4 ms·

Banking seems like an industry that is super ripe for disruption. A problem seems to be that it's based on trust (do I trust this person enough to loan them mo

Banking seems like an industry that is super ripe for disruption. A problem seems to be that it's based on trust (do I trust this person enough to loan them money), and once it is based on trust, that trust will be abused.

deleted 10y ago
[deleted]
leereeves 10y ago
Disruption can be the problem. For example: mortgage backed securities and other innovations were a huge disruption to the traditionally boring banking business.
- yummyfajitas 10y ago
  What's the problem with mortgage backed securities?
  - leereeves 10y ago
    The 2008 financial crisis.
    - yummyfajitas 10y ago
      I'm confused; mortgages have been securitized since 1968 and MBS have been common since the 80's. How did they cause a financial crisis 40 years later, and why did it take so long?
      - aangjie 10y ago
        Maybe he meant CDOs or was it CDSs? It is harder to keep track of each new order of difference instruments that were built off mortgage. I wasn't aware of when mortgages were securitized, so I assumed that was true. Nevertheless, I think the point I made in my previous comment is true.
      - leereeves 10y ago
        More specifically: subprime MBSs (and CDOs) Failure to rate them properly (giving them AAA ratings) led governments, banks, pension funds, insurance companies and other "safe" investors to invest vast sums, making that money available for subprime lending, leading to poor (nearly nonexistent) lending standards and the housing bubble, and when the bubble burst, forcing the government to eat private losses to prevent financial ruin.
        yummyfajitas 10y ago
        Why do you believe that in the absence of MBS, a failure to properly rate home loans would have let to a different result?
        leereeves 10y ago
        Not many would lend their own money to someone with no income and no assets. But by bundling many such NINJA loans into complicated investments that few understood, mortgage writers were able to fund these loans with money from most risk averse investors. Would anyone have been fooled by individual NINJA loans with AAA ratings?
        yummyfajitas 10y ago
        We know this to be false; most mortgage issuers did lend their own money for NINJA purposes. The typical practice done by Countrywide and others was to sell off the AAA tranches of MBS and keep the riskiest ones. Would anyone have been fooled by individual NINJA loans with AAA ratings? This question betrays a gross misunderstanding of how mortgage securitization works. It's perfectly legitimate to construct AAA mortgages from arbitrarily bad loans, provided you've accurately quantified how bad they are.
        leereeves 10y ago
        I didn't say no one would. I said not many - meaning, in particular, not the risk averse investors who control vast sums of other people's money and demand top rated securities. Countrywide was making a profit off the resale of the loans, removing short term profits from the corporation, leading to personal gains even after the scheme failed, and Countrywide's CEO agreed to pay a "$22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors". Countrywide wasn't your typical investor. > This question betrays a gross misunderstanding of how mortgage securitization works. Your comment betrays a misunderstanding of what happened. People were fooled by the complexity. I said nothing about the ability to construct accurately rated loans. The fact is that the MBSs and CDOs did fool many people, including the rating agencies. And you didn't answer the question. How many would be fooled by a simple, individual, AAA rated NINJA loan?
  - aangjie 10y ago
    I think part of the problem comes from the illegibility* of trust. In the specific example of mortage-backed securities, as much as it disrupted the (debt? non-finance guy here) industry, it also enabled opportunistic behaviour in people at the micro level.(Think that stripper with 5 houses mortgaged from "The Big Short" movie) and at the macro level(think rating agencies vs the big bankers). At the end of the day, any disruption of the finance industry that cannot check(not necessarily stop) this kind of opportunistic behaviour will always be liable to bubbles and big crashes. The checks might simply be limiting the amount of loss in crash. Not sure how to develop something like that though.. * -- http://www.ribbonfarm.com/2010/07/26/a-big-little-idea-called-legibility/ http://www.ribbonfarm.com/2010/07/26/a-big-little-idea-calle...

deleted 10y ago

[deleted]

leereeves 10y ago

Disruption can be the problem. For example: mortgage backed securities and other innovations were a huge disruption to the traditionally boring banking business.

yummyfajitas 10y ago
What's the problem with mortgage backed securities?
- leereeves 10y ago
  The 2008 financial crisis.
  - yummyfajitas 10y ago
    I'm confused; mortgages have been securitized since 1968 and MBS have been common since the 80's. How did they cause a financial crisis 40 years later, and why did it take so long?
    - aangjie 10y ago
      Maybe he meant CDOs or was it CDSs? It is harder to keep track of each new order of difference instruments that were built off mortgage. I wasn't aware of when mortgages were securitized, so I assumed that was true. Nevertheless, I think the point I made in my previous comment is true.
    - leereeves 10y ago
      More specifically: subprime MBSs (and CDOs) Failure to rate them properly (giving them AAA ratings) led governments, banks, pension funds, insurance companies and other "safe" investors to invest vast sums, making that money available for subprime lending, leading to poor (nearly nonexistent) lending standards and the housing bubble, and when the bubble burst, forcing the government to eat private losses to prevent financial ruin.
      - yummyfajitas 10y ago
        Why do you believe that in the absence of MBS, a failure to properly rate home loans would have let to a different result?
        leereeves 10y ago
        Not many would lend their own money to someone with no income and no assets. But by bundling many such NINJA loans into complicated investments that few understood, mortgage writers were able to fund these loans with money from most risk averse investors. Would anyone have been fooled by individual NINJA loans with AAA ratings?
        yummyfajitas 10y ago
        We know this to be false; most mortgage issuers did lend their own money for NINJA purposes. The typical practice done by Countrywide and others was to sell off the AAA tranches of MBS and keep the riskiest ones. Would anyone have been fooled by individual NINJA loans with AAA ratings? This question betrays a gross misunderstanding of how mortgage securitization works. It's perfectly legitimate to construct AAA mortgages from arbitrarily bad loans, provided you've accurately quantified how bad they are.
        leereeves 10y ago
        I didn't say no one would. I said not many - meaning, in particular, not the risk averse investors who control vast sums of other people's money and demand top rated securities. Countrywide was making a profit off the resale of the loans, removing short term profits from the corporation, leading to personal gains even after the scheme failed, and Countrywide's CEO agreed to pay a "$22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors". Countrywide wasn't your typical investor. > This question betrays a gross misunderstanding of how mortgage securitization works. Your comment betrays a misunderstanding of what happened. People were fooled by the complexity. I said nothing about the ability to construct accurately rated loans. The fact is that the MBSs and CDOs did fool many people, including the rating agencies. And you didn't answer the question. How many would be fooled by a simple, individual, AAA rated NINJA loan?
- aangjie 10y ago
  I think part of the problem comes from the illegibility* of trust. In the specific example of mortage-backed securities, as much as it disrupted the (debt? non-finance guy here) industry, it also enabled opportunistic behaviour in people at the micro level.(Think that stripper with 5 houses mortgaged from "The Big Short" movie) and at the macro level(think rating agencies vs the big bankers). At the end of the day, any disruption of the finance industry that cannot check(not necessarily stop) this kind of opportunistic behaviour will always be liable to bubbles and big crashes. The checks might simply be limiting the amount of loss in crash. Not sure how to develop something like that though.. * -- http://www.ribbonfarm.com/2010/07/26/a-big-little-idea-called-legibility/ http://www.ribbonfarm.com/2010/07/26/a-big-little-idea-calle...