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Banks to sell first post-crisis managed synthetic CDO

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Re: Banks to sell first post-crisis managed synthetic CDO

#31

Post by snarf21 »

Retric wrote: post #27
nradov wrote: post #24

Earlier quoted context omitted.

This is one reason why defined benefit pension plans are a terrible idea with hidden risks for employees, employers, and taxpayers. Everyone pretends things are fine but when investment returns come in below expectations the illusion will fall apart. As a society we should aggressively phase out pensions and replace them with defined contribution plans.

Defined benifit pensions can utilize the same investments as defined contribution pensions. The actual difference is who gets the surplus from early deaths, either other pensioners or children/charities etc. Equivalent investments are thus safer in defined benifit pensions at least in terms of a safe retirement. Of course this is all rather dependent on good regulations and equivalent funding. Allow companies to issu…

As you say, the incentives are out of whack. I'd say the other difference the defined benefit tend to have an extra layer of cost in them. Maybe this can be paid for strictly with the surplus but when it can't, they start chasing. I've always found defined contribution to be more fair (why can't my children benefit from my hard work?) and by definition lower cost.

Re: Banks to sell first post-crisis managed synthetic CDO

#32

Post by nradov »

Retric wrote: post #27
nradov wrote: post #24

Earlier quoted context omitted.

This is one reason why defined benefit pension plans are a terrible idea with hidden risks for employees, employers, and taxpayers. Everyone pretends things are fine but when investment returns come in below expectations the illusion will fall apart. As a society we should aggressively phase out pensions and replace them with defined contribution plans.

Defined benifit pensions can utilize the same investments as defined contribution pensions. The actual difference is who gets the surplus from early deaths, either other pensioners or children/charities etc. Equivalent investments are thus safer in defined benifit pensions at least in terms of a safe retirement. Of course this is all rather dependent on good regulations and equivalent funding. Allow companies to issu…

That is not how it actually works. Regardlesss of investment selection, most defined benefit pensions won't have a surplus. They will have deficits due to unrealistic expected returns. Many plan sponsors can't afford to pay the difference and will end up bankrupt (especially local governments). This is risky for retirees because even if the plan had PBGC insurance their payments will be cut.

Defined benefit pension plans are a hidden growing cancer in our economy and may cause the next huge financial crisis.

Re: Banks to sell first post-crisis managed synthetic CDO

#33

Post by luckydata »

morley wrote: post #17
nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

I think the author understands CDOs just fine, what you probably want to miss is that the system is built on manufactured trust in what is an extremely corrupt environment. CDOs are not safe because ratings are a joke, as evidently proven by the facts that led to our last recession.

Re: Banks to sell first post-crisis managed synthetic CDO

#34

Post by lotsofpulp »

Retric wrote: post #27
nradov wrote: post #24

Earlier quoted context omitted.

This is one reason why defined benefit pension plans are a terrible idea with hidden risks for employees, employers, and taxpayers. Everyone pretends things are fine but when investment returns come in below expectations the illusion will fall apart. As a society we should aggressively phase out pensions and replace them with defined contribution plans.

Defined benifit pensions can utilize the same investments as defined contribution pensions. The actual difference is who gets the surplus from early deaths, either other pensioners or children/charities etc. Equivalent investments are thus safer in defined benifit pensions at least in terms of a safe retirement. Of course this is all rather dependent on good regulations and equivalent funding. Allow companies to issu…

For taxpayer funded defined benefit pensions, the actual difference is that in the defined benefit pension case, future taxpayers are on the hook for any underfunding and understating of costs in exchange for government employee votes as well as other kinds of fraud.

With defined contribution, politicians and senior union officials can’t play those numbers games since there is no lien on future taxpayers.

Re: Banks to sell first post-crisis managed synthetic CDO

#35

Post by smileysteve »

morley wrote: post #17
nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

Re: The movie adaptation; Here's the Vennett / Anthony Bourdain scene, https://www.youtube.com/watch?v=xbiDrzTd8fE

Re: Banks to sell first post-crisis managed synthetic CDO

#36

Post by slumdev »

morley wrote: post #17
nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

I've seen the movie and not read the book, and I took away two things:

1. Derivatives can be riskier than the underlying asset.

2. Ratings agencies will lie if it makes a big client happy.

I don't think either 1 or 2 is controversial. And put together, those two truths will lead us right back to 2008.

Re: Banks to sell first post-crisis managed synthetic CDO

#37

Post by xondono »

overcast wrote: post #4

What good is our species having the ability of written language, if we never learn from our past mistakes.

We do learn from past mistakes, paraphrasing Friedman: “We won’t make the same mistake again, but we’ll find another new way to fail”

Re: Banks to sell first post-crisis managed synthetic CDO

#38

Post by qroshan »

foogazi wrote: post #5

Is it time to invest in ZeroHedge ?

I'm sure you bet against humans conquering flights as soon as you saw the first crash.

I'm sure you thought internet was a fad after the dot-com crash.

But, people who read zero hedge exactly have that line of thinking. In fact every article from them tries to link to 2007-08.

12 years and wrong... That's what a cult looks like

Re: Banks to sell first post-crisis managed synthetic CDO

#39

Post by qroshan »

onlyrealcuzzo wrote: post #18
umichguy wrote: post #15

Reminds me of all the scenes from the movie "The Big Short."

For anyone interested in the growth of CDOs (and the composition of them) leading up to 2008 -- here's some charts: http://fcic.law.stanford.edu/resource/staff-data-projects/cd... Basically, by 2006, CDO originations were ~$250B. It took about 4 years for originations to get that large, and by 2008, there was probably less than ~$600B total. GDP was ~$14.7T. If history repeats itself, this is the beginning of the end…

Yep, the first unsuccessful flight pretty much ensured that humans will never conquer flight again

Re: Banks to sell first post-crisis managed synthetic CDO

#40

Post by riffraff »

slumdev wrote: post #36
morley wrote: post #17

Earlier quoted context omitted.

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

I've seen the movie and not read the book, and I took away two things: 1. Derivatives can be riskier than the underlying asset. 2. Ratings agencies will lie if it makes a big client happy. I don't think either 1 or 2 is controversial. And put together, those two truths will lead us right back to 2008.

one interesting fact the movie didn't mention about CDOs, IIRC, is that the repackaging makes sense only with the assumption that the underlying assets are independent variables.

I.e. if you have 2 independent bonds which will default with 50% probability you can combine 4 outcomes into a single one and issue two tranches.

The senior one should be payed back 3 times out of 4 (it's enough if one bond pays back) and the other will be paying back 1 time out of 4 (both need to work out).

But if the underlying things are correlated, they will fail or succeed at the same time, so when you buy the senior tranche your assumption that it's safer is wrong.

OTOH, buying the other one you'd get a good deal: you will pay for 25% chance of getting the money, but get something more than that.

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