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Posted by Douglas Johnson on October 27, 2007, 1:52 pm
Here is an excellent article on how the sub prime mess was created, how it is
playing out, who is winning, who is losing, and who is pointing fingers.
http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversio
-- Doug
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Posted by Elle on October 28, 2007, 1:34 pm
> Here is an excellent article on how the sub prime mess was
> created, how it is
> playing out, who is winning, who is losing, and who is
> pointing fingers.
>
http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversio
The most troubling point to me is that Goldman was in the
business of selling junk mortgages (in whatever package) and
simultaneously hedging them. The more Goldman pushed junk
mortgages and promoted a bubble, the more it stood to gain
from its hedging. Were its analysts really not savvy enough
to recognize that home prices would not keep going up? Was
Goldman "working" investors, promoting a product in which
Goldman really did not believe?
Also worrisome is how Moody's and S&P would pay heed only to
short term performance of junk mortgage borrowers. So much
of the investment industry relies on these credit rating
agencies. This blunder should cause a loss of confidence.
Could Moody's and S&P been so swept up by the rises in home
prices that they bet this was no bubble?
Our education system is failing, with instant this, instant
that failing to ground younger people that nothing good
comes easily, except by luck?
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Posted by on October 29, 2007, 3:54 am
Douglas Johnson wrote:
> Here is an excellent article on how the sub prime mess was created, how it is
> playing out, who is winning, who is losing, and who is pointing fingers.
>
>
http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversio
One thing that has always puzzled me. U.S. Treasuries -- backed by the
full faith and taxing power of the largest/strongest economy in the
world -- are rated AAA. How on earth can S&P or Moody's give that same
rating to a mortgage-backed security and then investors just swallow
it hook-line-sinker?
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Posted by Douglas Johnson on October 29, 2007, 3:13 pm
wyu@talisys.com wrote:
>One thing that has always puzzled me. U.S. Treasuries -- backed by the
>full faith and taxing power of the largest/strongest economy in the
>world -- are rated AAA. How on earth can S&P or Moody's give that same
>rating to a mortgage-backed security and then investors just swallow
>it hook-line-sinker?
Well, the theory was that the rating agency would take a package of loans and
plug it into a computer model. The model would use history to say that loans
of this type and mix defaulted x% of the time with an associated loss of y%.
Now the revenue stream from the loans would sliced into groups, called tranches.
The highest rated tranche would get first call on the payments and interest from
the loans, the next highest would have the next call. So on down to the lowest
(and highest yielding) tranche, which would have first call on the losses.
So, if the model held up, the likely losses would be down in the lowest one or
two tranches. The highest tranche should have little or no chance of loss
because they not only get paid soonest, they have all those other tranches that
have to lose everything before they do.
But the model is based on history. In the meantime, the lending standards were
deteriorating. The loans actually being made were not nearly as good as the
history in the model, so the model was optimistic at best. The decline in
housing prices exposed this when people that used to be able to sell when they
got in trouble couldn't anymore.
In fact, the AAA rated tranches will probably come out all right. They really
are a long way from any risk of loss. But they are currently priced around 80
cents on the dollar because nobody is sure.
The magic I don't understand is how the investment banks can round up a bunch of
the mid-level tranches, repackage them into tranches, and get AAA ratings on the
best of the repackaged junk. Same thing, I guess.
-- Doug
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