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This article is a bit misleading. The subprime crisis occurred because of the leverage on packaged debt that was held by big banks. Where by an original loan am

by raiyu 8y ago

This article is a bit misleading. The subprime crisis occurred because of the leverage on packaged debt that was held by big banks. Where by an original loan amount of say $1MM had an outstanding obligation perhaps 100x that. The issue was that the banks held this debt, which means when there was an issue, they would become insolvent, which would lead to a financial crisis like the great depression, which is why government intervention was needed. $1.2T of outstanding debt is high, however, not very relevant without knowing who the debt holders are. And as the article states, the primary big banks aren't overly exposed to this debt. Additionally if the debt isn't leveraged on top of the outstanding loan amounts, again the damage from a potential crisis in this area will be very contained. As the article states a lot of this exposure sits with private equity funds and hedge funds, which would result in very little impact to the average citizen if there were an issue. In regards to the Michael Burry comments about fraud, that was specifically related to a bubble. That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. A loosening of debt requirements, while a bad idea, doesn't qualify as fraud. There also isn't general speculation that is associated with a bubble, which was one of the main ingredients for the housing mortgage crash as well. So while there maybe an issue here if defaults occur those issues will be very contained. There maybe some hit to the general financial markets, but nothing even remotely close to what occurred with the housing crisis. This is basically the equivalent of saying that any debt that shows loosening guidelines and floating APR is the same thing as the housing crisis, which isn't accurate.

RestlessMind 8y ago
> That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. That reads like a description of SV. Mass hysteria - check (eg. BTC, shitty startups)! "dumber" people making money - check! rampant speculation - check (eg. Uber IPO valuation of 120B, bay area shacks going for millions)! Actors committing fraud - check (eg. Theranos, Zenefits)! So can we say that SV is in a bubble, maybe confined to the tech sector?
- raiyu 8y ago
  SV doesn't really fit the criteria of a bubble. Bubbles gain steam by being accessible. The more people that get involved, the larger the bubble becomes. It isn't a ponzi scheme, but acts like one in many ways. ICOs were well on their way to becoming a bubble, but being pegged to the price of cryptocurrencies, the bitcoin bubble popped before the ICO bubble really took off. But if you look at the ICOs there was rampant fraud. Basically people writing white papers, with no real companies or products, and then raising millions of dollars. Very similar to the dot com bubble. SV in and of itself creates a tremendous amount of value. Sure there are some spectacular failures, and some questionable investments, but overall there is value that is created. Without getting into any morality discussions, but purely looking at revenue, profitability, return to investors, companies like Uber, Facebook, Twitter, Airbnb, Tesla, and so forth have created tremendous shareholder value. When you some a "stupid" app raise $5MM it really isn't much considering how much these other companies have raised, the revenue they generated and so forth. So SV is definitely not a bubble per say. You could make the case that some valuations are inflated, but that is a sign of the macro market where SaaS companies are enjoying their largest revenue multiples ever, but if that corrects there will be a rest of perhaps 30-50% in market cap, but no where near total collapse. Additionally these companies do have underlying products, services, benefits, and revenue. You could say there is hype, over valuation, and so forth, but we aren't anywhere near bubble territory.
  - grey-area 8y ago
    Bubbles are usually based on real anticipated value, that's what gets them started. The opportunity is there and a transformation is ocurring, but the investors in the bubble won't profit as they're too early or late or don't happen to invest in companies which survive. e.g. South Sea Bubble, Railway mania, .com etc
  - lmm 8y ago
    > Without getting into any morality discussions, but purely looking at revenue, profitability, return to investors, companies like Uber, Facebook, Twitter, Airbnb, Tesla, and so forth have created tremendous shareholder value. Facebook yes, but how many of the others have paid any dividends to shareholders? Even these "success stories" seem to have valuations that are based mostly on speculation; plenty of investors have made money but they could have just been selling to "greater fools".
XnoiVeX 8y ago
The question then is, is this being repackaged and resold by the PE firms and the funds?
- raiyu 8y ago
  The repackaging and selling of debt isn't an issue in and of itself. During the housing crisis didn't start because the debt was being resold, that's actually a positive thing. It allows firms looking to invest to buy large blocks of an asset with a return from interest and a rating for risk. The problem with the housing crisis was that the ratings agencies were committing fraud and so where the banks. The ratings agencies were simply labeling too much risky debt as non risky. While, the banks were committing their own fraud by taking less than triple AAA debt, packaging it together, and then saying that if you buy pools of B debts, because they are separate pools you are de-risking, so different B-rated debt pools should be rated as AAA because they are "de-risked". So in this case as long as the ratings aren't fraudulent, the risk is properly stated and understood, then repackaging and selling is fine. The second piece, which was really where the problem became "too big to fail" was that each one of these debt packages were doing resold through insurances 10 to 100x, so the total outstanding liability was not the original debt, but something like 100x the actual debt. Again, if that isn't the case here, then any debt holders will just have to deal with whatever defaults occur, but if hey are PE and hedge fund firms that own half of that debt, this won't be felt across the broader economy.

by raiyu 8y ago

RestlessMind 8y ago

> That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. That reads like a description of SV. Mass hysteria - check (eg. BTC, shitty startups)! "dumber" people making money - check! rampant speculation - check (eg. Uber IPO valuation of 120B, bay area shacks going for millions)! Actors committing fraud - check (eg. Theranos, Zenefits)! So can we say that SV is in a bubble, maybe confined to the tech sector?

raiyu 8y ago
SV doesn't really fit the criteria of a bubble. Bubbles gain steam by being accessible. The more people that get involved, the larger the bubble becomes. It isn't a ponzi scheme, but acts like one in many ways. ICOs were well on their way to becoming a bubble, but being pegged to the price of cryptocurrencies, the bitcoin bubble popped before the ICO bubble really took off. But if you look at the ICOs there was rampant fraud. Basically people writing white papers, with no real companies or products, and then raising millions of dollars. Very similar to the dot com bubble. SV in and of itself creates a tremendous amount of value. Sure there are some spectacular failures, and some questionable investments, but overall there is value that is created. Without getting into any morality discussions, but purely looking at revenue, profitability, return to investors, companies like Uber, Facebook, Twitter, Airbnb, Tesla, and so forth have created tremendous shareholder value. When you some a "stupid" app raise $5MM it really isn't much considering how much these other companies have raised, the revenue they generated and so forth. So SV is definitely not a bubble per say. You could make the case that some valuations are inflated, but that is a sign of the macro market where SaaS companies are enjoying their largest revenue multiples ever, but if that corrects there will be a rest of perhaps 30-50% in market cap, but no where near total collapse. Additionally these companies do have underlying products, services, benefits, and revenue. You could say there is hype, over valuation, and so forth, but we aren't anywhere near bubble territory.
- grey-area 8y ago
  Bubbles are usually based on real anticipated value, that's what gets them started. The opportunity is there and a transformation is ocurring, but the investors in the bubble won't profit as they're too early or late or don't happen to invest in companies which survive. e.g. South Sea Bubble, Railway mania, .com etc
- lmm 8y ago
  > Without getting into any morality discussions, but purely looking at revenue, profitability, return to investors, companies like Uber, Facebook, Twitter, Airbnb, Tesla, and so forth have created tremendous shareholder value. Facebook yes, but how many of the others have paid any dividends to shareholders? Even these "success stories" seem to have valuations that are based mostly on speculation; plenty of investors have made money but they could have just been selling to "greater fools".

XnoiVeX 8y ago

The question then is, is this being repackaged and resold by the PE firms and the funds?

raiyu 8y ago
The repackaging and selling of debt isn't an issue in and of itself. During the housing crisis didn't start because the debt was being resold, that's actually a positive thing. It allows firms looking to invest to buy large blocks of an asset with a return from interest and a rating for risk. The problem with the housing crisis was that the ratings agencies were committing fraud and so where the banks. The ratings agencies were simply labeling too much risky debt as non risky. While, the banks were committing their own fraud by taking less than triple AAA debt, packaging it together, and then saying that if you buy pools of B debts, because they are separate pools you are de-risking, so different B-rated debt pools should be rated as AAA because they are "de-risked". So in this case as long as the ratings aren't fraudulent, the risk is properly stated and understood, then repackaging and selling is fine. The second piece, which was really where the problem became "too big to fail" was that each one of these debt packages were doing resold through insurances 10 to 100x, so the total outstanding liability was not the original debt, but something like 100x the actual debt. Again, if that isn't the case here, then any debt holders will just have to deal with whatever defaults occur, but if hey are PE and hedge fund firms that own half of that debt, this won't be felt across the broader economy.