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"The original lender is only required to retain around 10% of the consolidated loans." That part may be the only redeemable part of this process. Because, hey
by ancorevard 7y ago
"The original lender is only required to retain around 10% of the consolidated loans."
That part may be the only redeemable part of this process.
Because, hey...let's package these into collateral debt obligations, and then hey...let's engineer these CDOs with tranches of various credit quality as rated by rating organizations not understanding what they are rating and afraid of asking for more information because their profit is based on volume of these ratings and not quality, and hey...let's create a second CDO based on the lowest rated tranche of the first CDO, and boom, that low credit score is magically now a AAA, and why not create tranches of this second CDO too. Then, let's create a market out of this with a way to short the CDOs, and let's call this new instrument something ridiculous as Credit Default Swap. No one is ever going to need those, because everybody in the financial industry believes the underlying assumptions that 1) the real-estate prices will forever go up, 2) and there is no chance that more than 4% of sub-prime mortgages are going to default. Seeing that this makes a lot of sense, let's make a trillion dollars worth of these and we don't have to put them on the balance sheet because they are AAA rated, safe as the US Treasury bonds, and so why not get leveraged 40 to 1 on these. Oh wait, that's already been tried.
- logicalmind 7y agoYep, it is the same thing over again with a different underlying loan source. And why shouldn't it be. The people responsible for the 2008 crisis are mostly still in place. In fact, many of the people who survived were promoted to more prominent positions. In fact, some say the loans of 2008 are said to be "recovering" and it's "not so bad". This translates from the expectation that these loans would lose 90% of their value and they ended up only losing 75%.
- neffy 7y agoExactly. And 10 years after the crash - the fact that the first paragraph of this article is factually wrong (thereby illustrating a lot of what is still wrong with macro-economic analysis) - goes unremarked. Banks do not lend their deposits. (That's what a fund does.) Banks create deposit money when they make a loan, and statistically multiplex asset cash against deposits to manage transfers of money within the banking system. Repayment of loans then removes the created deposit money from the system.
- emeraldd 7y agoI might have an inkling of what this comment is saying, but I'm not sure. As written it almost sounds like the description of a ponzi scheme or a more pedantic means of saying "they lend out the money given to them by depositors" ... anyone around who could clarify this a bit?
- kurthr 7y agoIt's called fractional reserve lending... and it works until it doesn't. As long as your "divedsified" losses are less than (~10% of loans) your reserve collateral (actual Treasuries and Rentable real estate) which generate cash or can be used to pay taxes... then you're solvent. If not then assume the Fed will bail you out... they did last time. Meanwhile, you can lever your "low risk" loan income 10x so that 1-3% marginal yield looks like 10-30% profit. Hard to give up that crack pipe!
- neffy 7y agoSorry to be the bearer of bad news.. The fault tolerance of banks using FRB, is approximately 1% of loan capital per year. Any more than that, and they are driven into regulatory incompliance - which then has monetary significance. Reserves don't actually play a roll in loss management, bad loans have to be written off against loss provisions and/or profits - liability/equity accounts. Basel 3 has put mandatory limits on how much loss provisions/capital has to be held, but it hasn't solved the fundamental problem with the interaction with the money supply.
- nunb 7y agoYes it's a multiplier scheme and if you squint just right, it's pretty much a ponzi too. But it isn't a pedantic way of restating "lend out". Discussion of the issue is often fraught with accusations of conspiracy theory. Austrian economists (widely regarded as kooky by the establishment) have a bunch of books related to these issues perhaps the best of which is Rothbard. _0 https://mises.org/library/mystery-banking https://mises.org/library/mystery-banking _1 http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf http://www.bundesbank.de/download/bildung/geld_sec2/geld2_ge... _2 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... _3 https://www.youtube.com/watch?v=CvRAqR2pAgw https://www.youtube.com/watch?v=CvRAqR2pAgw
- et2o 7y agoThis is actually one of the most succinct (ever so slightly hyperbolic) write-ups of the 2008 financial crisis I've seen.
- sk5t 7y agoCheck out "Diary of a Very Bad Year" for a longer but equally, ah, education-packed treatment.
- TylerE 7y agoThat’s because OP ripped it off word for word from Wolf of Wall Street
- acct1771 7y agoReads like that, but, if you've seen it (or haven't) how else would you describe the concept?
- TylerE 7y agoNot sure what you mean. What OP copypastaed is word-for-word from a monologue in the movie.
- ancorevard 7y agoThat is impossible. I've never seen the movie.
- ancorevard 7y agoI've never read Wolf of Wall Street.
- Garvey 7y agoPedantic I know but I wanted to check if it was in Wolf of Wall Street and having searched the script it would appear it wasn't... Maybe another movie?
- benj111 7y ago"That part may be the only redeemable part of this process." Until they start hedging their exposure in some more or less creative way.