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> Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA? Yes. But I suspect you don't understand precisely what th

by Lazare 10y ago

> Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA? Yes. But I suspect you don't understand precisely what that means: First: A large number of mortgages were made, grouped into pools, and sliced into "tranches", where losses were assigned to the most junior tranches first, and the most senior tranches last. Thus, a junior tranche might stop paying out if 5% of the loans in the pool were defaulted on, while a very senior tranche might only stop paying out if 80% of the loans in the pool went bad. (Or whatever; numbers for example only.) Second: These tranches were submitted to ratings agencies, who constructed models where they said "well, the chance of 5% of the loans defaulting is X%, the chance of 20% is Y%, the chance of 60% default is Z%...", then based on this model they assigned ratings to the tranches, reflecting the models estimation of their likelyhood of paying out, which is the entire job of a ratings agency. Third: Tranches rated AAA were sold as AAA securities, because they were. The model said that Random Senior Tranche was 99.5% likely not to default, which is enough for a AAA rating from whomever was giving the ratings, so that's what it got. We've later come to question some of the models used, and in particular, it's been suggested that the ratings agencies incorrectly assumed default risk was less correlated than it was, and systematically undervalued the chance of a "black swan" event. But that's hindsight. > If so, how is that not straight up fraud? How is it even sort of fraud? Or if it is fraud, who do you think committed it, and what should they have done differently to avoid it?

YZF 10y ago
What about robo-signers? ( https://en.wikipedia.org/wiki/2010_United_States_foreclosure_crisis#Robo-signing_controversy https://en.wikipedia.org/wiki/2010_United_States_foreclosure... ) EDIT: Also the scenario described could still be fraud. The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. If someone did this for their personal benefit while the company they were running took a loss then they would also be defrauding share holders. So it's a lot more complicated than simply saying the instruments were AAA rated by the rating agency and they were simply sold like any other AAA rated instrument. It could have all been innocent but it certainly smells and warrants investigating.
- Lazare 10y ago
  The robo-signing stuff is straight up illegal. But that falls under my original point 1: The people doing that were tiny, tiny fish, who had nothing to do with the CDOs. > The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. Legally that's a harder question than you might imagine. However... ...there's absolutely zero evidence of this on a systemic basis. Banks overwhelmingly made it clear that they believed the assets were good. The bailouts went primarily to institutions that had originated utter crap and then held on to it because they thought it was a great investment. Studies have been done to look at the personal investments of bank executives; it turns out they were closely correlated with their job; the more you knew about CDOs and MBSs, and the more closely linked to the system you were, the more you thought CDOs were safe as houses, and the more willing you were to have your retirement invested in it. Conversely, the small handful of Cassandras were utterly ignored by the world in large part because they were complete outsiders who had no inside knowledge. The arguments boiled down to: "What do they know? The people who know the most about CDOs are all in; these people must just not understand the models." (There are exceptions in specific cases. One that springs to mind is Fabrice Tourre[1]. But he was very much the exception to the rule, and it's probably not a coincidence he worked at Goldman...) > It could have all been innocent but it certainly smells and warrants investigating. And it was. Unfortunately (or fortunately, depending on your view) no smoking guns emerged. [1]: http://www.reuters.com/article/us-goldmansachs-sec-tourre-idUSBREA2B11220140312 http://www.reuters.com/article/us-goldmansachs-sec-tourre-id...
  - YZF 10y ago
    Wouldn't any economist be able to say that the assumption that house prices will not move in a correlated way across the united states is patently false? It happened before during the great depression, and to some degree in the 80's and 90's. It was also clear house prices were in bubble territory by any sort of economic measure. While no one can accurately time the burst of bubbles there's enough historical data to be able to have an idea of whether things are over valued by various metrics. What I'm saying it that I don't think that claims that bankers, who are sophisticated players and experts in their field, didn't know what they were selling. They should have known those instruments were not of the quality they represented them to their customers. I don't think shifting the blame to the rating agency holds water. At the same time they were giving mortgages to people who wouldn't "normally" qualify and where the risk was obviously very high they were selling pieces of those mortgages as AAA rated securities. Doesn't pass the red face test in my books.
rpgmaker 10y ago
Actually they were all junk. Even the "good ones" and they knew it. When the pool became so shitty that the rating agencies were about to start rating them as junk they changed their rating "algorithm" at the behest of the banks. It was straight up fraud all around but the govt just didn't want to prosecute the anyone that mattered.
Donzo 10y ago
Yeah, but what if all the worst tranches were repackaged into CDOs that were knowingly composed of shit loans, and then rated AAA, like what happened?
didibus 10y ago
Jailing is pointless and dumb. What we need to do is put in a process that will prevent this from happening ever again. On that point, I see no actions being taken. So jail or don't, there's just going to be more crisis down the line.
- marcoperaza 10y ago
  One such process is what would have happened by default: let the banks who bought bad assets crash and burn. Now that we bailed them out, we have actually encouraged similar behavior in the future. The banks get all of the upside rewards, but none of the downside risk. I'm not arguing that the bail out was necessarily the wrong thing to do. There's other considerations (like the effect on the rest of the economy) but this is one of the big drawbacks.

by Lazare 10y ago

YZF 10y ago

What about robo-signers? ( https://en.wikipedia.org/wiki/2010_United_States_foreclosure_crisis#Robo-signing_controversy https://en.wikipedia.org/wiki/2010_United_States_foreclosure... ) EDIT: Also the scenario described could still be fraud. The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. If someone did this for their personal benefit while the company they were running took a loss then they would also be defrauding share holders. So it's a lot more complicated than simply saying the instruments were AAA rated by the rating agency and they were simply sold like any other AAA rated instrument. It could have all been innocent but it certainly smells and warrants investigating.

Lazare 10y ago
The robo-signing stuff is straight up illegal. But that falls under my original point 1: The people doing that were tiny, tiny fish, who had nothing to do with the CDOs. > The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. Legally that's a harder question than you might imagine. However... ...there's absolutely zero evidence of this on a systemic basis. Banks overwhelmingly made it clear that they believed the assets were good. The bailouts went primarily to institutions that had originated utter crap and then held on to it because they thought it was a great investment. Studies have been done to look at the personal investments of bank executives; it turns out they were closely correlated with their job; the more you knew about CDOs and MBSs, and the more closely linked to the system you were, the more you thought CDOs were safe as houses, and the more willing you were to have your retirement invested in it. Conversely, the small handful of Cassandras were utterly ignored by the world in large part because they were complete outsiders who had no inside knowledge. The arguments boiled down to: "What do they know? The people who know the most about CDOs are all in; these people must just not understand the models." (There are exceptions in specific cases. One that springs to mind is Fabrice Tourre[1]. But he was very much the exception to the rule, and it's probably not a coincidence he worked at Goldman...) > It could have all been innocent but it certainly smells and warrants investigating. And it was. Unfortunately (or fortunately, depending on your view) no smoking guns emerged. [1]: http://www.reuters.com/article/us-goldmansachs-sec-tourre-idUSBREA2B11220140312 http://www.reuters.com/article/us-goldmansachs-sec-tourre-id...
- YZF 10y ago
  Wouldn't any economist be able to say that the assumption that house prices will not move in a correlated way across the united states is patently false? It happened before during the great depression, and to some degree in the 80's and 90's. It was also clear house prices were in bubble territory by any sort of economic measure. While no one can accurately time the burst of bubbles there's enough historical data to be able to have an idea of whether things are over valued by various metrics. What I'm saying it that I don't think that claims that bankers, who are sophisticated players and experts in their field, didn't know what they were selling. They should have known those instruments were not of the quality they represented them to their customers. I don't think shifting the blame to the rating agency holds water. At the same time they were giving mortgages to people who wouldn't "normally" qualify and where the risk was obviously very high they were selling pieces of those mortgages as AAA rated securities. Doesn't pass the red face test in my books.

rpgmaker 10y ago

Actually they were all junk. Even the "good ones" and they knew it. When the pool became so shitty that the rating agencies were about to start rating them as junk they changed their rating "algorithm" at the behest of the banks. It was straight up fraud all around but the govt just didn't want to prosecute the anyone that mattered.

Donzo 10y ago

Yeah, but what if all the worst tranches were repackaged into CDOs that were knowingly composed of shit loans, and then rated AAA, like what happened?

didibus 10y ago

Jailing is pointless and dumb. What we need to do is put in a process that will prevent this from happening ever again. On that point, I see no actions being taken. So jail or don't, there's just going to be more crisis down the line.

marcoperaza 10y ago
One such process is what would have happened by default: let the banks who bought bad assets crash and burn. Now that we bailed them out, we have actually encouraged similar behavior in the future. The banks get all of the upside rewards, but none of the downside risk. I'm not arguing that the bail out was necessarily the wrong thing to do. There's other considerations (like the effect on the rest of the economy) but this is one of the big drawbacks.