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Dissecting The Bear Stearns Hedge Fund Collapse
- Step #1: Purchase collateralized debt obligations (CDOs) that pay an interest rate over and above the cost of borrowing. In this instance 'AAA' rated tranches of subprime, mortgage-backed securities were used.
- Step #2: Use leverage to buy more CDOs than you can pay for with capital alone. Because these CDOs pay an interest rate over and above the cost of borrowing, every incremental unit of leverage adds to the total expected return. So, the more leverage you employ, the greater the expected return from the trade.
- Step #3: Use credit default swaps as insurance against movements in the credit market. Because the use of leverage increases the portfolio's overall risk exposure, the next step is to purchase insurance on movements in credit markets. These "insurance" instruments are called credit default swaps, and are designed to profit during times when credit concerns cause the bonds to fall in value, effectively hedging away some of the risk.
Dissecting The Bear Stearns Hedge Fund Collapse
- Step #4: Watch the money roll in. When you net out the cost of the leverage (or debt) to purchase the 'AAA' rated subprime debt, as well as the cost of the credit insurance, you are left with a positive rate of return, which is often referred to as "positive carry" in hedge fund lingo.
Derivatives galore!
U.S. household wealth fell by about $16.4 trillion of net worth from its peak in spring 2007, about six months before the start of the recession, to when things hit bottom in the first quarter of 2009, according to figures from the Federal Reserve.
America's lost trillions
"Zero sum game". BWA-HA-HA-HA-HA!
The only possible explanation is a coma.
The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion.
<snip>
“Think about home insurance,” McDonald says. “If you’ve sold insurance on a house, and the house burns to the ground, you have to pay. The insurance seller has the same risk as an uninsured homeowner.” Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
What Went Wrong at AIG?
"Zero sum game". BWA-HA-HA-HA-HA!
The only possible explanation is a coma.
Lehman: One Big Derivatives Mess
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers (LEHMQ) may have been the disaster he imagined.
It HAS to be a coma.
$1,413 $1,294 $1,295 $1,087
DEMWITTS went crazy while in control from 2009-2012
LAND O' GOSHEN!
note: those are only the "deficits". Impact on debt was higher on the year I showed (above) by ~40/666. Wonder why they don't track better than that?
Wait a second. Are you one of those tards who thinks the explosion in subprime mortgages had something to do with negroes?Lehman: One Big Derivatives Mess
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers (LEHMQ) may have been the disaster he imagined.
It HAS to be a coma.
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
When Lehman is the counterparty in a derivatives contract, and Lehman fails, what happens to the collateral they pledged? Or the collateral they held from the counterparty?
This is about untangling a very messy bankruptcy.
It's not backing your claim that they failed because of derivatives.
Keep trying though.....it's amusing.
The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion.
<snip>
“Think about home insurance,” McDonald says. “If you’ve sold insurance on a house, and the house burns to the ground, you have to pay. The insurance seller has the same risk as an uninsured homeowner.” Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
What Went Wrong at AIG?
"Zero sum game". BWA-HA-HA-HA-HA!
The only possible explanation is a coma.
Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
Yup.
For every million AIG paid out, their counterparties received a million.
Wait a second. Are you one of those tards who thinks the explosion in subprime mortgages had something to do with negroes?Lehman: One Big Derivatives Mess
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers (LEHMQ) may have been the disaster he imagined.
It HAS to be a coma.
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
When Lehman is the counterparty in a derivatives contract, and Lehman fails, what happens to the collateral they pledged? Or the collateral they held from the counterparty?
This is about untangling a very messy bankruptcy.
It's not backing your claim that they failed because of derivatives.
Keep trying though.....it's amusing.
The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion.
<snip>
“Think about home insurance,” McDonald says. “If you’ve sold insurance on a house, and the house burns to the ground, you have to pay. The insurance seller has the same risk as an uninsured homeowner.” Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
What Went Wrong at AIG?
"Zero sum game". BWA-HA-HA-HA-HA!
The only possible explanation is a coma.
Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
Yup.
For every million AIG paid out, their counterparties received a million.
That does not mean it was a zero sum game, idiot. Holy shit, you clearly don't understand what that means.
Besides, AIG FP didn't pay out. They went under and the government had to cover the losses.
The only possible explanation for your ignorance about this is a coma.
The GSEs were following the lead of Wall Street.Wait a second. Are you one of those tards who thinks the explosion in subprime mortgages had something to do with negroes?Lehman: One Big Derivatives Mess
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers (LEHMQ) may have been the disaster he imagined.
It HAS to be a coma.
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
When Lehman is the counterparty in a derivatives contract, and Lehman fails, what happens to the collateral they pledged? Or the collateral they held from the counterparty?
This is about untangling a very messy bankruptcy.
It's not backing your claim that they failed because of derivatives.
Keep trying though.....it's amusing.
Nah, Fannie and Freddie buying over $1 trillion of subprime mortgages had absolutely nothing to do
with the real estate bubble. Not one iota.
The GSEs were following the lead of Wall Street.Wait a second. Are you one of those tards who thinks the explosion in subprime mortgages had something to do with negroes?Lehman: One Big Derivatives Mess
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers (LEHMQ) may have been the disaster he imagined.
It HAS to be a coma.
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
When Lehman is the counterparty in a derivatives contract, and Lehman fails, what happens to the collateral they pledged? Or the collateral they held from the counterparty?
This is about untangling a very messy bankruptcy.
It's not backing your claim that they failed because of derivatives.
Keep trying though.....it's amusing.
Nah, Fannie and Freddie buying over $1 trillion of subprime mortgages had absolutely nothing to do
with the real estate bubble. Not one iota.
Do you know why subprime lending exploded?
It exploded because the financial services industry believed they had eliminated risk through the use of credit derivatives.
Wall Street resented the dominance of the GSEs in the secondary market, and they resented having to make conforming loans and set aside capital they could not put to work.
So they created credit derivatives and convinced regulators these derivatives mitigated risk and they could therefore reduce their capital reserves.
But in fact these derivatives were causing systemic risk. When defaults of the underlying non-conforming loans began occuring, credit events were triggered all through the banking system.
And that caused the implosion of the economy.
By 2005, the GSEs were no longer the dominant force in the secondary market. They were shunted aside and Wall Street took over.
All thanks to credit derivatives.
Yes, AIG did not pay out. They had not set enough cash aside in the event defaults reached all the way to the senior tranches of the credit derivative they were insuring.The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion.
<snip>
“Think about home insurance,” McDonald says. “If you’ve sold insurance on a house, and the house burns to the ground, you have to pay. The insurance seller has the same risk as an uninsured homeowner.” Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
What Went Wrong at AIG?
"Zero sum game". BWA-HA-HA-HA-HA!
The only possible explanation is a coma.
Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
Yup.
For every million AIG paid out, their counterparties received a million.
That does not mean it was a zero sum game, idiot. Holy shit, you clearly don't understand what that means.
Besides, AIG FP didn't pay out. They went under and the government had to cover the losses.
The only possible explanation for your ignorance about this is a coma.
That does not mean it was a zero sum game
Do you even know what a zero sum game means? Obviously not.
Definition of zero-sum
: of, relating to, or being a situation (such as a game or relationship) in which a gain for one side entails a corresponding loss for the other side
That sounds familiar.......
"For every million AIG paid out, their counterparties received a million"
Besides, AIG FP didn't pay out.
They did. It was in all the papers.
They went under and the government had to cover the losses.
Ummm....the bailout was to prevent them from going under.
Aha! So you DO think it had something to do with negroes!The GSEs were following the lead of Wall Street.Wait a second. Are you one of those tards who thinks the explosion in subprime mortgages had something to do with negroes?Lehman: One Big Derivatives Mess
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers (LEHMQ) may have been the disaster he imagined.
It HAS to be a coma.
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
When Lehman is the counterparty in a derivatives contract, and Lehman fails, what happens to the collateral they pledged? Or the collateral they held from the counterparty?
This is about untangling a very messy bankruptcy.
It's not backing your claim that they failed because of derivatives.
Keep trying though.....it's amusing.
Nah, Fannie and Freddie buying over $1 trillion of subprime mortgages had absolutely nothing to do
with the real estate bubble. Not one iota.
Do you know why subprime lending exploded?
It exploded because the financial services industry believed they had eliminated risk through the use of credit derivatives.
Wall Street resented the dominance of the GSEs in the secondary market, and they resented having to make conforming loans and set aside capital they could not put to work.
So they created credit derivatives and convinced regulators these derivatives mitigated risk and they could therefore reduce their capital reserves.
But in fact these derivatives were causing systemic risk. When defaults of the underlying non-conforming loans began occuring, credit events were triggered all through the banking system.
And that caused the implosion of the economy.
By 2005, the GSEs were no longer the dominant force in the secondary market. They were shunted aside and Wall Street took over.
All thanks to credit derivatives.
The GSEs were following the lead of Wall Street.
Wall Street wasn't buying crappy mortgages because of a government mandate.
You write that, and then claim a CDS is zero sum.Definition of zero-sum
: of, relating to, or being a situation (such as a game or relationship) in which a gain for one side entails a corresponding loss for the other side
Yes, AIG did not pay out. They had not set enough cash aside in the event defaults reached all the way to the senior tranches of the credit derivative they were insuring.The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion.
<snip>
“Think about home insurance,” McDonald says. “If you’ve sold insurance on a house, and the house burns to the ground, you have to pay. The insurance seller has the same risk as an uninsured homeowner.” Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
What Went Wrong at AIG?
"Zero sum game". BWA-HA-HA-HA-HA!
The only possible explanation is a coma.
Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
Yup.
For every million AIG paid out, their counterparties received a million.
That does not mean it was a zero sum game, idiot. Holy shit, you clearly don't understand what that means.
Besides, AIG FP didn't pay out. They went under and the government had to cover the losses.
The only possible explanation for your ignorance about this is a coma.
That does not mean it was a zero sum game
Do you even know what a zero sum game means? Obviously not.
Definition of zero-sum
: of, relating to, or being a situation (such as a game or relationship) in which a gain for one side entails a corresponding loss for the other side
That sounds familiar.......
"For every million AIG paid out, their counterparties received a million"
Besides, AIG FP didn't pay out.
They did. It was in all the papers.
They went under and the government had to cover the losses.
Ummm....the bailout was to prevent them from going under.
So the American taxpayer had to come up with the cash.
So much for your idiotic "zero sum" myth.
Insurance, which is what a CDS is, is not zero sum. One party breaks even, the other party loses money. The net is a loss, not zero.
In actuality, the buyers of CDS should have been forced to take a loss, but Goldman Sachs was paid one hundred cents on the dollar. Gee, I wonder if that had anything to do with the TreasSec having come straight from his position as Goldman CEO to run the Treasury.
Aha! So you DO think it had something to do with negroes!The GSEs were following the lead of Wall Street.Wait a second. Are you one of those tards who thinks the explosion in subprime mortgages had something to do with negroes?Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
When Lehman is the counterparty in a derivatives contract, and Lehman fails, what happens to the collateral they pledged? Or the collateral they held from the counterparty?
This is about untangling a very messy bankruptcy.
It's not backing your claim that they failed because of derivatives.
Keep trying though.....it's amusing.
Nah, Fannie and Freddie buying over $1 trillion of subprime mortgages had absolutely nothing to do
with the real estate bubble. Not one iota.
Do you know why subprime lending exploded?
It exploded because the financial services industry believed they had eliminated risk through the use of credit derivatives.
Wall Street resented the dominance of the GSEs in the secondary market, and they resented having to make conforming loans and set aside capital they could not put to work.
So they created credit derivatives and convinced regulators these derivatives mitigated risk and they could therefore reduce their capital reserves.
But in fact these derivatives were causing systemic risk. When defaults of the underlying non-conforming loans began occuring, credit events were triggered all through the banking system.
And that caused the implosion of the economy.
By 2005, the GSEs were no longer the dominant force in the secondary market. They were shunted aside and Wall Street took over.
All thanks to credit derivatives.
The GSEs were following the lead of Wall Street.
Wall Street wasn't buying crappy mortgages because of a government mandate.
Jesus Christ.
You write that, and then claim a CDS is zero sum.Definition of zero-sum
: of, relating to, or being a situation (such as a game or relationship) in which a gain for one side entails a corresponding loss for the other side
Hey, if your house burns down and the insurance company pays you the value of your loss, what did you gain?
Some good books which explain how derivatives took down our economy:
https://www.amazon.com/Fools-Gold-Corrupted-Financial-Catastrophe/dp/1439100136&tag=ff0d01-20
https://www.amazon.com/All-Devils-Are-Here-Financial/dp/159184438X&tag=ff0d01-20
https://www.amazon.com/Traders-Guns-Money-derivatives-Financial/dp/0273731963&tag=ff0d01-20
That last one was written on the eve of the crash by a derivatives trader who tried to warn what was happening. It's probably the best of the three.
