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what does "blended into derivatives" mean? Yes mortgages were sold on a packaged up into MBS (Mortgage back securities), but these are cash products, like a bon

by retube 11y ago

what does "blended into derivatives" mean? Yes mortgages were sold on a packaged up into MBS (Mortgage back securities), but these are cash products, like a bond or equity, NOT a derivative.

maxerickson 11y ago
There were MBSs built by splitting bundles of other MBSs into various tranches. Those certainly seem to be derivatives. What would they be called if they aren't derivatives?
- JumpCrisscross 11y ago
  Portfolios. There are synthetic MBSs, too. Those are derivatives. They were also relatively uncommon.
- retube 11y ago
  > What would they be called if they aren't derivatives? Securitised bonds, which is a cash product. The distinction between a cash & derivative product is really simple - one is leveraged the other isn't. E.g if I buy 100m of MBS I actually have to cough up 100m in cash - I am buying both the interest and principal repayments of the underlying mortgages. On the other hand if I enter into an interest rate swap with 100m notional I don't pay anything at all (assuming traded at spot market levels, and ignoring initial margin). The risk, or sensitivity, to interest rates is the same on both, but am only paying out cash for the securitised bond. Hence the bond, or MBS is "cash" and the swap is "derivative".
deleted 11y ago
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daveguy 11y ago
Ahh. I stand corrected. Looking at your later post (which for some reason I can't respond to directly): so the derivatives are just what amplified the MBS crash with leverage -- allowed organizations to put more money into toxic MBS assets than they would normally be able to with cash? All the splitting and recombining of MBS does that not act as a vehicle for laundering or coverup? I mean it wasn't technically laundering because it was completely legal to offer mortgages to people who couldn't afford them. But didn't the MBS allow banks to resell those poor assets which normally wouldn't have been sought after as investments? And the investments were leveraged through derivatives so that crashing of the poor quality assets were amplified? So it seems that there was a complex interaction of unregulated financial vehicles that caused the crisis and not simply "bad mortgages" or simply "derivatives" or simply "MBS". Any one of those alone would not have caused a huge bubble and crash, right? I do not have a background in finance, but I think it is important for a layperson to understand what happened.

by retube 11y ago

what does "blended into derivatives" mean? Yes mortgages were sold on a packaged up into MBS (Mortgage back securities), but these are cash products, like a bond or equity, NOT a derivative.

maxerickson 11y ago

There were MBSs built by splitting bundles of other MBSs into various tranches. Those certainly seem to be derivatives. What would they be called if they aren't derivatives?

JumpCrisscross 11y ago
Portfolios. There are synthetic MBSs, too. Those are derivatives. They were also relatively uncommon.
retube 11y ago
> What would they be called if they aren't derivatives? Securitised bonds, which is a cash product. The distinction between a cash & derivative product is really simple - one is leveraged the other isn't. E.g if I buy 100m of MBS I actually have to cough up 100m in cash - I am buying both the interest and principal repayments of the underlying mortgages. On the other hand if I enter into an interest rate swap with 100m notional I don't pay anything at all (assuming traded at spot market levels, and ignoring initial margin). The risk, or sensitivity, to interest rates is the same on both, but am only paying out cash for the securitised bond. Hence the bond, or MBS is "cash" and the swap is "derivative".

deleted 11y ago

[deleted]

daveguy 11y ago

Ahh. I stand corrected. Looking at your later post (which for some reason I can't respond to directly): so the derivatives are just what amplified the MBS crash with leverage -- allowed organizations to put more money into toxic MBS assets than they would normally be able to with cash? All the splitting and recombining of MBS does that not act as a vehicle for laundering or coverup? I mean it wasn't technically laundering because it was completely legal to offer mortgages to people who couldn't afford them. But didn't the MBS allow banks to resell those poor assets which normally wouldn't have been sought after as investments? And the investments were leveraged through derivatives so that crashing of the poor quality assets were amplified? So it seems that there was a complex interaction of unregulated financial vehicles that caused the crisis and not simply "bad mortgages" or simply "derivatives" or simply "MBS". Any one of those alone would not have caused a huge bubble and crash, right? I do not have a background in finance, but I think it is important for a layperson to understand what happened.