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Everyone is still mistaking why these bonds were/are 'toxic.' It isn't that no one wanted to buy them. It's that no one wanted to buy them for the price at wh

by tc 17y ago

Everyone is still mistaking why these bonds were/are 'toxic.' It isn't that no one wanted to buy them. It's that no one wanted to buy them for the price at which the banks needed to sell them to remain solvent. The bonds were 'toxic' because if the banks sold any of them for their market value, the banks would have had to mark down the value of the bonds still on their books. That would have shown that the banks were insolvent. By not allowing a market value for the bonds to emerge, the banks could maintain the illusion that their assets were greater than their liabilities.

wmeredith 17y ago
> By not allowing a market value for the bonds to emerge, the banks could maintain the illusion that their assets were greater than their liabilities. Fixed that for you: By not allowing a market value for the bonds to emerge, the banks maintain the illusion that their assets are greater than their liabilities.
- ars 17y ago
  wmeredith removed the word "could". You are implying there is no market for toxic assets right now. Demonstrably false. And in any case that's a poor way of making an argument.
ctkrohn 17y ago
A common phrase on a trading floor: "there's no such thing as a bad bond -- only a bad price."
imajes 17y ago
I agree about the murky definition of toxic: you're talking about mark to market, something all the banks refused to do, till the treasury + fed told them to start doing it, stat. But this is just one part of it; certainly the balance sheets were all over the place (with most firms senior management unclear as to their end-day positions) - but it's just as valid to state that GS/JP's requests for greater collateral which took down Lehman's and AIG so fast, as was the short selling which SEC Chairman Cox failed to properly curb early enough. (the FSA protected some of the london banking sector against shorts which ended up helping them massively). The truth is, it was a cascade of events, with a dozen or more senior players, all of whom could have changed things if took a different attitude. Fuld (CEO, Lehman's) could have sold lehmans for more than it's worth now a handful of times, but held out for a bigger number (not because he was trying to self-enrich, but to make his staff richer: they all held stock and he was very much a company man); Blankfein (CEO, GS) /Dimon (CEO, JP): could have given their trade partners (AIG, Lehman's) a break and not required them to post the majority of their capital reserve as collateral for their day-to-day; Paulson, Bernanke et al: could have been less naive to think that the market would sort it out, and should have stood their ground and stepped in earlier with (ironically) less money, which would have facilitated liquidity sufficient to calm the market and let these banks deleverage the bad debt at a more acceptable pace; Cox at the SEC: could have been less spineless. Chris Flowers, Warren Buffet, others: could have been less picky and bought stuff, rather than requiring that the government go in with them on any deal they proposed without any backing or collateral. etc etc. there were (apparently) so many potential exit points for this thing, and well, the industry managed to grab defeat from the jaws of victory often - if only because it wasn't the 'right thing to do'. a very good read for anyone who wants to get a good grasp of the timeline of all this is Aaron Ross Sorkin's Too Big To Fail. It's a rather fascinating expose into some of the inner meetings and conversations. the tl;dr of it: - everyone tried to buy/acquire/merge/whatever everyone else. Fuld literally tried to sell Lehman's to every single member of the big banks - this thing could have been solved a half dozen times if it weren't for something quite simple/trivial - it turns out that the UK Treasury eventually were the ones to crush the last minute save of Lehman's via Barclay's Capital. A deal was struck, ALL the big banks posted collateral to support Lehman's, and yet Darling at the British Treasury shut it down over a procedural issue in Barclays' company charter... (and, well, because the political reality is that the deal wasn't as good as it could be...)
diroussel 17y ago
I think the term toxic comes from the idea that you can be damaged by being in contact with one. CDSs and CDOs are contracts that carry cash flows in both directions. When you sell a CDS you receive the premium, but if there is a credit event you have to pay out way more than the premium. If you sold one in the good times you'd now be stuck with a contact to payout a whole load of money an no way to sell it off. For a CDO you have a similar upside and downside, but it's a bit more complex. You can be in the position where your cotract exposes you to alot of risk, and no matter how cheap you make it no one wants to buy it. That's a toxic asset.
- jacoblyles 17y ago
  CDOs are a bit trickier. If the issuing company held onto the lowest tranche then they were required to hold the debt and assets on-balance sheet and it was essentially a form of financing like any other. If they sold all the tranches, then they could keep the issuing fees and push all the debt and assets off-balance sheet. There usually was no recourse to the company for off-balance sheet CDOs, but there were some complicated and obscure exceptions.

by tc 17y ago

wmeredith 17y ago

> By not allowing a market value for the bonds to emerge, the banks could maintain the illusion that their assets were greater than their liabilities. Fixed that for you: By not allowing a market value for the bonds to emerge, the banks maintain the illusion that their assets are greater than their liabilities.

ars 17y ago
wmeredith removed the word "could". You are implying there is no market for toxic assets right now. Demonstrably false. And in any case that's a poor way of making an argument.

ctkrohn 17y ago

A common phrase on a trading floor: "there's no such thing as a bad bond -- only a bad price."

imajes 17y ago

I agree about the murky definition of toxic: you're talking about mark to market, something all the banks refused to do, till the treasury + fed told them to start doing it, stat. But this is just one part of it; certainly the balance sheets were all over the place (with most firms senior management unclear as to their end-day positions) - but it's just as valid to state that GS/JP's requests for greater collateral which took down Lehman's and AIG so fast, as was the short selling which SEC Chairman Cox failed to properly curb early enough. (the FSA protected some of the london banking sector against shorts which ended up helping them massively). The truth is, it was a cascade of events, with a dozen or more senior players, all of whom could have changed things if took a different attitude. Fuld (CEO, Lehman's) could have sold lehmans for more than it's worth now a handful of times, but held out for a bigger number (not because he was trying to self-enrich, but to make his staff richer: they all held stock and he was very much a company man); Blankfein (CEO, GS) /Dimon (CEO, JP): could have given their trade partners (AIG, Lehman's) a break and not required them to post the majority of their capital reserve as collateral for their day-to-day; Paulson, Bernanke et al: could have been less naive to think that the market would sort it out, and should have stood their ground and stepped in earlier with (ironically) less money, which would have facilitated liquidity sufficient to calm the market and let these banks deleverage the bad debt at a more acceptable pace; Cox at the SEC: could have been less spineless. Chris Flowers, Warren Buffet, others: could have been less picky and bought stuff, rather than requiring that the government go in with them on any deal they proposed without any backing or collateral. etc etc. there were (apparently) so many potential exit points for this thing, and well, the industry managed to grab defeat from the jaws of victory often - if only because it wasn't the 'right thing to do'. a very good read for anyone who wants to get a good grasp of the timeline of all this is Aaron Ross Sorkin's Too Big To Fail. It's a rather fascinating expose into some of the inner meetings and conversations. the tl;dr of it: - everyone tried to buy/acquire/merge/whatever everyone else. Fuld literally tried to sell Lehman's to every single member of the big banks - this thing could have been solved a half dozen times if it weren't for something quite simple/trivial - it turns out that the UK Treasury eventually were the ones to crush the last minute save of Lehman's via Barclay's Capital. A deal was struck, ALL the big banks posted collateral to support Lehman's, and yet Darling at the British Treasury shut it down over a procedural issue in Barclays' company charter... (and, well, because the political reality is that the deal wasn't as good as it could be...)

diroussel 17y ago

I think the term toxic comes from the idea that you can be damaged by being in contact with one. CDSs and CDOs are contracts that carry cash flows in both directions. When you sell a CDS you receive the premium, but if there is a credit event you have to pay out way more than the premium. If you sold one in the good times you'd now be stuck with a contact to payout a whole load of money an no way to sell it off. For a CDO you have a similar upside and downside, but it's a bit more complex. You can be in the position where your cotract exposes you to alot of risk, and no matter how cheap you make it no one wants to buy it. That's a toxic asset.

jacoblyles 17y ago
CDOs are a bit trickier. If the issuing company held onto the lowest tranche then they were required to hold the debt and assets on-balance sheet and it was essentially a form of financing like any other. If they sold all the tranches, then they could keep the issuing fees and push all the debt and assets off-balance sheet. There usually was no recourse to the company for off-balance sheet CDOs, but there were some complicated and obscure exceptions.