# Can explain to me the jist of Minsky's theories? **URL:** \ **Category:** Factual Questions\ **Created:** [May 26, 2013, 12:38am UTC](https://boards.straightdope.com/t/can-explain-to-me-the-jist-of-minskys-theories/659359 "2013-05-26T00:38:41Z")\ **Posts on this page:** 3\ **Page:** 3
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [June 1, 2013, 2:06pm UTC](https://boards.straightdope.com/t/can-explain-to-me-the-jist-of-minskys-theories/659359/41 "2013-06-01T14:06:44Z")
I’m not harping on anything I was responding to Hellestal but since you think my posts constitute “harping” I’ll cease responding to yours. How’s that? ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [June 2, 2013, 12:26pm UTC](https://boards.straightdope.com/t/can-explain-to-me-the-jist-of-minskys-theories/659359/42 "2013-06-02T12:26:21Z")
> [@deltasigma](#): > > BTW. on documentation. Assuming that your reading is correct, at least 90% had proper income documentation. I missed this comment the first time, but **deltasigma** was kind enough to repeat it. > [@deltasigma](#): > > As for the content of prospectuses, I have already indicated that the disclosure of certain negative information may have been deemed within acceptable tolerances. For example in the NovaStar example you jumped on the fact that only half had full documentation but I pointed out that 90% had proper income documentation. Generally income documentation is regarded as the most critical factor for obvious reasons. 40% of the mortgages in the pool I cited in post 23 were “stated income” loans. **deltasigma** characterizes these loans as having had proper income documentation, and says that of course this is the most important documentation to have. I want to clarify here that these kinds of loans really do serve a genuine purpose for people who can’t demonstrate the actual size of their income with conventional paperwork, such as waiters who have a high percentage of income as tips and also (especially) self-employed people. These people must at least prove the nature of their employment, if not the actual size of income. They prove employment, then state income without having the paperwork that proves the _size_ of that income. Notice the types of people I’m listing here. Waiters. The self-employed. Then look again at the percentage of stated income loans I cited in that pool: 40%. Let that number bounce around in our brains a bit… That would include wage-earners. That would include people with easy access to documentation. Now a relevant cite, [from the Washington Post](http://www.washingtonpost.com/wp-dyn/content/article/2007/04/09/AR2007040901463_2.html?hpid=topnews). > [@Washington Post](#): > > These “stated income” loans were designed for a limited purpose: giving self-employed people a crack at homeownership. But during the boom, the number of such loans exploded to the point that they became a running joke in the industry, earning the nickname “liar loans.” Estimates vary widely, but research suggests that they made up a significant portion of all mortgages during the boom – 58 percent in a study by First American LoanPerformance. > > Mortgage lenders in theory have a right to compare loan documents to a buyer’s tax returns, but they rarely do. In the few cases where it has been done, results were startling. In a study published by the Mortgage Asset Research Institute, **one lender sampled 100 stated-income loan applicants and found that 90 had exaggerated take-home pay by 5 percent or more and that nearly 60 inflated their pay by more than 50 percent.** > > Mortgage originators often neglected extensive document verification because it slowed loan approvals. “Everyone in the mortgage industry is trying to approve loans faster than their competitors,” said James Croft, founder of MARI in Reston. “They all offer the same basic rates and the same basic mortgage products. But if I can get the loan faster, that gives me a competitive advantage.” > > Many industry experts say stated-income loans became an invitation to fraud, while mortgage brokers – paid commissions to put loans through, not slow them down – often looked the other way. Emphasis added. This the category of loans being characterized by **deltasigma** as having had proper income documentation. He says 90% of the loans had proper income documentation, arriving at this figure by adding together the Full Documentation category with the Stated Income category. Obviously, there are sometimes “acceptable tolerances” for loan standards, as he says. But Stated Income taking up such a large percentage of the pools? Given the enormous number of these loans that were issued, is it any surprise at all that more than 50% of people sampled would exaggerate their income by more than 50%? I am beginning to understand why he is so convinced there is nothing useful to learn from a more careful reading of the prospectuses. I don’t really have much more to say at this point. **Martin Hyde** has already pointed out **deltasigma** ’s “fraud” misrepresentations of my posts. In the interest of thoroughness, however, I will offer one last comparison. Here is another excerpt from the book I previously cited. > [@Michael Lewis: The Big Short](#): > > On May 19, 2005—a month before the terms were finalized—Mike Burry did his first subprime mortgage deals… Burry had devoted himself to finding exactly the right ones to bet against. He’d read dozens of prospectuses and scoured hundreds more, looking for the dodgiest pools of mortgages, and was still pretty certain even then (and dead certain later) that he was the only human being on earth who read them, apart from the lawyers who drafted them… > > He analyzed the relative importance of the loan-to-value ratios of the home loans, of second liens on the homes, of the location of the homes, of the absence of loan documentation and proof of income of the borrower, and a dozen or so other factors to determine the likelihood that a home loan made in America circa 2005 would go bad. Then he went looking for the bonds backed by the worst of the loans… It surprised him that Deutsche Bank didn’t seem to care which bonds he picked to bet against… The triple-B-rated tranches—the ones that would be worth zero if the underlying mortgage pool experienced a loss of just 7 percent—were what he was after. As I previously said, the typical pool could have nearly 80% of the bonds as AAA rated. After BBB craps out, there’s not much buffer left. So the question now is: Should people come to the same basic ideas about the risk of the pools, based on the information in the prospectuses? > [@Michael Lewis: The Big Short](#): > > He felt this to be a very conservative bet… Anyone who even glanced at the prospectuses could see that there were many critical differences between one triple-B bond and the next—the percentage of interest-only loans contained in their underlying pool of mortgages, for example. He set out to cherry-pick the absolute worst ones… > > Goldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. “This was shocking to me, actually,” he says. “They were all priced according to the lowest rating from one of the big three ratings agencies.” He could pick from the list without alerting them to the depth of his knowledge. It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop… > > He found one mortgage pool that was 100 percent floating-rate negative-amortizing mortgages—where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it. Obviously, not everyone who shorted subprime used this technique. But I would say this is an indisputable indication that those who read carefully would have had much different opinions of the underlying risks of different pools. But there are other perspectives. > [@deltasigma](#): > > If the information contributed to investment decisions at all, it was only a speck on a back drop of other much more persuasive evidence as noted above and I seriously doubt it was much of a consideration at all - any claims to the contrary not withstanding. > [@deltasigma](#): > > Let me try to explain the purpose of a prospectus. It’s designed to provide investors with a means of understanding the potential risks involved in an investment. Moreover, it’s meant to provide a full disclosure of all such relevant risks. > > Therefore, to the extent that it succeeds in doing this, all investors reading a prospectus should come to similar conclusions regarding the risks involved and should make similar decisions as to whether or not to invest BUT that is only true if certain other factors are also true. > > One of those obviously is risk tolerance. But the one that is most relevant here would be an assessment of the economic factors relevant to issues discussed in the prospectus. So for example interest rate trends, trends in real estate prices, etc. > > Therefore 2 people can read the same prospectus and have 2 completely different views of the value of the investment depending on how they assess factors that relate to issues that will affect the value of the investment. But it should be clear that this is very different from simply reading a prospectus more carefully. At this point, I’ll leave everyone here to make up their own minds about which interpretation is more convincing. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [June 2, 2013, 4:40pm UTC](https://boards.straightdope.com/t/can-explain-to-me-the-jist-of-minskys-theories/659359/43 "2013-06-02T16:40:42Z")
Hellestal: Your original point was that some people simply read these prospectuses “more carefully.” You again refer to this in your most recent post but you only reinforce the point I have already made regarding the economic factors affecting issues in a prospectus. Specifically, you have talked about stated income loans. Anyone with intimate knowledge of the mortgage industry at that time would have been suspicious of such loans and would have made a different evaluation of the risks involved. So you have simply made my point for me. [Previous page](https://boards.straightdope.com/t/can-explain-to-me-the-jist-of-minskys-theories/659359.md?page=2)