Ask HN: What do you still not understand about the Financial Crisis? • Hacker News Board

Re: Ask HN: What do you still not understand about the Financial Crisis?

#11

Post by fanboy123 » Fri, Aug 20, 2010, 12:47 AM UTC

johngalt wrote: post #5

If mortgage paper was trading for much less than face value why not allow people to buy their debt back? Thereby creating increased demand for the "worthless assets"; at the very least it would have created a pretty solid floor for the value of these types of investments. It also would've helped the freefalling house values because it would have given underwater homeowners a chance to be part of the solution rather t…

The debt was put into structured securities which means the banks/investors did not own individual loans. Letting people prepay for less than par would have caused infighting between the investors and was not legal for the servicers (administrators for these structures) to do.

Re: Ask HN: What do you still not understand about the Financial Crisis?

#12

Post by CyberFonic » Fri, Aug 20, 2010, 2:57 AM UTC

nkassis wrote: post #6

One thing that bothers me is why job creation hasn't started up again. Only reason I could come up with is that companies don't need more employees, they manage with what they have. I'm guessing that productivity is increasing.

Productivity is definitely decreasing (dropping morale, etc) but then so is demand! When there is less money to go around, there is way less demand.

Re: Ask HN: What do you still not understand about the Financial Crisis?

#13

Post by johngalt » Fri, Aug 20, 2010, 5:19 PM UTC

AlexMuir wrote: post #8

johngalt wrote: post #5

If mortgage paper was trading for much less than face value why not allow people to buy their debt back? Thereby creating increased demand for the "worthless assets"; at the very least it would have created a pretty solid floor for the value of these types of investments. It also would've helped the freefalling house values because it would have given underwater homeowners a chance to be part of the solution rather t…

Buy it back with what? Nearly everyone would need to get another mortgage to buy back their debt.

I know many people that are buying another small house then walking away from the underwater home. This gives them a different option.

Re: Ask HN: What do you still not understand about the Financial Crisis?

#14

Post by johngalt » Fri, Aug 20, 2010, 5:42 PM UTC

aspiringsensei wrote: post #7

johngalt wrote: post #5

If mortgage paper was trading for much less than face value why not allow people to buy their debt back? Thereby creating increased demand for the "worthless assets"; at the very least it would have created a pretty solid floor for the value of these types of investments. It also would've helped the freefalling house values because it would have given underwater homeowners a chance to be part of the solution rather t…

This is a great question: I am working on getting you an answer from a derivatives expert. I suspect the reason has to do with difficulty inherent to unbundling existing derivatives contracts in order to isolate "your" mortgage, but I'll circle back when I get an expert opinion.

Why would you have to isolate "your" mortgage? Couldn't you just buy the equivalent number of shares in the correct CDO then present them as payment to your bank? Rather than try to follow the mortgage all the way through the system, just focus on each end.

I'm sure this isn't allowed contractually, but there was a lot of paper torn up by the federal government during the bailout. I would argue that this change would have been less damaging to all parties invovled.

Consider that everyone that owned a home would be scraping every dime they have together to put money into this system. There would still be loss, but this would stop the panic and add a floor to the housing/debt markets.

Re: Ask HN: What do you still not understand about the Financial Crisis?

#15

Post by johngalt » Fri, Aug 20, 2010, 5:52 PM UTC

fanboy123 wrote: post #11

johngalt wrote: post #5

If mortgage paper was trading for much less than face value why not allow people to buy their debt back? Thereby creating increased demand for the "worthless assets"; at the very least it would have created a pretty solid floor for the value of these types of investments. It also would've helped the freefalling house values because it would have given underwater homeowners a chance to be part of the solution rather t…

The debt was put into structured securities which means the banks/investors did not own individual loans. Letting people prepay for less than par would have caused infighting between the investors and was not legal for the servicers (administrators for these structures) to do.

I understand that, but if I'm in risk group X and buy shares of the equivalent risk group. Why can't I trade those for my debt?

On one side we have underwater homeowners that have no option but to walk away. On the other side we have cash strapped banks that are holding on to debt obligations that are worthless because homeowners are all walking away.

It seems to me that giving homeowners a way to buy into this system rather than walk away from it would benefit everyone.

I understand there is no legal/contractual method for this currently. I was suggesting adding one.