5 ms·

Though the real problem was that the sick cows were signed off as fighting fit.

by akronim 18y ago

Retric 18y ago
Not all of them where signed off as fighting fit. The assumption was that less than 10% would fail so you could break the risk out so someone who want's zero risk and is willing to only make 4% is safe as long as 80% of them live. The math would have been fine if each morgage was independent but because the economy as a whole tanked the default rate went way up and people who where not willing to take much risk still got a beating.
- time_management 18y ago
  The math would have been fine if each morgage was independent but because the economy as a whole tanked the default rate went way up and people who where not willing to take much risk still got a beating. Close, but I'm going to disagree with you on one detail. The subprime debacle began in the spring of 2007, and really began to spiral out of control on July 26 with various calamities in the CDO markets. By August 6-10 (the week of quant turmoil) it was starting to have an effect on equity markets-- which were strong at the time, and didn't start taking a real beating until Jan. 2008. The economy was strong in 2007, with 4.9% (annualized) growth in Q3. Subprime didn't blow up because the economy tanked, because the mess began during a great economy, and turned it into a bad one. Of course, the tanking of the economy has made the credit situation even worse and will lead to even more defaults. The default rate goes up during a bad economy, and everyone knew that this risk was there, and that a cyclical recession would occur sooner or later. What caused the rate to be "unexpectedly" high was the prevalence of speculation. In a bad economy with falling house prices, a resident homeowner is still going to make his best efforts to avoid the embarrassment and hassle of foreclosure, even if he has negative equity. Negative equity is irrelevant if he's going to live there for 10 years. On the other hand, a greedy and unscrupulous speculator has no reason not to default.
  - Retric 18y ago
    To clarify people that where taking the high risk stuff got hit early when the economy was doing "well" but for the most part the "AAA" stuff could withstand a fair amount of foreclosures with little impact. The crap nobody wanted was really high risk so banks kept it which is one of the reasons why Lemon Brothers failed. Granted there was also a fair amount of crap rated like gold, but late 2007 to now we have been in a recession which kept feeding off of more and more people getting bitten as an ever increasing number of mortgages failed while nobody wanted to buy the property's. Let's say a bank loans 300k on a house that was worth 200k but got inflated to 300k in a bubble fine somebody takes a 100k hit when it fails but they are only down 33%. However, if nobody is going to buy it for six months and by then it's only worth 150k and the spiral continues. I also think the economy was fubar as early as 2005 with the fed using low interest rates to make everyone pretend that the economy was fine this was really helped by CDO's and people taking out risky mortgages. Then there was a little bump in interest rates which finally set this ball rolling but it was obviously going to happen at some point. Basically, when any little thing is going to upset the house of cards there is already a problem even if it looks ok. PS: When the economy tanks it's a lot harder to prop up stupid companies so we are seeing a lot of things that where on their death beds for a while all fail but in the long term this is a good thing.

Though the real problem was that the sick cows were signed off as fighting fit.

by akronim 18y ago

Though the real problem was that the sick cows were signed off as fighting fit.

Not all of them where signed off as fighting fit. The assumption was that less than 10% would fail so you could break the risk out so someone who want's zero risk and is willing to only make 4% is safe as long as 80% of them live. The math would have been fine if each morgage was independent but because the economy as a whole tanked the default rate went way up and people who where not willing to take much risk still got a beating.

time_management 18y ago
The math would have been fine if each morgage was independent but because the economy as a whole tanked the default rate went way up and people who where not willing to take much risk still got a beating. Close, but I'm going to disagree with you on one detail. The subprime debacle began in the spring of 2007, and really began to spiral out of control on July 26 with various calamities in the CDO markets. By August 6-10 (the week of quant turmoil) it was starting to have an effect on equity markets-- which were strong at the time, and didn't start taking a real beating until Jan. 2008. The economy was strong in 2007, with 4.9% (annualized) growth in Q3. Subprime didn't blow up because the economy tanked, because the mess began during a great economy, and turned it into a bad one. Of course, the tanking of the economy has made the credit situation even worse and will lead to even more defaults. The default rate goes up during a bad economy, and everyone knew that this risk was there, and that a cyclical recession would occur sooner or later. What caused the rate to be "unexpectedly" high was the prevalence of speculation. In a bad economy with falling house prices, a resident homeowner is still going to make his best efforts to avoid the embarrassment and hassle of foreclosure, even if he has negative equity. Negative equity is irrelevant if he's going to live there for 10 years. On the other hand, a greedy and unscrupulous speculator has no reason not to default.
- Retric 18y ago
  To clarify people that where taking the high risk stuff got hit early when the economy was doing "well" but for the most part the "AAA" stuff could withstand a fair amount of foreclosures with little impact. The crap nobody wanted was really high risk so banks kept it which is one of the reasons why Lemon Brothers failed. Granted there was also a fair amount of crap rated like gold, but late 2007 to now we have been in a recession which kept feeding off of more and more people getting bitten as an ever increasing number of mortgages failed while nobody wanted to buy the property's. Let's say a bank loans 300k on a house that was worth 200k but got inflated to 300k in a bubble fine somebody takes a 100k hit when it fails but they are only down 33%. However, if nobody is going to buy it for six months and by then it's only worth 150k and the spiral continues. I also think the economy was fubar as early as 2005 with the fed using low interest rates to make everyone pretend that the economy was fine this was really helped by CDO's and people taking out risky mortgages. Then there was a little bump in interest rates which finally set this ball rolling but it was obviously going to happen at some point. Basically, when any little thing is going to upset the house of cards there is already a problem even if it looks ok. PS: When the economy tanks it's a lot harder to prop up stupid companies so we are seeing a lot of things that where on their death beds for a while all fail but in the long term this is a good thing.