Unless they’re driven to buy more of things which they don’t need. That’s a personal problem though, IMO.
Not really, that’s the shorthand answer. The long answer has to do with our history and the attitude which has developed over time, beginning with the notions of freedom of speech, freedom of worship, individualism, etc.
My post #79 was in answer to Dinsdale’s question of “where did we get this idea” of unlimited expansion.
If you suppose people shouldn’t satisfy their wants after they’ve satisfied their needs, I’d say it is a problem of yours, yes.
Moderation in all things, is what I mean. There comes a point when “more material goods” is unneccesary, don’t you think?
I don’t mean the case of “Henry makes more money so he can now afford a nicer TV set for the family to enjoy movies”. Good for Henry.
I mean the case of “Henry maxed out all of his credit cards because he wanted all his kids to each have a TV set in their own rooms”.
Before you say “Who are you to decide what Henry does with his finances?” let me say that Henry is certainly free to do whatever he likes. But if he acts in a foolish manner with his finances, I’m going to think (to myself) that he’s got a problem controlling his spending habits.
Call me an optimist, so let’s try again. You need to look at the current situation from a bear market perspective of a risk manager. No need for a fancy model, just seat of the pants indicators that every market profession recognizes. Every one of the following points are a problem for CDO’s and default rates are going up.
Examine how the sub prime CDO’s are put together. Structured product people slap together different variations, get a company like AIG FP to provide a guarantee, get the rating agencies to rate the bond as “investment” grade and some pension fund in Iceland will buy it. (Taking a turd and making it look like gold - some had gold paint and some were electroplated.) Now the guarantees are in question and the rating agencies tarnished if not discredited. Institutional buyers limited to investment grade assets are not going to be able to touch a sub prime CDO with a 10 foot chopstick. The potential pool of buyers has shrunk considerably without even looking at the effects of liquidity or economic slowdown. Here’s a piece on AIG FP: http://www.nytimes.com/2008/09/28/business/28melt.html
Any quant on the street can reverse engineer the products and put a valuation on the derivatives portion (FYI, HK and Tokyo are no different than NY or London). It’s the underlying asset that can’t be valued properly. The sub prime (and people who refinanced their 30 year fixed mortgages into variable rates) is a new asset class. There is no historic data on default rates, and certainly no historic data on recessionary default rates. What % of sub-prime will default, what % will default if there is a 2 year recession, what is the unsold overhang on the market, what % are insured by Freddie/Fannie, what will be the takeup rate for new and existing housing, what is the average time for foreclosed homes on the market, what % of the asset price will the foreclosed home pay, what is the probability that tranche A, B or C will default, what % of the insurance will default, etc. Now if you can’t answer the above (on a probability basis across the class or sub class), you can’t really value the underlying sub prime assets. No one can answer the above questions with any degree of probability, which means buyers will ask for a steep discount. Once again, this is the #1 point, no one can value this underlying and therefore you can’t value the derivative.
It is a fallacy to think that CDO’s as an asset class are just “oversold” and will reach PAR at maturity (with the exception of those bonds with real guarantees). These aren’t treasuries, other sovereigns or sterling company bonds that have been temporarily tarnished by the broader market woes.
[This is different than say CDO’s backed by credit cards like Maeglin is talking about. Credit card securitization has significant historic data in different environments that offer a reasonable correlation to the current market. Think back to S&L, or the 1990-93 slowdown. This is an existing asset class. Of course, this slowdown introduces a new sub prime factor and I would be interested to see what the trend line is for sub prime owners choosing to default on credit cards or homes first. ]
You really can not explain the problem until you deal with swaps. They were an insurance on the mortgage paper instruments that were created. 60 minutes says that estimates are that 60 trillion dollars may be wrapped up in them. They are very complex and run to a couple hundred pages in the contracts. They are called swaps because insurance actually has some regulation and oversight. AIG and the other swap dealers lobbied hard to keep the government away. The swap concepts are so complex that they were designed by physicists and mathematicians. In theory they could not lose. They had no transparency and nobody knows for sure who has them and how much money is involved. 600 million dollars wont dent that problem.
I didn’t see the 60 Minute piece, but from your summary it sounds pretty sensationalized.
First, you could read up on credit default swaps on Wiki.
Second, you are looking at the nominal or notional or “face” value of the underlying instruments. Total exposure is still a big number but nothing like $60 trillion dollars.
Swap concepts are not difficult to understand. The models were designed by financial engineers (called “quants” on the street) but are not that difficult (probably an 7 on a scale of 1 to 10 and not an 11). Most models can be run on an Excel spreadsheet. These models all make assumptions, and if you get an assumption wrong (or the underlying math) then you can be in big trouble. Theoretically, it’s little different from life insurance actuarial calculations. For life insurance, you know that someone with profile A dies at rate X. Therefore, you charge the life insurance premium to cover rate X plus profit plus a buffer. If a new virus appears and causes profile A to die off faster, then you get into trouble when the buffer is used up. Nothing really wrong with the actual model calculations, but the assumption of rate X was flawed (or the situation changed after you wrote the life insurance).
Swap contracts that I used to go through tended to be just a few pages 10-12 years ago. The *prospectus’*can be several hundred pages and filled with so many “potential risks” as to be meaningless. It’s a old Wall Street trick to put in pages and pages and pages of potential risks to a) cover against any possible issue and b) bury the real risk in there somewhere.
Bloomberghas a pretty damning piece on the SEC and how lack of oversight led to Bear Sterns (and the industry) becoming overextended. Two paragraphs quoted below:
An unedited version of the 137-page study posted to Grassley’s Web site Sept. 26 showed that Bear Stearns traders used pricing models for mortgage securities that ``rarely mentioned’’ default risk.
Bear Stearns was able to **create capital'' by inflating the value of assets including mortgages,** according to the unedited study. Two days before it was rescued, the firm paid out $1.1 billion to numerous counterparties to squelch rumors’’ it couldn’t meet its margin calls, the full report said. The finding didn’t appear in the censored version.
`create capital’’ by inflating the value of assets including mortgages: translation - assets were not marked to market and/or realistically valued for risk of default. And it wasn’t just Bear…
Translation. They lied.
Phew. How’s this for a prediction?
ETA: I know nothing about this guy in general; just came across it through links. Everyone out there prepared for cordoned-off cities and a Dow at 10% of today’s value?
Umm, looks like a blog rant.
I think the colonic irrigation of global interest rate cuts, central banks flooding liquidity, bailouts will clear the credit constipation plaguing global markets. Looks like we’ve come back from the cliff edge. That said, high risk of looking like Japan - more than a decade of tough times following the bursting of their bubble in 1989. Nikkei 225 index was just shy of 40,000 in 1989, it’s been under 20,000 for 15 years and closed today at 9,157. :eek: