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A major source of demand for AAA assets came from foreign institutional investors. Caballero (2010, 2009) argues that global payment imbalances were the manifestation of global excess demand for AAA securities that placed enormous pressure on the U.S. financial system and its incentives. Similarly, Gourinchas (2010) argues that excess demand for AAA assets created an irresistible profit opportunity for the U.S. financial system to create and market safe asset - backed securities to the rest of the world. Diamond and Rajan (2009) find that securitization became focused on squeezing out the most AAA paper from an underlying package of mortgages because, according to Gorton and Metrick (2009), there is not enough AAA debt in the world to satisfy demand.
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
US MORTGAGE MARKET WENT FROM $1 TRILLION A YEAR IN 2000 TO $4 TRILLION BY 2004
PLS (private label asset - backed securities) did this, not repeal of G//S
The Banksters went from AAA real securities to synthetic securities, aided by their creativeness'
60 per cent of all mortgage origination between 2005 and 2007 had reckless or toxic features````
America's economy risks the mother of all meltdowns - FT.com
Regulators and policymakers enabled this process at virtually every turn. Part of the reason they failed to understand the housing bubble was willful ignorance: they bought into the argument that the market would equilibrate itself. In particular, financial actors and regulatory officials both believed that secondary and tertiary markets could effectively control risk through pricing.
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst of Disaster_0.pdf
This is a pretty good summary of what caused the financial collapse. I would add a few points in support of how "financial innovation" made the system even more unstable and why it is going to happen again.
1. Glass- Steagel is actually the Banking Act of 1933, key provisions of which were repealed in 1998 due to the argument that banks knew how to manage their own risk. The former chairman of the Fed famously comment that he was wrong to fail to conceive that bankers could take the kind of risks they did. The problem was created and grew largely outside the regulated banking system (commonly called "shadow banking" which by 2007 was a bit larger than the regulated banking system and was generally unregulated by anyone). That system, composed of insurance companies, hedge funds, investment banks, options traders, and large institutional investors is still largely unregulated in the aspects that caused the collapse.
So the poster who stated that G-S would not have stopped the firms that collapsed was correct in one sense. When the 1933 Act was passed, along with the Securities Act and the Securities Exchanges Act, virtually all of the financial industry was covered except commodity brokerage. By 1940 the Investment Company Act brought mutual funds into the regulatory scheme. Derivatives in the current financial sense did not exist. In retrospect, the biggest failure was to allow the development of "instruments of mass financial destruction" without bringing them into the regulatory regime.
2. Particularly dangerous was the way the mortgage backed securities were structured and marketed. Before the mid-90's MBS's consisted only of government agency insured mortgages and based on the government guarantees, they had a very good track record, and achieved the coveted AAA ratings. When in the late 90's non-government backed mortgages began to be packaged, they also were rated AAA based on the performance of the government backed issues. The rating agencies never questioned the quality of the bonds without government backing.
But it got worse. The bonds were not sold simply as pro rata shares of the portfolio; they were divided into tranches. Each tranche took a slice of the risk of the entire portfolio until it was wiped out, and then the next tranche bore the risk. The investment (AAA) tranche was the most protected; losses had to exceed 20% before it would be effected. The mezzanine tranche absorbed losses from 10%--20% of the portfolio, and the speculative tranche took the riskiest 10% (at a great discount). This turned out to have two effects. First the investment tranche would vigorously oppose any effort to "work out" any mortgages (at least the write-down touched their interests) making the bonds impossible to resolve back into mortgages. The underwriting could not be unwound and it became virtually impossible to provide borrowers mortgage relief. Second, it guaranteed that once cumulative losses approached 20%, the mortgage and MBS markets would collapse.
3. The problem was and remains systemic. Bankers knew that a catastrophic collapse was possible, but they did not protect their firms. A competitive market can fail, and the dynamic here was everyone felt they could make lots of money today and get out when things started looking bad. But they couldn't get out. No one in a classic bubble ever can (see Hyman Minsky). Bubbles and systemic financial collapses are an inevitable part of market capitalism just as much as regular business cycles and profit motive. The dangers can be reduced and the effects mitigated by regulation and public policy, but the Andrew Mellon view of capital markets going through massive episodes of destruction of capital as a natural and inevitable feature of market capitalism is essentially correct. Without adequate regulation and appropriate monetary and fiscal policy, a capitalist economy spends about half of the time in recession or depression and a major depression comes about every twenty years.
In retrospect, the biggest failure was to allow the development of "instruments of mass financial destruction" without bringing them into the regulatory regime.
Standardization and exchange clearing of derivatives would be nice. I'm all for it.
It wouldn't have prevented the collapse. No banks failed because of derivatives.
But they couldn't get out. No one in a classic bubble ever can
No one? Goldman came close and there were a few hedge funds that bet on the collapse and made big money.
Jamie Dimon, CEO of JPMorgan testified to the FCIC, "I blame the management teams 100% and...no one else."
That's because the folks at JP Morgan Chase knew that they were "too big to fail" as defined by the welfare state politicians.
JPMorgan Chase CEO: Bank Took TARP, 'Because We Were Asked to' by Treasury Secretary
.
Jamie Dimon, CEO of JPMorgan testified to the FCIC, "I blame the management teams 100% and...no one else."
That's because the folks at JP Morgan Chase knew that they were "too big to fail" as defined by the welfare state politicians.
JPMorgan Chase CEO: Bank Took TARP, 'Because We Were Asked to' by Treasury Secretary
.
You mean BECAUSE they were to critical to the US and worlds economy and they had to much leverage?
Jamie Dimon, CEO of JPMorgan testified to the FCIC, "I blame the management teams 100% and...no one else."
This is a pretty good summary of what caused the financial collapse. I would add a few points in support of how "financial innovation" made the system even more unstable and why it is going to happen again.
1. Glass- Steagel is actually the Banking Act of 1933, key provisions of which were repealed in 1998 due to the argument that banks knew how to manage their own risk. The former chairman of the Fed famously comment that he was wrong to fail to conceive that bankers could take the kind of risks they did. The problem was created and grew largely outside the regulated banking system (commonly called "shadow banking" which by 2007 was a bit larger than the regulated banking system and was generally unregulated by anyone). That system, composed of insurance companies, hedge funds, investment banks, options traders, and large institutional investors is still largely unregulated in the aspects that caused the collapse.
So the poster who stated that G-S would not have stopped the firms that collapsed was correct in one sense. When the 1933 Act was passed, along with the Securities Act and the Securities Exchanges Act, virtually all of the financial industry was covered except commodity brokerage. By 1940 the Investment Company Act brought mutual funds into the regulatory scheme. Derivatives in the current financial sense did not exist. In retrospect, the biggest failure was to allow the development of "instruments of mass financial destruction" without bringing them into the regulatory regime.
2. Particularly dangerous was the way the mortgage backed securities were structured and marketed. Before the mid-90's MBS's consisted only of government agency insured mortgages and based on the government guarantees, they had a very good track record, and achieved the coveted AAA ratings. When in the late 90's non-government backed mortgages began to be packaged, they also were rated AAA based on the performance of the government backed issues. The rating agencies never questioned the quality of the bonds without government backing.
But it got worse. The bonds were not sold simply as pro rata shares of the portfolio; they were divided into tranches. Each tranche took a slice of the risk of the entire portfolio until it was wiped out, and then the next tranche bore the risk. The investment (AAA) tranche was the most protected; losses had to exceed 20% before it would be effected. The mezzanine tranche absorbed losses from 10%--20% of the portfolio, and the speculative tranche took the riskiest 10% (at a great discount). This turned out to have two effects. First the investment tranche would vigorously oppose any effort to "work out" any mortgages (at least the write-down touched their interests) making the bonds impossible to resolve back into mortgages. The underwriting could not be unwound and it became virtually impossible to provide borrowers mortgage relief. Second, it guaranteed that once cumulative losses approached 20%, the mortgage and MBS markets would collapse.
3. The problem was and remains systemic. Bankers knew that a catastrophic collapse was possible, but they did not protect their firms. A competitive market can fail, and the dynamic here was everyone felt they could make lots of money today and get out when things started looking bad. But they couldn't get out. No one in a classic bubble ever can (see Hyman Minsky). Bubbles and systemic financial collapses are an inevitable part of market capitalism just as much as regular business cycles and profit motive. The dangers can be reduced and the effects mitigated by regulation and public policy, but the Andrew Mellon view of capital markets going through massive episodes of destruction of capital as a natural and inevitable feature of market capitalism is essentially correct. Without adequate regulation and appropriate monetary and fiscal policy, a capitalist economy spends about half of the time in recession or depression and a major depression comes about every twenty years.
In retrospect, the biggest failure was to allow the development of "instruments of mass financial destruction" without bringing them into the regulatory regime.
Standardization and exchange clearing of derivatives would be nice. I'm all for it.
It wouldn't have prevented the collapse. No banks failed because of derivatives.
But they couldn't get out. No one in a classic bubble ever can
No one? Goldman came close and there were a few hedge funds that bet on the collapse and made big money.
You mean a few people who pushed the ponzi scheme made out like bandits? Shocking, how about the other 99%?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
That's because the folks at JP Morgan Chase knew that they were "too big to fail" as defined by the welfare state politicians.
JPMorgan Chase CEO: Bank Took TARP, 'Because We Were Asked to' by Treasury Secretary
.
You mean BECAUSE they were to critical to the US and worlds economy and they had to much leverage?
Jamie Dimon, CEO of JPMorgan testified to the FCIC, "I blame the management teams 100% and...no one else."
Yep.
"The prediction that governments would bail out poorly managed banks was made in 1984 by investigative reporter Penny Lernoux:
The second discovery was that all sorts of hanky-panky had been going on in U.S. banks, and that several pillars of the U.S. financial community had been near collapse in the mid-1970s. During a meeting with a congressional staffer who was an expert on banking, I had with me a copy of The Crash of 79, a romantic thriller about the follies of international bankers, written by former banker Paul E. Erdman. "You think that's fiction," the staffer laughed. "Look at this page about huge real estate losses. Erdman was talking about Chase Manhattan and Citibank." Many more such revelations followed during my weeks in Washington, by the end of which it seemed clear that the facts were more startling than any fiction."
In retrospect, the biggest failure was to allow the development of "instruments of mass financial destruction" without bringing them into the regulatory regime.
Standardization and exchange clearing of derivatives would be nice. I'm all for it.
It wouldn't have prevented the collapse. No banks failed because of derivatives.
But they couldn't get out. No one in a classic bubble ever can
No one? Goldman came close and there were a few hedge funds that bet on the collapse and made big money.
You mean a few people who pushed the ponzi scheme made out like bandits? Shocking, how about the other 99%?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
You mean a few people who pushed the ponzi scheme made out like bandits? Shocking, how about the other 99%?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
So you don't know how their leverage models actually work huh?
Where the 4 largest banks in the US have over 10 years of ALL US GDP on 'bets' today?
Oh, big, bad Dante is a jerk!Yeah, and you are a jerk. You come across as a jerk in every post.
But to answer your question.... duh... yeah.
Why can't you figure this out?
Banks do not need to be told "go make loans to everyone that wants one, and can afford it".
Banks will do that without the slightest external motivation.
You don't need to motivate banks to make loans, anymore than you need to motivate a dog to eat, or need to motivate a leftard Dante, to be an arrogant jerk on the forums.
It comes naturally. No one had to tell Dante to be an a$$hole, he just naturally is. That's why every post he's a jerk. Just like you don't tell a dog to eat, he just naturally eats until there's no food left.
Nor do you have to motivate a bank to make loans. They do that naturally.
So when the government says they are going to "push for more home ownership" what does that mean? They can't push for more credit worthy borrowers to get loans, because banks already give credit worthy borrowers loans without being told.
The only possible area that the government can 'push banks to make more loans', when they already give out all the loans they can to those who are safe.... is to those not credit worthy.
Which is exactly what happened. And when you suddenly increase the base of home buyers, by lowering the standards to include those who are not prime rate borrowers.....
Economics 101 jerk boy..... Demand goes... UP... supply stays the same.... what does the price do? It goes up. Did you keep up with that jerk boy?
So to answer your ignorance based question.... yes, pushing more home ownership directly caused the price bubble.
FYI, if you want to be treated like an adult, the first prerequisite, it to act like one, and treat others like you are one. If you are ok being treated as a spoiled brat child, keep on going, and I'll treat you the way you act.cry me a river
Your simplistic faith in economic models is hilarious.
You are referring to fascism, socialism, parasitism , I'm sure.
.
All we have to do is get Government out of loaning people money for homes...
Sure, though the best loans were governed by Gov't regulations. WORLD WIDE BANKSTER CREDIT BUBBLE
Gov't was involved since FDR, what changed?
Loans that were under government regulation did better than private loans, especially if they were regulated by the "Community Reinvestment Act."
Center for Public Integrity reported in 2011, mortgages financed by Wall Street from 2001 to 2008 were 4½ times more likely to be seriously delinquent than mortgages backed by Fannie and Freddie.
Examining the big lie: How the facts of the economic crisis stack up
The boom and bust was global. Proponents of the Big Lie ignore the worldwide nature of the housing boom and bust.
Examining the big lie: How the facts of the economic crisis stack up | The Big Picture
""Loans that were under government regulation did better than private loans, especially if they were regulated by the "Community Reinvestment Act.""
Funny, I was just reading the oppsite bs halfway up and thought, "do i really want to go round this merry go round again by pulling up the facts, again".
They have no credible research to point to, just this bs meme that someone made up and they've been passing it around like an STD. (Socially Transmitted Disease).
You are referring to fascism, socialism, parasitism , I'm sure.
Hummmmmmmmmmmm
So I take it that you have evidence that a PRIVATE BANKER, who does not have coercive monopoly powers, open his doors with the intention to lose money?!?!?!?!?!?
Link, puhleese.
.
What it is with today's conervatives is that the facts - whether scientific, historical, or just common sense - interfere with their ideological utopia.
Wall street banks freed to wheel and deal on main street got into the mortgage business because they could invest 1 dollar in the purchase of a mortgage and then magically change it into negotiable paper that produced 30 dollars of profit.
Available mortgages were quickly absorbed, so in an effort to produce more mortgages, Wall Street banks lowered their standards in order to produce more mortgages to be chopped up and sold as "investment paper" that would continue to produce unsustainable and totally fraudulent profits for the banks.
When investors started to get weary, Wall Street created the credit default swap which was insurance on the investments, this kept the machine rolling - W Bush tried to turn over Social Security funds to keep the pyramid alive, but he was rebuffed by the people.
Greed accompanied by deregulation caused the mess, Fanny and Freddie were late comers to the feast they did not cause the mess at all, though they got caught up in it.
Anyone that fails to recognize the facts is either ignorant or blatantly cynical.
Some researcher, over at the Fed, matched up credit reports with motgage apps and found that the majority of the bad loans were to second, third, and fourth property buyers. In other words, flippers. Property flippers don't get good interest rates so they really liked the low doc and no doc loans that didn't reveal they were flippers? They are high risk because they are in it for the buck and have no problem walking away. The !arket softened then ot crashed as the flippers dropped of the keys at the bank.
You can find it by doing a search on the word "flipper" at the fed research site.
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
So you don't know how their leverage models actually work huh?
Where the 4 largest banks in the US have over 10 years of ALL US GDP on 'bets' today?
You mean the leverage models where no bank failed because of derivatives?
What about them?
In retrospect, the biggest failure was to allow the development of "instruments of mass financial destruction" without bringing them into the regulatory regime.
Standardization and exchange clearing of derivatives would be nice. I'm all for it.
It wouldn't have prevented the collapse. No banks failed because of derivatives.
But they couldn't get out. No one in a classic bubble ever can
No one? Goldman came close and there were a few hedge funds that bet on the collapse and made big money.
You mean a few people who pushed the ponzi scheme made out like bandits? Shocking, how about the other 99%?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
So you don't know how their leverage models actually work huh?
Where the 4 largest banks in the US have over 10 years of ALL US GDP on 'bets' today?
You mean the leverage models where no bank failed because of derivatives?
What about them?
Derivatives and the Legal Origin of the 2008 Credit Crisis
Derivative contracts are probabilistic bets on future events. They can be used to hedge, which reduces risk, but they also provide attractive vehicles for disagreement-based speculation that increases risk
These traditional legal restraints on OTC speculation were systematically dismantled during the 1980s and 1990s, culminating in 2000 with the enactment of the CFMA. That legislation set the stage for the 2008 crises by legalizing, for the first time in U.S. history, speculative OTC trading in derivatives. The result was an exponential increase in the size of the OTC market, culminating in 2008 with the spectacular failures of several systemically important financial institutions (and the near-failures of several others) due to bad derivatives bets.
Yet the bulk of post-CFMA derivatives trading was done by financial firms like hedge funds, pension funds, mutual funds, investment banks, and newly created proprietary trading divisions of commercial banks and insurance companies like AIG.
The first major financial institution to be brought down by OTC derivatives losses was investment bank Bear Stearns. In March of 2008, Bear Stearns found itself nearly insolvent from
trading losses suffered by two in-house hedge funds that speculated in mortgage-backed bonds and derivatives. Bear avoided bankruptcy only through a last-minute, government-orchestrated bailout in the form of a Federal Reserve-assisted sale to JP Morgan Chase.
On September 15, 2008, it was announced that brokerage firm Merrill Lynch had suffered the same fate, and would be sold off to Bank of America. The same day, Lehman Brothers declared bankruptcy
Derivatives and the Legal Origin of the 2008 Credit Crisis by Lynn A. Stout :: SSRN
Fed's rescue halted a derivatives Chernobyl
When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard
We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.
"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.
"There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."
Fed's rescue halted a derivatives Chernobyl - Telegraph
Warren Buffett labeled those derivatives financial weapons of mass destruction
The Mistakes Made
The Bear Stearns fund managers' first mistake was failing to accurately predict how the subprime bond market would behave under extreme circumstances. In effect, the funds did not accurately protect themselves from event risk.
Dissecting The Bear Stearns Hedge Fund Collapse
NO BANKS HUH?
Merrill Lynch is the quintessential example of why it was common for the investment banks to hold in portfolio large amounts of collateralized debt obligations (CDOs). Some observers have jumped to the naïve assumption that this indicates that the senior managers thought the CDOs were safe investments. The recipe for an investor maximizing reported income differs only slightly from the recipe for lenders.
Grow rapidly by
Holding poor quality assets that provide a premium nominal yield while
Employing extreme leverage, and
Providing only grossly inadequate allowances for future losses on the poor quality assets
Investment banks that followed this recipe (and most large U.S. investment banks did), were guaranteed to report record (albeit fictional) short-term income. That income was certain to produce extreme compensation for the controlling officers. The strategy was also certain to produce extensive losses in the longer term unless the investment bank could sell its losing position to another entity that would then bear the loss.
The optimal means of committing this form of accounting control fraud was with the AAA-rated top tranche of CDOs.
Merrill Lynch was known for the particularly large CDO positions it retained in portfolio. These CDO positions doomed Merrill Lynch. B of A knew that Merrill Lynch had tremendous losses in its derivatives positions when it chose to acquire Merrill Lynch.
William Black: Not With A Bang, But A Whimper: Bank Of America?s Derivatives Death*Rattle - Home - The Daily Bail
You mean a few people who pushed the ponzi scheme made out like bandits? Shocking, how about the other 99%?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
How math killed Lehman Brothers
CDO is a lot riskier than bank deposits, but Lehman Brothers, like many investors, didn't seem to know that.
Lehman Brothers, unaware of the hidden risks, decided to invest big on CDO. It even had a 35 to 1 debt to equity ratio, that is, it only owned $1 out of every $36 in its bank account the other $35 were borrowed from somewhere. This meant that a loss of just 3% of the money on its balance sheet, would have meant the loss of all the money it owned. After suffering heavy losses (more than 3% of the money in its balance) from CDO, borrowers began to lose confidence and called back the loans. As Lehman had always relied on short-term loans, its lenders were able to pull their cash back quickly. Now the bank was in trouble. It borrowed much more than it was able to return and soon found itself unable to pay back. On 15th September 2008, the world's fourth biggest investment bank was gone, forever.
How maths killed Lehman Brothers | plus.maths.org
A group of Wall Street banks and ratings agencies told a federal court in Miami that greed and the need to grow earnings was responsible for the 2009 demise of Eastern Financial Florida CU, the one-time $2.4 billion credit union, not alleged fraud on their part in the sale of $100 million of risky financial derivatives known as collateralized debt obligations.
Wall Street banks said Eastern Financial was a sophisticated investor that asserted in writing numerous times it was warned and knew of the risky nature of the CDOs, which amount to derivatives created from derivatives, in this case mortgage assets.
Wall Street Says Greed, Not CDOs, Killed Florida Credit Union|National Mortgage News
NEED MORE?
[MENTION=20503]Contumacious[/MENTION]Oh, big, bad Dante is a jerk!
Your simplistic faith in economic models is hilarious.
You are referring to fascism, socialism, parasitism , I'm sure.
.
clue: economic models
jesus!
You mean the leverage models where no bank failed because of derivatives?
What about them?
Derivatives and the Legal Origin of the 2008 Credit Crisis
Derivative contracts are probabilistic bets on future events. They can be used to hedge, which reduces risk, but they also provide attractive vehicles for disagreement-based speculation that increases risk
These traditional legal restraints on OTC speculation were systematically dismantled during the 1980s and 1990s, culminating in 2000 with the enactment of the CFMA. That legislation set the stage for the 2008 crises by legalizing, for the first time in U.S. history, speculative OTC trading in derivatives. The result was an exponential increase in the size of the OTC market, culminating in 2008 with the spectacular failures of several systemically important financial institutions (and the near-failures of several others) due to bad derivatives bets.
Yet the bulk of post-CFMA derivatives trading was done by financial firms like hedge funds, pension funds, mutual funds, investment banks, and newly created proprietary trading divisions of commercial banks and insurance companies like AIG.
The first major financial institution to be brought down by OTC derivatives losses was investment bank Bear Stearns. In March of 2008, Bear Stearns found itself nearly insolvent from
trading losses suffered by two in-house hedge funds that speculated in mortgage-backed bonds and derivatives. Bear avoided bankruptcy only through a last-minute, government-orchestrated bailout in the form of a Federal Reserve-assisted sale to JP Morgan Chase.
On September 15, 2008, it was announced that brokerage firm Merrill Lynch had suffered the same fate, and would be sold off to Bank of America. The same day, Lehman Brothers declared bankruptcy
Derivatives and the Legal Origin of the 2008 Credit Crisis by Lynn A. Stout :: SSRN
Fed's rescue halted a derivatives Chernobyl
When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard
We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.
"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.
"There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."
Fed's rescue halted a derivatives Chernobyl - Telegraph
Warren Buffett labeled those derivatives financial weapons of mass destruction
The Mistakes Made
The Bear Stearns fund managers' first mistake was failing to accurately predict how the subprime bond market would behave under extreme circumstances. In effect, the funds did not accurately protect themselves from event risk.
Dissecting The Bear Stearns Hedge Fund Collapse
NO BANKS HUH?
Merrill Lynch is the quintessential example of why it was common for the investment banks to hold in portfolio large amounts of collateralized debt obligations (CDOs). Some observers have jumped to the naïve assumption that this indicates that the senior managers thought the CDOs were safe investments. The recipe for an investor maximizing reported income differs only slightly from the recipe for lenders.
Grow rapidly by
Holding poor quality assets that provide a premium nominal yield while
Employing extreme leverage, and
Providing only grossly inadequate allowances for future losses on the poor quality assets
Investment banks that followed this recipe (and most large U.S. investment banks did), were guaranteed to report record (albeit fictional) short-term income. That income was certain to produce extreme compensation for the controlling officers. The strategy was also certain to produce extensive losses in the longer term unless the investment bank could sell its losing position to another entity that would then bear the loss.
The optimal means of committing this form of accounting control fraud was with the AAA-rated top tranche of CDOs.
Merrill Lynch was known for the particularly large CDO positions it retained in portfolio. These CDO positions doomed Merrill Lynch. B of A knew that Merrill Lynch had tremendous losses in its derivatives positions when it chose to acquire Merrill Lynch.
William Black: Not With A Bang, But A Whimper: Bank Of America?s Derivatives Death*Rattle - Home - The Daily Bail
Merrill Lynch was known for the particularly large CDO positions it retained in portfolio.
Yes, Merrill lost a lot on their bond positions.
You're not confusing CDOs with derivatives, are you?
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
How math killed Lehman Brothers
CDO is a lot riskier than bank deposits, but Lehman Brothers, like many investors, didn't seem to know that.
Lehman Brothers, unaware of the hidden risks, decided to invest big on CDO. It even had a 35 to 1 debt to equity ratio, that is, it only owned $1 out of every $36 in its bank account the other $35 were borrowed from somewhere. This meant that a loss of just 3% of the money on its balance sheet, would have meant the loss of all the money it owned. After suffering heavy losses (more than 3% of the money in its balance) from CDO, borrowers began to lose confidence and called back the loans. As Lehman had always relied on short-term loans, its lenders were able to pull their cash back quickly. Now the bank was in trouble. It borrowed much more than it was able to return and soon found itself unable to pay back. On 15th September 2008, the world's fourth biggest investment bank was gone, forever.
How maths killed Lehman Brothers | plus.maths.org
A group of Wall Street banks and ratings agencies told a federal court in Miami that greed and the need to grow earnings was responsible for the 2009 demise of Eastern Financial Florida CU, the one-time $2.4 billion credit union, not alleged fraud on their part in the sale of $100 million of risky financial derivatives known as collateralized debt obligations.
Wall Street banks said Eastern Financial was a sophisticated investor that asserted in writing numerous times it was warned and knew of the risky nature of the CDOs, which amount to derivatives created from derivatives, in this case mortgage assets.
Wall Street Says Greed, Not CDOs, Killed Florida Credit Union|National Mortgage News
NEED MORE?
In their motion to dismiss the suit, the Wall Street banks said Eastern Financial was a sophisticated investor that asserted in writing numerous times it was warned and knew of the risky nature of the CDOs, which amount to derivatives created from derivatives, in this case mortgage assets.
Wow! They think a CDO is a derivative created from mortgage assets that are somehow derivatives?
People who don't understand the topic really shouldn't write articles.
NO BANK FAILED BECAUSE OF DERIVATIVES?
Correct.
Oh you mean for the 4th time since the GOP great depression tax payers stepped up and saved the Banksters?
Yes, no bank failed because of derivatives. Even if mortgages they wrote, or bought, required a bailout.
How math killed Lehman Brothers
CDO is a lot riskier than bank deposits, but Lehman Brothers, like many investors, didn't seem to know that.
Lehman Brothers, unaware of the hidden risks, decided to invest big on CDO. It even had a 35 to 1 debt to equity ratio, that is, it only owned $1 out of every $36 in its bank account the other $35 were borrowed from somewhere. This meant that a loss of just 3% of the money on its balance sheet, would have meant the loss of all the money it owned. After suffering heavy losses (more than 3% of the money in its balance) from CDO, borrowers began to lose confidence and called back the loans. As Lehman had always relied on short-term loans, its lenders were able to pull their cash back quickly. Now the bank was in trouble. It borrowed much more than it was able to return and soon found itself unable to pay back. On 15th September 2008, the world's fourth biggest investment bank was gone, forever.
How maths killed Lehman Brothers | plus.maths.org
A group of Wall Street banks and ratings agencies told a federal court in Miami that greed and the need to grow earnings was responsible for the 2009 demise of Eastern Financial Florida CU, the one-time $2.4 billion credit union, not alleged fraud on their part in the sale of $100 million of risky financial derivatives known as collateralized debt obligations.
Wall Street banks said Eastern Financial was a sophisticated investor that asserted in writing numerous times it was warned and knew of the risky nature of the CDOs, which amount to derivatives created from derivatives, in this case mortgage assets.
Wall Street Says Greed, Not CDOs, Killed Florida Credit Union|National Mortgage News
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In their motion to dismiss the suit, the Wall Street banks said Eastern Financial was a sophisticated investor that asserted in writing numerous times it was warned and knew of the risky nature of the CDOs, which amount to derivatives created from derivatives, in this case mortgage assets.
Wow! They think a CDO is a derivative created from mortgage assets that are somehow derivatives?
People who don't understand the topic really shouldn't write articles.
