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93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

nytimes.com

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Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#51

Post by mediaman »

yummyfajitas wrote: post #24
akadien wrote: post #21

Earlier quoted context omitted.

It's more likely underpaid raters at Moody's and S&P being intimidated by overpaid traders at Goldman Sachs and Deutsche Bank. I'm reading "The Big Short" (highly recommended), and it puts all of this and the current GS hearings in the right perspective.

Quant's at rating agencies get the same pay as any back office quant.

Not from what I saw. I worked at a very large Manhattan-based investment bank and we paid the research quants way more than the rating agencies. There was a brain drain from rating agencies to the bulge bracket firms. There's a lot more money in making the right trades (for yourself or for clients) than in writing reports.

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#52

Post by jbooth »

yummyfajitas wrote: post #27
DuncanIdaho wrote: post #20

Earlier quoted context omitted.

Now I don't understand what your motive is - but your quote is taken waaay out of context... Original quote: "The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on…

The point of that editorial is that business investment won't end the recession, so the only hope is housing. "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. " Krugman is just repeating the same "insufficient demand" theory of recessions that Keynesian economists are using today.

And he was right. 7 years from 2001 to 2008 he was saying this and everyone dismissed his concerns by calling him a partisan bush-hater. Maybe so, but he was still right.

Keynesian economics brought us out of the great depression and the lack of their application led to deflation and the lost decade for Japan.

Supply-side economics, on the other hand, have been tried twice in the last 30 years and both times they ended with massive government deficit and collapsed asset bubbles.

Before casting aspersions on someone by virtue of their -isms, I'd check the record of the -isms in question.

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#53

Post by yummyfajitas »

mediaman wrote: post #51
yummyfajitas wrote: post #24

Earlier quoted context omitted.

Quant's at rating agencies get the same pay as any back office quant.

Not from what I saw. I worked at a very large Manhattan-based investment bank and we paid the research quants way more than the rating agencies. There was a brain drain from rating agencies to the bulge bracket firms. There's a lot more money in making the right trades (for yourself or for clients) than in writing reports.

The quants who figure out the right trades are front office quants. Back office quants (risk management, finance, operations) are not paid nearly as well, even in investment banks.

Ratings is back office work, and is paid commensurately.

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#54

Post by btilly »

yummyfajitas wrote: post #38
joe_bleau wrote: post #31

Earlier quoted context omitted.

I've wondered this too. As an employee of a small company, I really wish I could use the same argument (and trust me, I've tried). "Hey boss, I'm doing the work of two people, at about a 40% discount to market rates for the average embedded engineer. You don't seem to think I'm average, and there's no question that you're more than happy with my performance. I realize business is off right now and sales suck, but why…

Try asking for the bonus Wall St style: "Hey boss, you know I am worth a lot. Pay me more or I quit. " Your boss may find the money, or your new job will pay more.

The better way to do this is to find the other job, get that offer, then go to your current employer and say, "Another company is gave me an offer for more salary elsewhere, but I don't want to go there for reasons X, Y and Z. However (name financial reason - spouses are convenient) is pushing me to take the money. Can you help me?"

The fact that you went to your employer first, and you made it clear that you didn't want to leave, both go a long way to mitigate the possibility of bad emotional reactions. (They don't eliminate it, but they mitigate it.) And they put you in a position to renegotiate your salary. Furthermore if it doesn't work, your fallback is a new job at higher pay.

Be warned, though, that this is a bullet you can only fire once. Having done it, you've burned some social capital. If you keep going back to that well, your employer is going to eventually cut you loose.

Also be warned that if you have actually accepted a job elsewhere, you should never accept a counter-offer. In that situation your employer will be willing to offer a lot because they are desperate, but they know that it is just a question of time until they lose unhappy people. So they will work to replace you, and it is just a question of time until you are fired with no job offer in hand.

That's why if you try this it is critically important to go to your employer with the message that you want to stay, but (financial situation X) is a problem for you. (It helps, a lot, if the financial situation is both real and known to your employer.)

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#55

Post by yummyfajitas »

jbooth wrote: post #52
yummyfajitas wrote: post #27

Earlier quoted context omitted.

The point of that editorial is that business investment won't end the recession, so the only hope is housing. "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. " Krugman is just repeating the same "insufficient demand" theory of recessions that Keynesian economists are using today.

And he was right. 7 years from 2001 to 2008 he was saying this and everyone dismissed his concerns by calling him a partisan bush-hater. Maybe so, but he was still right. Keynesian economics brought us out of the great depression and the lack of their application led to deflation and the lost decade for Japan. Supply-side economics, on the other hand, have been tried twice in the last 30 years and both times they end…

I didn't cast aspersions on anyone. I simply summarized Krugmans column: to increase consumer demand, the fed should create a housing bubble, but even that is unlikely to work.

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#56

Post by jbooth »

yummyfajitas wrote: post #55
jbooth wrote: post #52

Earlier quoted context omitted.

And he was right. 7 years from 2001 to 2008 he was saying this and everyone dismissed his concerns by calling him a partisan bush-hater. Maybe so, but he was still right. Keynesian economics brought us out of the great depression and the lack of their application led to deflation and the lost decade for Japan. Supply-side economics, on the other hand, have been tried twice in the last 30 years and both times they end…

I didn't cast aspersions on anyone. I simply summarized Krugmans column: to increase consumer demand, the fed should create a housing bubble, but even that is unlikely to work.

I don't think that's what he was intending to say. I remember a whole bunch of cautionary columns of his from that time period, some of which were very partisan and accused Greenspan of keeping interest rates low for political reasons.

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#57

Post by barry-cotter »

Symmetry wrote: post #44
btilly wrote: post #5

When people say they will act one way and have financial incentives to act another, expect them to follow the financial incentives. Appropriate regulation can help for a bit. But unfortunately the regulated party has incentives to provide incentives (such as contributions to political campaigns) to gain control of the regulations. This leads to regulatory capture that then renders the regulations ineffective. In a pe…

Whats that economics law that says something like "Once pressure is put upon an observed regularity in the markets for control purposes it tends to disappear"? When buyers only cared about the truth of a rating they had a pretty good reason to want the ratings to be as accurate as possible (counteracting the seller's incentives). But as soon as reserve requirements are dependent on how what the credit rating says sud…

Lucas Critique

http://en.wikipedia.org/wiki/Lucas_critique

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#59

Post by anigbrowl »

gaius wrote: post #17
btilly wrote: post #5

When people say they will act one way and have financial incentives to act another, expect them to follow the financial incentives. Appropriate regulation can help for a bit. But unfortunately the regulated party has incentives to provide incentives (such as contributions to political campaigns) to gain control of the regulations. This leads to regulatory capture that then renders the regulations ineffective. In a pe…

which would mean that they wouldn't be paying out absurd bonuses No it wouldn't. Investment banks are huge and diverse businesses. If you're an FX trader, nothing whatsoever to do with mortgage-backed securities, and you've done your job well this year and made excellent profits (which for the bank as a whole offset their losses) then why shouldn't you get a bonus as usual? Of course the loss-making traders shouldn't…

I'm sure the head chef on the Titanic wasn't too happy when it started sinking either.

Big powerful organizations attract skilled employees by offering status, pay and economic security. And at the individual level, diligent and honest performance should indeed be rewarded. But the whole reason most of us obey the law and pay our taxes is founded on the idea of mutuality: our interdependence is essential to freedom economic success.

Commercial losses are ultimately a shareholders' problem. But when the public become shareholders or creditors by necessity, it's facile to say that individually successful employees are economic free agents who should earn the full reward of their productivity. Nothing prevents them from leaving to join a more stable competitor, or establishing their own funds: if they choose to stay with an organization that benefits from public expenditure, they've made a choice of financial security over financial liberty.

Besides, limiting the bonus payments of the productive employees when other staff rack up huge losses is a fabulous economic incentive to improve risk management and governance within the organization. Those who consider such matters above their pay grade or outside their job description are obviously not ready to leave the kiddie pool.

Re: 93% of 2006 AAA-rated subprime mortgage-backed securities now rated junk

#60

Post by tansey »

ksraines wrote: post #58

Let's not forget that Krugman was one of the chief advocates of the housing bubble (before it popped) and that his "berating of the raters" should begin with an apology. http://blog.mises.org/10153/krugman-did-cause-the-housing-bu...

That is bunk. That blog article is pulling a few quotes from 2001. In 2001 we had a recession with high unemployment, and lowering interest rates was sound advice.

If you find some quotes from 2004 or beyond where Krugman actually advocates policies that would encourage a housing bubble, then you may have a case.

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