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Banks to sell first post-crisis managed synthetic CDO
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- overcast 7y agoWhat good is our species having the ability of written language, if we never learn from our past mistakes.
- stanferder 7y agoWritten language can be used to overturn history as well as reinforce it. In this case, the article mentions "meatier yields", and that two-word combination by itself is something I would bet on in a fight against any article-length analysis of the 2008 crisis.
- tenebrisalietum 7y agoYou will always have the haves and have-nots. You will always have tribal borders. The haves will gain and use knowledge and technology to make their lives and those of their tribe easier and it will benefit them more than those of the have-nots. So written language containing the body of science and technical knowledge benefits them always. The effect on the entire species is unimportant to those with comfortable, limited lives. Other non-technical written language to create a world of mystical morality to keep the other side in check also benefits the haves. Until the human species changes into something new where competitive behavior is not a base need/instinct, nothing will ever change. You can't escape this.
- overcast 7y agoSo basically the evolutionary gift we've received, is being wasted on us.
- ficklepickle 7y ago100%. We have a powerful conscious mind that we use to rationalize our primate biases. It used to bum me out, but I've developed a more zen-like outlook. It just is. Everything just is.
- kazagistar 7y agoThis is an ideological claim, not a normative one. I will similarly claim with st least as much validity that humans can cooperate more then compete in the right context and dont need to be physically changed to do so.
- JackFr 7y agoInvestors wan't leverage. Always. When you plug one leak, they will scramble and innovate until they find another way to get it. Buying on margin, options, CDS, structured products... the list goes on.
- piker 7y agoMight be a product of the generous bankruptcy system in the US. I.e., investors are rational in their willingness to take big risks because of the asymmetric payoff associated with highly-leveraged investing. It's a great system, but not without negative unintended consequences such as this kind of moral hazard.
- kleer001 7y agoOnce we evolve to consist only written language then we will be perfect. Until then any new tools come with the luggage of all the old tools.
- TallGuyShort 7y agoMany memes also require written language. There are still benefits.
- xondono 7y agoWe do learn from past mistakes, paraphrasing Friedman: “We won’t make the same mistake again, but we’ll find another new way to fail”
- all_blue_chucks 7y agoThere is nothing wrong with CDOs. The mistake was treating junk loans as investment grade. You can do that regardless of how the loans are securitized.
- foogazi 7y agoIs it time to invest in ZeroHedge ?
- dirtydroog 7y agoThe Russians will never give you a slice.
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- qroshan 7y agoI'm sure you bet against humans conquering flights as soon as you saw the first crash. I'm sure you thought internet was a fad after the dot-com crash. But, people who read zero hedge exactly have that line of thinking. In fact every article from them tries to link to 2007-08. 12 years and wrong... That's what a cult looks like
- zelias 7y agoTime is a flat circle
- ChickenTicklerz 7y agoHey! It's 2008 again!
- nickles 7y agoIt has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1], a misallocation of investments that ultimately leads to economic contraction. CDOs attempt to manufacture safe assets from riskier ones. Various debts are pooled, then the pool is divided into 'tranches'. Each tranche has a different rating, indicating riskiness of the tranche, according to the tranche's claim on distributions. A higher rated tranche will get paid before riskier tranches, allowing investors to choose their risk tolerance. Riskier tranches have higher yields commensurate with a greater risk of not being paid. In theory, this structure is sound, provided that the debt being pooled has known characteristics. During the financial crisis, ratings fraud contributed to the breakdown of CDOs [2]. Lenders made unsound loans and lied about the characteristics of the collateral and the borrowers. Ratings agencies (Fitch, Moody’s and S&P) then rated this debt as being less risky than it actually was, due to having false information and perverse compensation incentives. Additionally, structurers assumed that diversifying geographically would prevent correlated defaults on individual debts (which was not the case). These assumptions led to CDOs having unsound risk pools. More exotic products, like CDO squared (CDOs composed of CDOs), further amplified problems. Similar products (e.g. CLOs) have been in high demand, as there is a genuine need for safe assets. Ideally CDOs can be produced without succumbing to the issues they faced during the financial crisis. The current interest rate environment exhibits suspicious behaviors, including negative yielding sovereign debt and investment grade/high yield spreads [3][4] roughly as tight as they were prior the financial crisis. Increasing the supply of safe assets may help lead to a rates environment that would previously have been considered normal. [0] https://voxeu.org/article/safe-asset-shortage-rise-mark-ups-and-decline-labour-share https://voxeu.org/article/safe-asset-shortage-rise-mark-ups-... [1] https://en.wikipedia.org/wiki/Malinvestment https://en.wikipedia.org/wiki/Malinvestment [2] https://macromarketmusings.blogspot.com/2010/01/academic-vs-wall-street-economists.html https://macromarketmusings.blogspot.com/2010/01/academic-vs-... [3] https://fred.stlouisfed.org/series/BAMLC0A0CM https://fred.stlouisfed.org/series/BAMLC0A0CM [4] https://fred.stlouisfed.org/series/BAMLH0A0HYM2/ https://fred.stlouisfed.org/series/BAMLH0A0HYM2/
- umichguy 7y agoReminds me of all the scenes from the movie "The Big Short."
- onlyrealcuzzo 7y agoFor anyone interested in the growth of CDOs (and the composition of them) leading up to 2008 -- here's some charts: http://fcic.law.stanford.edu/resource/staff-data-projects/cdo-charts http://fcic.law.stanford.edu/resource/staff-data-projects/cd... Basically, by 2006, CDO originations were ~$250B. It took about 4 years for originations to get that large, and by 2008, there was probably less than ~$600B total. GDP was ~$14.7T. If history repeats itself, this is the beginning of the end. Not the end. But anything can happen. Who knows?
- qroshan 7y agoYep, the first unsuccessful flight pretty much ensured that humans will never conquer flight again
- Pigo 7y agoAs long as corporate welfare is there to bail them out, I feel like we're at least partly to blame for expecting something different.
- snarf21 7y agoI'll bite. So how do we fix it? Most people just want to live their life and not fight the powers that be. Only when things get really bad to people stand up in numbers. Voting for change is just living "Animal Farm" in real life. I'm not trying to be snarky or cynical. I'm really not sure how we exit this spiral.
- ThrustVectoring 7y agoThis is actually fine. While CDOs were involved in the last financial crisis, they weren't the fundamental culprit. That honor would belong to ill-coordinated banking regulations between the US and Europe. In order to provide a public backstop without encouraging moral hazard, banking regulators impose risk-taking limitations on banks. In the US, this took the form of encouraging asset sales into capital markets, under the assumption that this would make any risk the banks take dissipate away harmlessly. In the EU, this took the form of leverage limits based off the credit rating of the asset, with the highest rated asset commanding the largest leverage limits. These regulations combined in a very unfortunate way in the transatlantic CDO trade. The CDO part isn't the important innovation, though; as long as the above structure persisted, something would be found to take advantage of it. Anyhow, the short of the crisis is that American banks would sell their risky assets into concentrated positions of systematically important banks, particularly ones outside of the narrow American regulatory purview. On the other side of the Atlantic, they accidentally applied a massive incentive to figure out a way to slap an AAA rating on stuff, and the market delivered that in spades. The cherry on top of this entire system is that when American banks make loans, this cash gets transferred and winds up sitting in some money market fund somewhere. These funds are searching for short-term dollar-denominated yields, and the best way to get that is to lend money to European banks secured by AAA-rated assets. After all, with the generous leverage limits bestowed on them, they can borrow a hell of a lot of money.
- coliveira 7y agoThese are all incidental issues. The real problem with CDOs and related financial products is that they deal with tremendous leverage without proper transparency. In a leveraged environment, you need to have a framework to understand who owns what and if the counterpart can pay for that leverage. Good examples of such a well regulated market are the options and futures markets. On the contrary, CDOs, swaps, and other exotic instruments give institutions the ability to leverage themselves, but nobody is regulating where the money is to pay counterparts when bets are wrong (and they eventually will be). The result are frozen markets! The only solution the financial world has at this point is to create money to bring liquidity to the markets again. This can only work up to a point, and in fact can exacerbate the results of a financial catastrophe.
- csense 7y agoHopefully by now, everyone knows a bunch of banks bought CDO's, and then in '08 they collapsed, or nearly did, and took the world economy with them. If you run a bank, and you know this product is dangerous and causes banks to fail, why in the world would you buy one of these products? Maybe you told your brother-in-law to take a massive short position on your bank?
- minikites 7y agoSometimes the invisible hand of the market is invisible because it's not there.
- qeternity 7y agoThey didn’t collapse because of CDOs. They collapsed because GSEs had pushed the real estate market to ridiculous levels. The GFC was a classic case of government interference creating market distortions.
- Craighead 7y agoWeird, why would indiscriminately layering traunches of risk to fool ratings agencies not be considered the problem?
- AnimalMuppet 7y agoEven if true, that's not very comforting. The real estate market is once again at ridiculous levels...
- dilippkumar 7y agoI have questions: 1. What/Who's debt is being packaged? 2. What happens if the debt holders don't pay? 3. How are rating agencies rating these? 4. Who is buying these?