught holding the 'bag' - the bad loan right ?
of coz there lots of bad packages going around & around...and the numbers for each is big !
still it's the final guy holding them who gets screwed right ?
coz the others have pass it on ?
It seems to me that this credit swap is going round in a circle. It started with say a sum of 500 billion, then Firm A sold it to Firm B who in turn sold it to Firm C, to D to E to F then who knows, it may be sold back to A. At each step margins were added, loss insurances were taken. The value and total credit got escalated. Each CEO then earned the big bonus for increase of Firm turnover. It started with real sum then bubbles were created. I think that is all there is. It happens in the diamonds trade. One piece of diamond traded among various dealers to push up the value, it helps dressing up the balance sheet to show a huge increase of turnover which in turn the dealer will take it to the bank to ask for a bigger loan. It is all bullshit.
I watched "60 minutes" which discussed some of this.
As I understand it, the big guys were buying up the high interest paying (namely the so-called sub-prime) mortgages, and repackaging and reselling them to investors looking for high yield investments. Since the mortgages themselves were risky, the institutions were selling these together with in effect an insurance policy that told the investors that they were getting high yield with insurance. How did they come ups with all this? By hiring hight powered mathematicians with complicated risk models to split up the mortgages in pieces and repackaging them, and in the process, changing (and improving) the credit ratings. Rather than calling them insurance products, which were highly regulated, they called them swaps which carried very little regulation.
The comment was made that many of the risky investments made would/should have been avoided even by rookie brokers and analysts, and were approved by top level executives who were being paid in the 10s and 100s of millions of $. And the comment was made that the companies did it to themselves.
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