# Thanks to Scylla, I pit the bond markets **URL:** \ **Category:** The BBQ Pit\ **Created:** [October 1, 2008, 6:00am UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973 "2008-10-01T06:00:41Z")\ **Posts on this page:** 13\ **Page:** 1
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [October 1, 2008, 6:00am UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/1 "2008-10-01T06:00:41Z")
I want to thank Scylla for [explaining the bond markets to me.](http://boards.straightdope.com/sdmb/showthread.php?t=485790) I did not know this. > [@Scylla](#): > > These mortgages and debts have all been securitized into bonds and bond-like instruments, and they trade in the financial markets. A bond is said to be “bad” if it becomes illiquid, that is, you can’t trade it. > > The vast majority of the debt that we are talking about is still paying interest, is not in default, and is not expected to be in default. It is simply illiquid. > > To understand this one needs to know that bonds typically trade much differently than stocks. Bonds tend to be held for longer periods of time and don’t necessarily trade every day. Imagine if GE stock traded only once every couple of months, and you get the picture. > > … > > A “good” bond is a liquid bond. This means it trades reasonably often and it trades reasonably predictably and with strong adherence to its benchmarks. You can simply look at a treasury and know what your bond is worth by comparison. More importantly, everybody else knows it too. Because of this you will be able to find a good and predictable price for your bond and sell it at that price pretty easily. > > A “Bad” AA bond might be the scum of the AA universe. It might have weird call features (when it can be redeemed.) It might lack collateral or seniority. It might not trade that often and when it does it might trade 200 basis points off its treasury one time and 250 basis points off the next time. > > All things being equal you would prefer AA rated bonds that are good from a liquid sense. However, this only confirms that we’re being extorted by a bunch of twerps who want to make money trading crap back & forth. This is all because the market disappeared for a kind of security that didn’t even exist 15 years ago? And people can’t play bond-trading games with your mortgage? Yeah. I say Suck It Up. Bunch of worthless crybaby parasites. My question is: Guillotines or ovens? ---
**Author:** ![Sophistry\_and\_Illusion](https://avatars.discourse-cdn.com/v4/letter/s/b3f665/32.png) [@Sophistry\_and\_Illusion](https://boards.straightdope.com/u/Sophistry_and_Illusion)\ **Post date:** [October 1, 2008, 9:04am UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/2 "2008-10-01T09:04:31Z")
I would like to add props to **Scylla** , who brings a lot of knowledge to the Dope (even if he is, you know, a CONSERVATIVE!) [hides women and valuables] There was a post he made a couple of months ago on why (in his view) the accumulation of debt by the gov’t is not a bad thing. I found it very interesting; I wish I could find it. Oh, and so this isn’t a total hijacking, the bond markets are teh suXX0r!!!1! ---
**Author:** ![Ale](https://avatars.discourse-cdn.com/v4/letter/a/f19dbf/32.png) [@Ale](https://boards.straightdope.com/u/Ale)\ **Post date:** [October 1, 2008, 10:05am UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/3 "2008-10-01T10:05:48Z")
Reading Scylla’s post the phrase “inbred Ponzy scheme” kept bouncing around my mind. ---
**Author:** ![muttrox](https://avatars.discourse-cdn.com/v4/letter/m/a8b319/32.png) [@muttrox](https://boards.straightdope.com/u/muttrox)\ **Post date:** [October 1, 2008, 1:33pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/4 "2008-10-01T13:33:29Z")
> [@foolsguinea](#): > > I did not know this.However, this only confirms that we’re being extorted by a bunch of twerps who want to make money trading crap back & forth. > > This is all because the market disappeared for a kind of security that didn’t even exist 15 years ago? And people can’t play bond-trading games with your mortgage? I don’t follow this pitting. Who do you think is extorting who? And making money by trading crap back and forth is fairly fundamental, don’tchathink? ---
**Author:** ![Dead\_Cat](https://avatars.discourse-cdn.com/v4/letter/d/9fc29f/32.png) [@Dead\_Cat](https://boards.straightdope.com/u/Dead_Cat)\ **Post date:** [October 1, 2008, 1:46pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/5 "2008-10-01T13:46:14Z")
> [@muttrox](#): > > I don’t follow this pitting. Who do you think is extorting who? And making money by trading crap back and forth is fairly fundamental, don’tchathink? It’s a pitting by someone who doesn’t understand the stock market. I don’t understand the stock market either, but I know enough about it not to make boneheaded OPs. The problem, as I understand it, is not so much that these instruments were created, but rather that banks bought them without understanding their riskiness, and in many cases did not (and still do not) appear to know what this exposed them to. But maybe someone who actually knows what they’re talking about will see this as a boneheaded remark - it’s certainly an oversimplification. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [October 1, 2008, 2:27pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/6 "2008-10-01T14:27:58Z")
> [@Dead\_Cat](#): > > The problem, as I understand it, is not so much that these instruments were created, but rather that banks bought them without understanding their riskiness, and in many cases did not (and still do not) appear to know what this exposed them to. But maybe someone who actually knows what they’re talking about will see this as a boneheaded remark - it’s certainly an oversimplification. The problem, as I understand it, is not that the risks weren’t understood- it’s that they weren’t _considered_. Once these packages of iffy debt have been securitized, it’s virtually impossible to analyze how crappy the underlying assets are. You could in theory, but we’re talking about offices full of people going through hundreds- even thousands- of individual mortgages and even unsecured loans. Those of you who’ve had a mortgage or auto loan have a vague idea of the kind of time we’re talking about. Since careful analysis of these “investments” is obviously not time- and cost-effective, nobody bothered. This, by itself, should have made these investments too risky to consider- not knowing the risks is effectively no different than knowing that there is a huge risk. When the (usually) reliable financials saw how much money was being made (at least on paper), though, they decided to get in on it too. Eventually, somebody started looking carefully at what they were buying, and the whole house of cards toppled. IANA economist, I may also be a bonehead, etc. [QUOTE=Scylla] These mortgages and debts have all been securitized into bonds and bond-like instruments, and they trade in the financial markets. A bond is said to be “bad” if it becomes illiquid, that is, you can’t trade it. The vast majority of the debt that we are talking about is still paying interest, is not in default, and is not expected to be in default. It is simply illiquid. [/QUOTE] I didn’t realize this. If that’s the case, can we expect Warren Buffet to start buying up the companies holding this “frozen” debt on the cheap? ---
**Author:** ![Pleonast](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pleonast/32/1183_2.png) [@Pleonast](https://boards.straightdope.com/u/Pleonast)\ **Post date:** [October 1, 2008, 3:03pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/7 "2008-10-01T15:03:38Z")
Another way of looking at it: dividing up assets to spread the risk is all right in principle. It’s why stocks work, for example (don’t own one company, own a piece of many companies). But it only works if the risks of the fundamental assets are unconnected. That is, whether or not a particular mortgage fails isn’t affected by the status of other mortgages. When the real estate bubble collapsed (which reasonable people could easily predict it would, the when was the hard part), this becomes manifestly not true. When many mortgages fail at once, the division of risk is worthless and the collateralized instrument is as risky as a single high-risk loan. ---
**Author:** ![muttrox](https://avatars.discourse-cdn.com/v4/letter/m/a8b319/32.png) [@muttrox](https://boards.straightdope.com/u/muttrox)\ **Post date:** [October 1, 2008, 3:34pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/8 "2008-10-01T15:34:45Z")
> [@Really\_Not\_All\_That\_Bright](#): > > If that’s the case, can we expect Warren Buffet to start buying up the companies holding this “frozen” debt on the cheap? He [bought](http://www.rttnews.com/PageNotFound.aspx)$5B of Goldman Sachs. ---
**Author:** ![mazinger\_z](https://avatars.discourse-cdn.com/v4/letter/m/5f9b8f/32.png) [@mazinger\_z](https://boards.straightdope.com/u/mazinger_z)\ **Post date:** [October 1, 2008, 3:40pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/9 "2008-10-01T15:40:16Z")
> [@Pleonast](#): > > Another way of looking at it: dividing up assets to spread the risk is all right in principle. It’s why stocks work, for example (don’t own one company, own a piece of many companies). But it only works if the risks of the fundamental assets are unconnected. That is, whether or not a particular mortgage fails isn’t affected by the status of other mortgages. When the real estate bubble collapsed (which reasonable people could easily predict it would, the when was the hard part), this becomes manifestly not true. When many mortgages fail at once, the division of risk is worthless and the collateralized instrument is as risky as a single high-risk loan. I agree wholeheartedly. I think the OP’s rage is misplaced. If you’re going to pit the bond markets, you might as well pit any form of an economy above barter. You might as well pit bartering too, because bubbles will always form. A bubble burst always distorts/hamstrings the economy. The effect is actually called something, I believe. Pit greed, but we all experience that in form of another. Any economy, even planned/command ones are cyclical. Corrections always hurt. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [October 1, 2008, 9:03pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/10 "2008-10-01T21:03:06Z")
I refuse to disagree with a giant mecha. > [@mazinger\_z](#): > > Pit greed, but we all experience that in form of another. Any economy, even planned/command ones are cyclical. Corrections always hurt. I’m sorry I was unclear. I’m not pitting pit greed, or the correction. I want a correction, we need a correction. I’ve seen poverty, I don’t fear a recession. I’m pitting the big babies who expect the government to step in & take these things off their hands so they can restart the the bubble. ---
**Author:** ![Mtgman](https://avatars.discourse-cdn.com/v4/letter/m/b5a626/32.png) [@Mtgman](https://boards.straightdope.com/u/Mtgman)\ **Post date:** [October 1, 2008, 10:11pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/11 "2008-10-01T22:11:55Z")
> [@muttrox](#): > > He [bought](http://www.rttnews.com/PageNotFound.aspx)$5B of Goldman Sachs. And another [$3 Billion into GE](http://www.bloomberg.com/apps/news?pid=20601087&sid=aAvdO5jrysP8&refer=home) today. Enjoy, Steven ---
**Author:** ![mazinger\_z](https://avatars.discourse-cdn.com/v4/letter/m/5f9b8f/32.png) [@mazinger\_z](https://boards.straightdope.com/u/mazinger_z)\ **Post date:** [October 1, 2008, 10:41pm UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/12 "2008-10-01T22:41:40Z")
> [@foolsguinea](#): > > I refuse to disagree with a giant mecha.I’m sorry I was unclear. I’m not pitting pit greed, or the correction. I want a correction, we need a correction. I’ve seen poverty, I don’t fear a recession. > > I’m pitting the big babies who expect the government to step in & take these things off their hands so they can restart the the bubble. Ahh, I see! I agree as well. Part of me says fuck’em, your risk, your loss. But, I sincerely believe that market distortions caused by the government (namely Fannie and Freddie) were a large contributor to all of this. Of course, they didn’t hold a gun to our heads, but our own greed took over. Because government helped cause the problem, perhaps they should also provide a remedy (I don’t want to call it a bail out)? I honestly don’t know. The S&L solution of the 1980’s didn’t seem so bad, maybe this one won’t be either. I don’t fear a recession. I fear a Great Depression. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [October 3, 2008, 4:16am UTC](https://boards.straightdope.com/t/thanks-to-scylla-i-pit-the-bond-markets/465973/13 "2008-10-03T04:16:10Z")
> [@mazinger\_z](#): > > But, I sincerely believe that market distortions caused by the government (namely Fannie and Freddie) were a large contributor to all of this. Er. Fannie and Freddie were private operations after 1968 and there were repeated statements that the US in no way extended them full faith and credit. The markets did not believe these statements, believing the twins to be too big too fail, and the markets were correct. But that’s not the main problem I’m having here. The main problem is that focusing on the 2 GSEs feels nice ideologically but puts a cap on understanding the underlying issues. Here’s [another take](http://delong.typepad.com/sdj/2008/09/index.html), emphasizing lack of due diligence: > [@Professor Brad DeLong](#): > > …because the **investors** and creditors did not do their due diligence and check that the **banks that were the ultimate holders** of derivative securities had done their due diligence and checked that the **financiers** who had created the derivatives had done their due diligence and checked that the **purchasers** of the securities had done their due diligence and checked that **securitizers** had done their due diligence and checked that the **lenders** had done their due diligence and checked that the **home buyers** had done their due diligence and checked that they could afford their mortgages if house prices stopped going up. > > Catastrophic failures of risk management at seven different points along the chain–any one of which would have kept us out of this current mess. Emphasis in original dutifully copied. I’ll note that a lot of the shenanigans was both noticed and not acted upon at the higher levels of government. And a lot of it occurred in 2006-2007, after the problem became more than a little obvious. ## (For completeness, I’ll include an interesting link that emphasis the GSE’s roll. I’m not claiming that they were irrelevant. [Did Fannie and Freddie Cause the Mortgage Crisis? | Seeking Alpha](http://seekingalpha.com/article/85146-did-fannie-and-freddie-cause-the-mortgage-crisis) ) At any rate, we perhaps agree on one thing. The government should avoid or evade a Great Depression by whatever means necessary, ideology be damned.