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The loans were the consequence of betting. Or, more precisely speaking, of false belief that AAA rated papers, which were betted on, are safe.
by maurycy 18y ago
The loans were the consequence of betting. Or, more precisely speaking, of false belief that AAA rated papers, which were betted on, are safe.
- Alex3917 18y agoNo, the loans were just bad investments. That is different than betting, at least in the sense that wall street people use the term betting. C.f. http://www.dailykos.com/storyonly/2008/11/13/201226/64/403/660641 http://www.dailykos.com/storyonly/2008/11/13/201226/64/403/6... Or listen to the NPR series on credit default swaps.
- maurycy 18y agoBut the reason why companies were so happy to lend so much money was caused by a belief, which turned out to be false, that loans securized into CDOs and such papers, frequently rated well, are safe and risk is properly managed. The betting merely caused a spread of the risk between all market participants, making it systematic risk. Also, the betting was not properly managed because market partipicants weren't able to understand the risk. Also, one might say that the reason why companies started securization and, then, betting on the papers are low interest rates, but, please, let's don't dig into the whole Fed discussion.
- Alex3917 18y agoThe betting didn't just spread the risk, it magnified it. For every dollar the banks lost on bad loans they probably lost 30 dollars of bets on those loans. No one even knows the exact number because the market is completely unregulated.
- maurycy 18y agoAnd the reason why banks, and not only banks, lost so much on the papers is because the loans were basically worthless. Banks knew that loans were worthless but the paper's ratings created a different impression, boosting the loans. The spread part is very important. If there were no betting, selling and reselling of the papers, then only bad lenders would collapse.