11 ms·

"Toxie," NPR's adopted 'toxic asset,' is dead

101 points by ben1040 16y ago

maukdaddy 16y ago
Direct link to the data visualization: http://www.npr.org/templates/story/story.php?storyId=124578382 http://www.npr.org/templates/story/story.php?storyId=1245783...
- mortenjorck 16y ago
  It looks a little complicated at first glance, but it's an excellent visualization, especially once you get the relationship between the "How we are doing" and "How long we have left" graphs (the left not mattering until January 2010). Watching the right one throughout the history of the asset is actually a little horrifying.
jeebusroxors 16y ago
Does someone care to explain how it died? The article mentions loan modifications - does that mean the loans in Toxie were replaced by other loans?
- patio11 16y ago
  Loam modifications are post-signing agreements to alter the terms of a loan, most commonly to reduce principal, waive interest, or alter the interest rate going forward. They are historically considered highly abnormal for residential mortgages. They have very negative effects for lower tranches of mortgage backed securities.
- amalcon 16y ago
  I am not in finance. This is a second-hand explanation. Tablespoon of salt and all that. These sorts securities were structured in such a way that some people get a lower ROI, but better risk profile. The way that works is that whoever accepts the lowest rate of return gets their portion first. When the money runs out, the assets that would have the highest rate of return miss out entirely. There are two major ways that a loan can change: default (where the debtor simply does not pay; this typically leads to foreclosure and the bank often takes a loss) and renegotiation (where the debtor negotiates a reduction in how much the debtor will eventually need to pay on the theory that the lower amount will make default less likely). Both of these reduce the amount of money coming in (and, indeed, the amount that is ever going to come in). What happened is that the amount of money coming in (and expected to come in) dropped to the point where, after paying every asset promising a lower rate than Toxie, there was no money left to pay Toxie. As there is no means by which this situation can change, Toxie no longer has value.
- btilly 16y ago
  The way that these deals are structured is that a bundle of loans are aggregated in a broad river of money over a period of time, and then the money is sliced by time into bonds. (Not entirely by time, it is usually structured so that later bonds get appropriate interest payments.) If you're in one of the later time slices and money doesn't come in, you don't get paid. If you're in one of the earlier time slices, you still get paid. This means that every deal generates bonds with a range of risk from extreme to AAA. (Unless the risk models are wrong, in which case the "AAA" can turn out to be risky. As happened.) When you have a loan modification, the principal owed drops. That means that the total amount of money coming into the deal goes down. Those losses hit the bottom bonds first. As you reduce principal, you reduce interest. Once enough money has gone out of the deal, those bonds won't pay anything more, and the bond is dead. (I haven't been in finance for several years, but I used to be in the CMBS world.)
- Oxryly 16y ago
  When a house is sold at a loss that particular stream of mortgage payment dries up entirely. Essentially all of the non-paid off loans had their collateral (houses) sold and were declared closed. At the point no money will ever flow into the asset ever again. It's dead.
- nestlequ1k 16y ago
  there's a really good followup here: http://www.npr.org/blogs/money/2010/09/24/130107647/what-does-it-mean-to-say-toxie-s-dead http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe...
hvs 16y ago
It's a little gimmicky, but I have to say that it is a clever bit of journalism that really helps to make the whole ordeal a slightly more understandable to less financially literate (like myself).
- goatforce5 16y ago
  I'm repeating myself, but Planet Money's podcast is genuinely very good. It was spun out as it's own entity after an episode of This American Life about the financial crisis got really good feedback. They explain some fairly complicated financial stuff in an easy to understand way, without dumbing it down. They have lots of good, heavy-hitting guests on. Go subscribe to the podcast. It's free: http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890 http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...
  - 16s 16y ago
    You should avoid everything that requires an expert "explaining" things in an "easy to understand way". Avoid religion and stocks markets. No one understands either. Both require a great deal of faith. And only a few people (ministers and stock brokers) proclaim to speak expertly on them... the rest of us just have to give them our cash and believe.
    - lmz 16y ago
      A lot of things fall into that category. Among others: computer programming, government bureaucracy, global warming. Should they be avoided too?
      - derefr 16y ago
        Creating government bureaucracy should definitely be avoided. We're stuck with inherently-complex problem domains of global climate and large-scale information manipulation, though.
      - lzw 16y ago
        Global warming.... A hilarious topic you hear a lot of lies about. It is actually a simple topic since the ear is getting cooler and it is easily proven. What's complicated is the extensive lengths the global warming religion will go to to try and pretend like this totally politically motivated movement has a relationship with science. It is amazing what you can get people to believe by constantly repeating unscientific claims and the mantra that "all scientists agree" even though in grade school you should have learned that this is not how science works. PT Barnum was right... I didn't believe it myself, until I tried to talk about global warming with NPR programmed automatons.
kls 16y ago
Yeah the thing that I don't understand is, so it is dead with no payments but their is collateral behind that asset so what happens when the foreclosures are sold. Do they receive a check for their portion of the asset sale? That would offset the the numbers I should imagine. So if they have collected roughly $450 of their $1000 investment and then receive a $300 check from the asset sale. that is $750 of their principal returned. In regards to the banks that hold these assets they received a bailout so I would assume that they still see a profit on these "Toxic"assets due to the bail out. As well this asset was purchased in the middle of the housing fall out while some of the other assets had been producing returns for some time before this whole mess. Also what about that PMI they make people buy if they finance more than 80% that is supposed to protect the mortgage holders principal, in the event of a default. One of the reasons I love math is one of the reasons I hate it the numbers are so easy to skew, to someone who does not know what variables to look for. I am not accusing NPR of anything here after all they are journalist by trade not economists or bankers, but I think there are some missing variables here.
- _delirium 16y ago
  From what I can tell, this is after the write-downs from sold assets: someone walks on their mortgage, the bank sells it in a foreclosure sale, some of the proceeds are distributed to the bond holders by tranches, and then that asset is removed from the bond. The way tranching works, lower tranches like this one lose assets that way disproportionately quickly. Their bond now has no remaining assets on which it has any claims left, so any cash they've already gotten is the full value of the security.
  - kls 16y ago
    Thanks, for clearing that up but from the charts I saw on the site, there where still assets in bankruptcy which temporarily stays the asset sale, I could be totally misreading the info (it happens) but it did look to me that their where still unsold assets under the umbrella protection of bankruptcy proceedings. As well I still do not see how PMI plays into their return.
- anigbrowl 16y ago
tokipin 16y ago
NOOOOOOOOOOOOO
Zak 16y ago
It seems to me that a modification to the interest rate or amount owed should not be allowed when the debt is owned by a third party - at least without that third party's consent. When a bunch of loans are rolled up in to a security, it's not practical to get the consent of all the shareholders.
- gchpaco 16y ago
  And then the homeowners will declare bankruptcy and the third parties get nothing instead of possibly something. The risk of this happening is supposed to be encoded in the risk rating of the loan, but that didn't happen in a very useful fashion.
- jrockway 16y ago
  it's not practical to get the consent of all the shareholders Well, you get that when they buy the security. "By signing, you agree to accept..." Except unlike for DVDs, this sort of thing is actually legally binding. Part of the whole subprime crisis was that nobody actually read these things, and they were caught by surprise when conditions changed. ("If 3 people default on their loans, your 50 billion investment is worthless." That's kind of bad when it's your own money, but really bad when you borrowed those 50 billion from someone else. Hence, a recession.)
VladRussian 16y ago
don't forget guys that toxic mortgage bonds (say totaling X) were "covered" by something like 10X of CDS (sold for the price of 0.01X), so whenever toxic bold holder (state teacher pension fund) lose the X, the CDS holders (smart Wall St guys like Paulson) make 9.99X. So the failure of the toxic bonds was historically necessary and thus unavoidable. The more toxic the toxic bonds are, the better it is for the CDS holders.
- jrockway 16y ago
  So the failure of the toxic bonds was historically necessary and thus unavoidable. Why? There were lots of people on the other side of the transaction, too. The money paid to the collectors of the CDSes did not come out of thin air, after all.
  - VladRussian 16y ago
    you hit the bull eye on both points: "There were lots of people on the other side of the transaction, too. " Absolutely. When you look into the current crisis, you'll notice that it isn't a crisis of "net loss". This crisis is just redistribution of money - for each loser there is a winner. No money or value was "net lost", instead it was redistributed. For each homeowner "B" who bought overpriced house, there is a previous owner "A" who made nice profit which is pretty much equal on average to what mortgage note holders lost when "B" foreclosed. " The money paid to the collectors of the CDSes did not come out of thin air, after all." Again, absolutely right. The CDSes were paid by taxpayers - government bailout of AIG and others. So what taxpayers lost, CDS holders won (as they are just better politically connected, surprise!). No net loss again.
    - flatulent1 16y ago
      In some cases those profiting from the earlier higher priced sale of a property, and the commissions, were committing fraud. One of the story links indicates that Toxie was connected to a known case. A realtor flipped a property back and forth between friends multiple times, it being sold for a higher price each time. The banks were happy to make the loans on the property that was increasing in value. The people involved shared the gains along the way, then the last one defaulted. The selling back and forth could happen normally... it seems the fraud was in the parties obtaining loans for an owner occupied property. It was apparently empty the whole time. These people didn't need an economic downturn to default. It was planned. http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flipping http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flip...
mattmaroon 16y ago
Ironically mortgage bonds were invented to solve the opposite problem: mortgages getting paid off (when moving or refinancing). People tend to do those things when interest rates go down. Investors didn't want to buy a bond that paid low rates of return when interest rates were high (as most bonds do) and then might get repaid in full with no penalty when the rates lowered. The answer, of course, was to roll a bunch of mortgages together into a special purpose vehicle (SPV) then sell bonds to fund it, then divide those bonds into tranches such that the lower tiers got repaid in full when the refinancings started. Kind of hard to believe now that investors used to be worried about people paying their mortgages off too soon.
cturner 16y ago
Do on scale. When people purchase, send them a high-quality plush toy representing their toxic asset, with crossed stitching for eyes, and a username and password. This login accesses an online app that tracks their asset. You can link it to your facebook account, so that progress updates will appear like farmville messages. If the asset gets profitable, they receive the eyes for the plush toy. Either way, once it's wound up they get a framed certificate to celebrate their participation in helping America out of deep financial shit. Imagine buying a close relative a toxic asset pack for Christmas. It's a bit like giving someone a plant. You get to watch it after the day. But it's more edgy gift, because of the faint chance it will make money.
flipbrad 16y ago
strange data on the pie chart for september, unless I'm misreading it or toxie is magic... the percentages add up to 150%, don't they?

101 points by ben1040 16y ago

Direct link to the data visualization: http://www.npr.org/templates/story/story.php?storyId=124578382 http://www.npr.org/templates/story/story.php?storyId=1245783...

mortenjorck 16y ago
It looks a little complicated at first glance, but it's an excellent visualization, especially once you get the relationship between the "How we are doing" and "How long we have left" graphs (the left not mattering until January 2010). Watching the right one throughout the history of the asset is actually a little horrifying.

jeebusroxors 16y ago

Does someone care to explain how it died? The article mentions loan modifications - does that mean the loans in Toxie were replaced by other loans?

patio11 16y ago
Loam modifications are post-signing agreements to alter the terms of a loan, most commonly to reduce principal, waive interest, or alter the interest rate going forward. They are historically considered highly abnormal for residential mortgages. They have very negative effects for lower tranches of mortgage backed securities.
amalcon 16y ago
I am not in finance. This is a second-hand explanation. Tablespoon of salt and all that. These sorts securities were structured in such a way that some people get a lower ROI, but better risk profile. The way that works is that whoever accepts the lowest rate of return gets their portion first. When the money runs out, the assets that would have the highest rate of return miss out entirely. There are two major ways that a loan can change: default (where the debtor simply does not pay; this typically leads to foreclosure and the bank often takes a loss) and renegotiation (where the debtor negotiates a reduction in how much the debtor will eventually need to pay on the theory that the lower amount will make default less likely). Both of these reduce the amount of money coming in (and, indeed, the amount that is ever going to come in). What happened is that the amount of money coming in (and expected to come in) dropped to the point where, after paying every asset promising a lower rate than Toxie, there was no money left to pay Toxie. As there is no means by which this situation can change, Toxie no longer has value.
btilly 16y ago
The way that these deals are structured is that a bundle of loans are aggregated in a broad river of money over a period of time, and then the money is sliced by time into bonds. (Not entirely by time, it is usually structured so that later bonds get appropriate interest payments.) If you're in one of the later time slices and money doesn't come in, you don't get paid. If you're in one of the earlier time slices, you still get paid. This means that every deal generates bonds with a range of risk from extreme to AAA. (Unless the risk models are wrong, in which case the "AAA" can turn out to be risky. As happened.) When you have a loan modification, the principal owed drops. That means that the total amount of money coming into the deal goes down. Those losses hit the bottom bonds first. As you reduce principal, you reduce interest. Once enough money has gone out of the deal, those bonds won't pay anything more, and the bond is dead. (I haven't been in finance for several years, but I used to be in the CMBS world.)
Oxryly 16y ago
When a house is sold at a loss that particular stream of mortgage payment dries up entirely. Essentially all of the non-paid off loans had their collateral (houses) sold and were declared closed. At the point no money will ever flow into the asset ever again. It's dead.
nestlequ1k 16y ago
there's a really good followup here: http://www.npr.org/blogs/money/2010/09/24/130107647/what-does-it-mean-to-say-toxie-s-dead http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe...

hvs 16y ago

It's a little gimmicky, but I have to say that it is a clever bit of journalism that really helps to make the whole ordeal a slightly more understandable to less financially literate (like myself).

goatforce5 16y ago
I'm repeating myself, but Planet Money's podcast is genuinely very good. It was spun out as it's own entity after an episode of This American Life about the financial crisis got really good feedback. They explain some fairly complicated financial stuff in an easy to understand way, without dumbing it down. They have lots of good, heavy-hitting guests on. Go subscribe to the podcast. It's free: http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890 http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...
- 16s 16y ago
  You should avoid everything that requires an expert "explaining" things in an "easy to understand way". Avoid religion and stocks markets. No one understands either. Both require a great deal of faith. And only a few people (ministers and stock brokers) proclaim to speak expertly on them... the rest of us just have to give them our cash and believe.
  - lmz 16y ago
    A lot of things fall into that category. Among others: computer programming, government bureaucracy, global warming. Should they be avoided too?
    - derefr 16y ago
      Creating government bureaucracy should definitely be avoided. We're stuck with inherently-complex problem domains of global climate and large-scale information manipulation, though.
    - lzw 16y ago
      Global warming.... A hilarious topic you hear a lot of lies about. It is actually a simple topic since the ear is getting cooler and it is easily proven. What's complicated is the extensive lengths the global warming religion will go to to try and pretend like this totally politically motivated movement has a relationship with science. It is amazing what you can get people to believe by constantly repeating unscientific claims and the mantra that "all scientists agree" even though in grade school you should have learned that this is not how science works. PT Barnum was right... I didn't believe it myself, until I tried to talk about global warming with NPR programmed automatons.

kls 16y ago

Yeah the thing that I don't understand is, so it is dead with no payments but their is collateral behind that asset so what happens when the foreclosures are sold. Do they receive a check for their portion of the asset sale? That would offset the the numbers I should imagine. So if they have collected roughly $450 of their $1000 investment and then receive a $300 check from the asset sale. that is $750 of their principal returned. In regards to the banks that hold these assets they received a bailout so I would assume that they still see a profit on these "Toxic"assets due to the bail out. As well this asset was purchased in the middle of the housing fall out while some of the other assets had been producing returns for some time before this whole mess. Also what about that PMI they make people buy if they finance more than 80% that is supposed to protect the mortgage holders principal, in the event of a default. One of the reasons I love math is one of the reasons I hate it the numbers are so easy to skew, to someone who does not know what variables to look for. I am not accusing NPR of anything here after all they are journalist by trade not economists or bankers, but I think there are some missing variables here.

_delirium 16y ago
From what I can tell, this is after the write-downs from sold assets: someone walks on their mortgage, the bank sells it in a foreclosure sale, some of the proceeds are distributed to the bond holders by tranches, and then that asset is removed from the bond. The way tranching works, lower tranches like this one lose assets that way disproportionately quickly. Their bond now has no remaining assets on which it has any claims left, so any cash they've already gotten is the full value of the security.
- kls 16y ago
  Thanks, for clearing that up but from the charts I saw on the site, there where still assets in bankruptcy which temporarily stays the asset sale, I could be totally misreading the info (it happens) but it did look to me that their where still unsold assets under the umbrella protection of bankruptcy proceedings. As well I still do not see how PMI plays into their return.
anigbrowl 16y ago

tokipin 16y ago

NOOOOOOOOOOOOO

Zak 16y ago

It seems to me that a modification to the interest rate or amount owed should not be allowed when the debt is owned by a third party - at least without that third party's consent. When a bunch of loans are rolled up in to a security, it's not practical to get the consent of all the shareholders.

gchpaco 16y ago
And then the homeowners will declare bankruptcy and the third parties get nothing instead of possibly something. The risk of this happening is supposed to be encoded in the risk rating of the loan, but that didn't happen in a very useful fashion.
jrockway 16y ago
it's not practical to get the consent of all the shareholders Well, you get that when they buy the security. "By signing, you agree to accept..." Except unlike for DVDs, this sort of thing is actually legally binding. Part of the whole subprime crisis was that nobody actually read these things, and they were caught by surprise when conditions changed. ("If 3 people default on their loans, your 50 billion investment is worthless." That's kind of bad when it's your own money, but really bad when you borrowed those 50 billion from someone else. Hence, a recession.)

VladRussian 16y ago

don't forget guys that toxic mortgage bonds (say totaling X) were "covered" by something like 10X of CDS (sold for the price of 0.01X), so whenever toxic bold holder (state teacher pension fund) lose the X, the CDS holders (smart Wall St guys like Paulson) make 9.99X. So the failure of the toxic bonds was historically necessary and thus unavoidable. The more toxic the toxic bonds are, the better it is for the CDS holders.

jrockway 16y ago
So the failure of the toxic bonds was historically necessary and thus unavoidable. Why? There were lots of people on the other side of the transaction, too. The money paid to the collectors of the CDSes did not come out of thin air, after all.
- VladRussian 16y ago
  you hit the bull eye on both points: "There were lots of people on the other side of the transaction, too. " Absolutely. When you look into the current crisis, you'll notice that it isn't a crisis of "net loss". This crisis is just redistribution of money - for each loser there is a winner. No money or value was "net lost", instead it was redistributed. For each homeowner "B" who bought overpriced house, there is a previous owner "A" who made nice profit which is pretty much equal on average to what mortgage note holders lost when "B" foreclosed. " The money paid to the collectors of the CDSes did not come out of thin air, after all." Again, absolutely right. The CDSes were paid by taxpayers - government bailout of AIG and others. So what taxpayers lost, CDS holders won (as they are just better politically connected, surprise!). No net loss again.
  - flatulent1 16y ago
    In some cases those profiting from the earlier higher priced sale of a property, and the commissions, were committing fraud. One of the story links indicates that Toxie was connected to a known case. A realtor flipped a property back and forth between friends multiple times, it being sold for a higher price each time. The banks were happy to make the loans on the property that was increasing in value. The people involved shared the gains along the way, then the last one defaulted. The selling back and forth could happen normally... it seems the fraud was in the parties obtaining loans for an owner occupied property. It was apparently empty the whole time. These people didn't need an economic downturn to default. It was planned. http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flipping http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flip...

mattmaroon 16y ago

Ironically mortgage bonds were invented to solve the opposite problem: mortgages getting paid off (when moving or refinancing). People tend to do those things when interest rates go down. Investors didn't want to buy a bond that paid low rates of return when interest rates were high (as most bonds do) and then might get repaid in full with no penalty when the rates lowered. The answer, of course, was to roll a bunch of mortgages together into a special purpose vehicle (SPV) then sell bonds to fund it, then divide those bonds into tranches such that the lower tiers got repaid in full when the refinancings started. Kind of hard to believe now that investors used to be worried about people paying their mortgages off too soon.

cturner 16y ago

Do on scale. When people purchase, send them a high-quality plush toy representing their toxic asset, with crossed stitching for eyes, and a username and password. This login accesses an online app that tracks their asset. You can link it to your facebook account, so that progress updates will appear like farmville messages. If the asset gets profitable, they receive the eyes for the plush toy. Either way, once it's wound up they get a framed certificate to celebrate their participation in helping America out of deep financial shit. Imagine buying a close relative a toxic asset pack for Christmas. It's a bit like giving someone a plant. You get to watch it after the day. But it's more edgy gift, because of the faint chance it will make money.

flipbrad 16y ago

strange data on the pie chart for september, unless I'm misreading it or toxie is magic... the percentages add up to 150%, don't they?