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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

#41

Post by HashThis »

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…

Of course they will invest in them. They will make profits. Or they will steal from all citizens if they will lose big.

In Ben Bernanke's book, it showed how the Fed used citizen's money to buy all mortgages that collapsed (that AIG insuranced) for FULL PRICE. This means their fraudulant peak. He paid 100% of the full price. That way the entire supply chain of mortgage holders (MBSs, CDOs, Synthetic CDOs) would never lose a penny.

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

#42

Post by jfengel »

darawk wrote: post #26
tialaramex wrote: post #25

Earlier quoted context omitted.

What potential benefit of CDOs did you feel wasn't explained? The movie is based on a book. Do you feel the book's author (Michael Lewis who has written about mortgage backed securities for years) also doesn't understand the theory behind CDOs? Or that the filmmakers didn't understand the book?

I've read the book. And all his other books. They're fun, but they're not a great source for serious understanding. The book and movie does briefly explain all this, but it paints a picture that the instruments themselves were inherently toxic, which was not the case. What was toxic were the assumptions that went into modeling their risk characteristics. The assets (like all assets) themselves were fine. The problem…

Blaming the problem on "people" is also missing a large part of the problem. The breadth of the crisis meant that it affected a lot of people who had never heard of CDOs, and never should have. People lost their jobs in totally unrelated fields. Companies couldn't grow because credit dried up while the mess was sorted out. People couldn't sell their houses because the entire market crashed. And so on.

Of the people who did know about CDOs, many should have understood them, because they were playing around with sums large enough to affect the economy as a whole. They didn't through a combination of inertia and fraud.

There were systemic effects, where a whole lot of people were making apparently sensible local decisions and nobody understood the entire interaction -- but that's not really a good justification for shrugging shoulders and say, "Well, I guess it's everybody's fault, then".

People should be able to make the "assumption" that they'll be able to work in a functioning economy, without having to become experts in complex financial instruments. If the financial industry can't leave them to make that assumption, they'll vote for a government that will enforce it -- probably clumsily. If the system requires everybody to understand a financial network that most of them can't, they'll forbid it, which isn't good for the economy but is more acceptable to a lot of people than being told that the financial crash was their fault.

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

#43

Post by samsonradu »

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 also seen the movie and didn't take away the message that "CDOs are evil", but rather that the risk was not accurately reflected in the ratings.

The reasons for that are debatable of course, ranging from bankers greed to rating agencies misbehavior and so on.

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

#44

Post by all_blue_chucks »

overcast wrote: post #4

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

There is nothing wrong with CDOs. The mistake was treating junk loans as investment grade. You can do that regardless of how the loans are securitized.

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

#45

Post by turk73 »

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…

The book was excellent.

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

#46

Post by Retric »

nradov wrote: post #32
Retric wrote: post #27

Earlier quoted context omitted.

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 p…

The elderly will receive some form on assistance in their old age if they have no assets or income. It’s a diffuse and therefore easily overlooked, but massive hidden cost. So, defined contribution plans are a much larger and more insidious long term threat that’s going to hit as an ever larger chunk of the oldest population run out of money and get government benefits either way.

Don’t forget this is a new system unlike pensions. The 401k system only started in 1978 and adoption lagged. It’s when people the entered the workforce in the late 90’s start to hit their 80’s that we are going to see a sudden spike in these costs. Worse it’s not limited based on incomes as anyone can out spend their nest egg.

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

#47

Post by boublepop »

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…

With the low availability of reliable assets doesn’t that mean that any government could issue like 2% bonds and essentially get near unlimited buyers? Thus financing huge projects like a complete transition to green energy, or large infrastructure projects and at the same time help work against the potential severity of a future crash?

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

#48

Post by ThrustVectoring »

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…

One important thing to note is that both the buy and sell side wanted ratings inflation in the run up to the 2008 crisis. European banking regulation limited leverage based off the rating of the asset held, with the highest rating allowing the largest leverage limits. Even when the banks had an accurate understanding of the risks involved in it, they could buy something like $50 instead of $35 of assets if it had a magical AAA rating.

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

#49

Post by acd »

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…

I personally think central banks are acting a little bit like Dr Jekyll and Mr Hyde.

First central banks prop up the interest rate market with cheap interest rates. So there is less and less places to invest for investors to get safe returns. Then the low interest rates created by central banks drives investors towards riskier investments. Then we get back to square one which was complex financial packaged products likeCDO that we could not predict the risk of.

https://en.wikipedia.org/wiki/Strange_Case_of_Dr_Jekyll_and_...

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

#50

Post by ThrustVectoring »

This is actually fine. While CDOs were involved in the last financial crisis, they weren't the fundamental culprit. That honor would belong to ill-coordinated banking regulations between the US and Europe.

In order to provide a public backstop without encouraging moral hazard, banking regulators impose risk-taking limitations on banks. In the US, this took the form of encouraging asset sales into capital markets, under the assumption that this would make any risk the banks take dissipate away harmlessly. In the EU, this took the form of leverage limits based off the credit rating of the asset, with the highest rated asset commanding the largest leverage limits.

These regulations combined in a very unfortunate way in the transatlantic CDO trade. The CDO part isn't the important innovation, though; as long as the above structure persisted, something would be found to take advantage of it. Anyhow, the short of the crisis is that American banks would sell their risky assets into concentrated positions of systematically important banks, particularly ones outside of the narrow American regulatory purview. On the other side of the Atlantic, they accidentally applied a massive incentive to figure out a way to slap an AAA rating on stuff, and the market delivered that in spades.

The cherry on top of this entire system is that when American banks make loans, this cash gets transferred and winds up sitting in some money market fund somewhere. These funds are searching for short-term dollar-denominated yields, and the best way to get that is to lend money to European banks secured by AAA-rated assets. After all, with the generous leverage limits bestowed on them, they can borrow a hell of a lot of money.

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