[Winstonm]

Let's talk about SIVs - Special Investment Vehicles that the banks were using to move risk off balance sheet and minimize capital requirements. Banks were indeed buying toxic assets - and foreclosures are only a part of the problem as the value of the undlying collateral dropping also affects the quality and value of the loan, which is why there has been so much discussion about "keeping people in their homes" - it is to support housing prices for the collateral value, not to be a good guy and let someone have a home.

And let's get real, banks have the choice under accounting rules to chose originally whether an asset is marked-to-market or is held until maturity. The problem the banks had was in borrowing short and lending long and using their own products as collateral. When they couldn't borrow, they were forced to sell assets, and because they were leveraged so highly, it only took a small move against them to wipe out their capital.

If the Fed bought 2006-2008 vintage MBS, they will lose billions. The underlying collateral is already worth 30% less and now unemployment is causing thee Alt A loans to default almost as quickly as the subprime has already.

All in all, it sounds to me like you've been watching too much Kudlow on CNBC.

[helene_t]

phil_20686, on Feb 1 2010, 07:18 PM, said:

A market is not efficient because a crowd chooses better than an expert, it is better because the experts dominate the market. A better analogy for a market is a poker game. Suppose I want to know the expectation for success on a given hand/betting strategy. If I take a poll on the first round of a tournnament with 1000 tables, i will generally get a much poorer answer than if I wait till there is only one table left, as all those people who answered badly are generally less skilled and have generally been knocked out. This is what happens in a market, those who play it will accumulate wealth, and the more wealth they have, the more votes they have in determining the price of something.

I think that's a good point.

Something else: If you ask an expert about his opinion about, say, the expected gain on an investment, he may not give you his real opinion. He may give you the opinion that aligns with his political views (I discourage investment in company X because the founder of the company is IMHO a bastard), he may give you the opinion that paints the most favorable image of himself (for example as an expert who values innovation), or he may try to persuade you to buy some toxic assets so he can get rid of them himself.

I am not saying that experts are generally corrupt, but these things can happen at the subconscious level. I feel that very strongly myself, when someone ask me about my opinion about something they expect me to be an expert on I often find it very hard to separate my real opinion from what opinion it is more opportune to pretend to have.

Now if you, instead, give the expert some money and ask him to invest them (he should do so secretly so that he won't invest in fancy companies for the sake of it), he is more likely to be guided by his true opinion.

[hrothgar]

phil_20686, on Feb 1 2010, 09:18 PM, said:

A market is not efficient because a crowd chooses better than an expert, it is better because the experts dominate the market.

This is laughable...

Who are these "experts" that you are talking about? There are any number of studies that show that "expert" stock pickers provide either no expected value to their clients or negative expected value to their clients.

Pick any managed fund you want.
A chimp with a some darts will outperform it 50% of the time...

[helene_t]

hrothgar, on Feb 2 2010, 11:52 AM, said:

Who are these "experts" that you are talking about?

Well that's the point. Letting the market sort it out may be better than appointing some "experts" based on their academic merits, or by means of nepotism.

Anyway, not all financial experts are as bad as investment fund managers. I believe my mortgage adviser did a good job at finding maybe not the best possible deal for me but certainly better than a random deal.

[Al_U_Card]

Experts or leaders.....or thieves?

http://www.bloomberg.com/apps/news?pid=206...id=aaIuE.W8RAuU

After being robbed by Snake, Apu would say: "Thank you, come again!"

Do we have to?

[hrothgar]

helene_t, on Feb 2 2010, 01:57 PM, said:

hrothgar, on Feb 2 2010, 11:52 AM, said:

Who are these "experts" that you are talking about?

Well that's the point. Letting the market sort it out may be better than appointing some "experts" based on their academic merits, or by means of nepotism.

The problem is that the market CAN'T sort this out...

Useful information gets arbitraged out of the system almost immediately. Unless a manager is able to benefit from some asymmetry (insider information, scale, ...) its (essentially) impossible for them to beat the market.

Don't get me wrong, there are plenty of investment managers who have beat the market for days, weeks, monthes, even years. However, almost all finance studies show that (positive) past performance has no power to predict future success.

The fund managers who have achieved that nice rate of return for the last five years are the ones who were blessed by the coin flipping fairy. They have (essentially) been making random choices and gotten really lucky.

[helene_t]

Agree with all that Richard.

Not sure what we are discussing. I suppose we would agree that letting the market decide a price for tomatoes leads to more efficient tomato allocation than letting a single expert decide the price, or voting about what the price should be.

If Phil thinks this is mainly due to ineffective tomato dealers having gone out of business, I would disagree, though. I think the reason is partly that it is more relevant what I am actually willing to pay for a tomato than what I think it "should" sell for according to my political or economical philosophy. Besides, if I am not a tomato buyer it is irrelevant what I think, even if I consider myself an expert on tomato prices.

Now does this translate to stock prices? I suppose one could ask the question whether the market for venture capital is efficient, because it is important that capital is allocated to the most promising ventures. But as for prices of existing stocks it strikes me as rather unimportant. An ineffective market would make investments more volatile so some pension funds would end paying less out than their investors had hoped for, while other pension fund investors will strike lucky and get a better pension. This happens anyway due to sheer uncertainty, but an inefficient stock market would add to it. My feelings are that it doesn't matter much. Pension funds spread their capital to reduce risk and if that's not enough, investors can put part of their capital in real estate, gold, foreign currency etc. But I am probably missing something.

[kenberg]

I have won against bridge players who are better than I am, I have been beaten by players who I think have less skill. These things happen. Nonetheless, if you want bridge advice you should pay more attention to Jeff Meckstroth than to me, and more attention to me than to some others. Knowledge, experince and judgment, combined with integrity, are traits were paying to tap into.

Without a doubt, there are a lot of people out there giving financial advice who should absolutely be ignored. They are salesmen. They learn a bit of car lingo if they are selling cars, they learn a bit of financial lingo if they are selling stocks. And I strongly suspect that there were, and maybe still are, a lot of people evaluating mortgage applications with expertise analogous to the bbo bridge "expert".

To some extent, this problem will always be with us. But we want to try to set the system to minimize the damage and especially to avoid the clustering of disasters. I really think that part of the reason bad mortgages were made was that some of the people doing the evaluating were dumb, lazy, untrained, or all three. But from what I gather, there also were some structural features that encouraged bad choices. The bonus system, as Phil mentions, certainly seems a likely culprit. But also the fact that it seems many of the players were in no way risking their own money or even the money of those who employed them The details are hazy, but it looks like a game of hot potato where some poor slob gets stuck holding the loss, and that poor slob turned out to be those of us who were not even in the game.


Risk is part of life, and it certainly is part of moving ahead economically. We need to set things up so that those who are evaluating the risk are strongly motivated to evaluate accurately. Obvious enough, of course, but I think that wasn't the way it was being done. As to how, in the modern economy, this should be done I think we will need to rely on experts. I don't mind at all saying I don't understand it.

[gwnn]

Helene stop agreeing with everybody!!!!!!!!

[Al_U_Card]

No matter which way the wind blows....forecast...

Gloom with a chance of doom.

http://www.dailyfinance.com/story/nouriel-...overy/19339614/

[Winstonm]

Sorry, but I can't leave this topic alone. Some of the proposals are downright silly, IMO.

It has been stated that the Fed will earn billions from buying MBS that no one else would buy. First off, if the products were worth all that much but could not get a bid, then it pretty much disproves the idea of an efficient market for MBS existed. And if there weren't any bids under the market, then it means that none of the solvent rational actors wanted to make the billions that the Fed is supposedly going to make.

Give me a break.

The computer models for these MBS were based on the assumption that real estate prices NEVER go down. Never? These brilliant chimps didn't even know their real estate history.

When foreclosures exceeded forecasts and real estate prices began to decline due to overcapacity, there was no efficient market with rational actors making rational choices - there was pure primate panic as margin calls went out forcing liquidation of non-liquid assets.

The Fed did not step in to make a profit but to create a market where none existed. The market had already set its price - pennies on the dollar - yet the Fed did not utilize market pricing and paid more. (And still now, mark-to-market accounting has been suspended so the still toxic crap on books that even the Fed wouldn't touch is marked-to-make-believe value.) So who was right, the market for pricing risk at pennies on the dollar or the Fed for ignoring market price?

[Al_U_Card]

On the hook for HOW MUCH?

[mike777]

thanks for the replies everyonemakes good points worth discussion.


Just to make clear efficient markets does not mean that markets/ a stock/bond/reckless loan is priced correctly. I think sometimes people confuse these two issues.


Just because a loan defaults does not mean it was a reckless loan.

[mike777]

side note I thought there was a very interesting article about Ted Turner and others and how, per the article, they built their fortune on minimizing risk.


I think I read it in the New Yorker magazine(non academic).

[helene_t]

mike777, on Feb 3 2010, 03:40 AM, said:

thanks for the replies everyonemakes good points worth discussion.

Just to make clear efficient markets does not mean that markets/ a stock/bond/reckless loan is priced correctly. I  think sometimes people confuse these two issues.

Just because a loan defaults does not mean it was a reckless loan.

hmmmm ..... from http://en.wikipedia....ket_hypothesis:
In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and instantly change to reflect new information. Therefore, according to theory, it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.

(btw it is not "to know information", it is "to have information", I have corrected that)

[mike777]

helene_t, on Feb 3 2010, 01:09 AM, said:

mike777, on Feb 3 2010, 03:40 AM, said:

thanks for the replies everyonemakes good points worth discussion.

Just to make clear efficient markets does not mean that markets/ a stock/bond/reckless loan is priced correctly. I  think sometimes people confuse these two issues.

Just because a loan defaults does not mean it was a reckless loan.

hmmmm ..... from http://en.wikipedia....ket_hypothesis:
In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and instantly change to reflect new information. Therefore, according to theory, it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.

(btw it is not "to know information", it is "to have information", I have corrected that)

yep.......this is often confused...see your quotes.........people do not understand what this means....


to put this simple......prices can be wrong...very wrong....


in this case.......mortgage insurance was priced wrong...very wrong..........but see other....

in this case....insurance was seen by super smart traders.....they arbitrage away...etc....





I just note...all traders were super smart, the very very best..........high IQ super IQ...


My point is ...these trades were not reckless.....wrong ..ok but not reckless


See my OP.....many smart people claim these trades were reckless! They may be right but proof it!
i mean the claim is not a few loans were reckless but all or almost all of them are.

[mike777]

hotShot, on Jan 30 2010, 04:58 AM, said:

Isn't it more likely that these smart people are right?

Are you suggesting that there was to much money around, so that save investments where all sold out. So the investors had to put their money to unsave investments?

typical this makes zero sense i mean have you read any phd economics...it seems no........your post makes zero sense.

you seem to claim investors/owners make nonsense loans so they can lose 100% of their money.

[mike777]

helene_t, on Feb 3 2010, 01:09 AM, said:

mike777, on Feb 3 2010, 03:40 AM, said:

thanks for the replies everyonemakes good points worth discussion.

Just to make clear efficient markets does not mean that markets/ a stock/bond/reckless loan is priced correctly. I  think sometimes people confuse these two issues.

Just because a loan defaults does not mean it was a reckless loan.

hmmmm ..... from http://en.wikipedia....ket_hypothesis:
In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and instantly change to reflect new information. Therefore, according to theory, it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.

(btw it is not "to know information", it is "to have information", I have corrected that)

I understand this is confusing but .........in fact there are 3 versions of this theory...not one....

in any case.......there is the discussion that prices reflect all known information or that they reflect it correctly......


for sake of this thread....I concede...that credit default swaps reflected all known information...........there was no secret...double secret unknown information........if we discuss in general wall street traders...management


I mentioned.......ethical....etc issues regarding FNMA i hope... i did here.


I hope I discussed FNMA in other threads.....1) I love super love FNMA 2) after 30 years I sold....and told all other to sell.......FNMA seem to take on insane risk...but I may be wrong......in general I own FNMA since it gets to print money......super cheap money.....at posters expense....

[hotShot]

mike777, on Feb 3 2010, 07:39 AM, said:

hotShot, on Jan 30 2010, 04:58 AM, said:

Isn't it more likely that these smart people are right?

Are you suggesting that there was to much money around, so that save investments where all sold out. So the investors had to put their money to unsave investments?

typical this makes zero sense i mean have you read any phd economics...it seems no........your post makes zero sense.

you seem to claim investors/owners make nonsense loans so they can lose 100% of their money.

Remember your post was:

mike777, on Jan 30 2010, 06:32 AM, said:

I keep hearing from very smart people that the entire usa system almost fell apart because of reckless lending.


On the face of it this seems nuts.

I think these very smart people need to stop and think deeper, much deeper.

Most of us assumed that you where disputing that lending was the major reason.

Your posts now seem to the suggest that you are disputing "reckless".

For most people I know buying a house is a once a lifetime action.
While I expect banks to deal with loans on a daily basis.
Since their customers are so inexperienced, while banks are experts, the banks have to take more responsibility in that deal. And they have to take the bigger part of the blame, if repaying the loan fails. Reckless or even irresponsible seem to properly describe some of the loans given. If the bank clerks get a bonus fee for every loan contract he makes, they might be tempted to resolve the clashing interests of their customers, the bank and their own, in their own favor.

[mike777]

hotShot, on Feb 3 2010, 03:31 AM, said:

mike777, on Feb 3 2010, 07:39 AM, said:

hotShot, on Jan 30 2010, 04:58 AM, said:

Isn't it more likely that these smart people are right?

Are you suggesting that there was to much money around, so that save investments where all sold out. So the investors had to put their money to unsave investments?

typical this makes zero sense i mean have you read any phd economics...it seems no........your post makes zero sense.

you seem to claim investors/owners make nonsense loans so they can lose 100% of their money.

Remember your post was:

mike777, on Jan 30 2010, 06:32 AM, said:

I keep hearing from very smart people that the entire usa system almost fell apart because of reckless lending.


On the face of it this seems nuts.

I think these very smart people need to stop and think deeper, much deeper.

Most of us assumed that you where disputing that lending was the major reason.

Your posts now seem to the suggest that you are disputing "reckless".

For most people I know buying a house is a once a lifetime action.
While I expect banks to deal with loans on a daily basis.
Since their customers are so inexperienced, while banks are experts, the banks have to take more responsibility in that deal. And they have to take the bigger part of the blame, if repaying the loan fails. Reckless or even irresponsible seem to properly describe some of the loans given. If the bank clerks get a bonus fee for every loan contract he makes, they might be tempted to resolve the clashing interests of their customers, the bank and their own, in their own favor.

so you suggest that owners want to make reckless loans..

I mean......lots of owners and lots of top management and lots of loan officers and lots of those who borrow.......I mean all of them thousands and thousands over years want to make reckless loans.....and .........regulators do not care?....is that what you say? or other?

I mean you may be correct but please say so....


1) owners of banks...loan reckess
2) management loan reckless
3_ loan officers loan reckless
4) borrowers reckless
5) government...lots of government....reckless.l....

so how does more laws help?????