Should the Glass Steagall Act be brought back?

[GWV5903]

ED PINTO HUH? lol, Couldn't find the other stooge for AEI, Peter Wallison? OK PINTO IT IS


The paper which introduces SRISK is "Volatility, Correlation and Tails" by Brownlees and Engle (2010) and is mentioned, along with Acharya et al. at the main page:

V-Lab: Systemic Risk Analysis Welcome Page

James Hamilton did an independent assessment of the NYU Stern Volatility Laboratory here:

Measuring systemic financial risk | Econbrowser

and concludes by saying:

"I view these measures as a supplement to, rather than replacement for, other analyses based on direct linkages and derivative exposure. CDS could offer another useful market indicator. But the advantage of the NYU Stern approach is it can immediately draw out some of the implications of the latest stock market valuations and comovements for real-time use by regulators, investors, and business planners."

It should be pointed out that in the interest of skepticism, that NYU Stern is in up to its hip boots in the whole Koch Brothers-Wallison-Pinto-AEI-Mercatus "government housing policy was responsible" propaganda machine.



n his New York Times column, "The Big Lie," referring to The Big Lie about Fannie and Freddie causing the financial crisis, Joe Nocera writes:

"You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own...Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto."

http://www.nytimes.com/2011/12/24/opinion/nocera-the-big-lie.html?hp

Pinto's work was thoroughly debunked by the Financial Crisis Inquiry Commission. The FCIC did what Wallison, Pinto and their advocates consistently refuse to do; they refuse to look at loan performance--delinquencies, defaults, losses on liquidation--on a comparative basis.

http://fcic-static.law.stanford.edu...ata and Comparison with Ed Pinto Analysis.pdf



Mortgages, Ed Pinto, And A Vast Conspiracy Of Silence

Pinto's key factoid is that FHA's foreclosure rate in 2006 is 13 times higher than it was in 1954. He attributes this spike in foreclosures to one singular cause, the spike in FHA borrower "leverage," which involves other calculations unique to Pinto. He writes, "From 1954 to 2006 FHA’s compound leverage (the combined effect of lower down payment, a longer loan tern and higher debt-to-income ratios) increased 16-fold while its incidence of foreclosure also exploded, increasing 13-fold."

Nothing else penetrates into Pinto's little artificial world. Why should he consider any other changes that happened between 1967 and 2006?





Mortgages, Ed Pinto, And A Vast Conspiracy Of Silence



Faulty Conclusions Based on Shoddy Foundations

FCIC Commissioner Peter Wallison and Other Commentators Rely on Flawed Data from Edward Pinto to Misplace the Causes of the 2008 Financial Crisis

Faulty Conclusions Based on Shoddy Foundations | Center for American Progress




AEI’s FHA Disinformation Campaign Ignores Basic Finance


AEI?s FHA Disinformation Campaign Ignores Basic Finance | The Big Picture



“I respect Ed, but he’s dead wrong,” Mr. Zandi of Moody’s said. “He’s got it absolutely backward.” The private sector, not government, led us into the bubble.

Mr. Pinto has been repeatedly criticized for exaggerating the role of Fannie Mae and Freddie Mac in the mortgage crisis. The Financial Crisis Inquiry Commission took a long hard look at them, because Peter J. Wallison, a major proponent of the theory that the government created the housing bubble, sat on the commission.

The commission found that the Pinto analysis was flawed.


http://dealbook.nytimes.com/2013/01/09/new-target-in-finger-pointing-over-housing-bubble/

So you think copy and pasting this drivel is meaningful?

You have no clue of what you copy & paste...

Do you have any idea how many Zero Down FHA DPA loans were done over the 10 year span it was around?

This is a subject I have done for a living so I suggest you stop while you're behind...

Take sometime, bury your bias and figure out what really happened...

Helping low income first time homeowners is all I have done for 20+ years, what our GSE's, Fed Regs, Congress and Admins did is set people up for failure, I assure you they knew this when they set this crap in motion...

But I am sure you will continue to copy & paste more crap that you have no knowledge of...

Got it, YOU are part of the problem. Sorry, I AM AN EXPERT, I've read and blogged on this subject for over 7 years, been part of a NYTimes article about it, and YOU can't refute a gaaawddamn thing I post! ALL you have is Wallison/Pinto/AEI talking points devoid of FACTS


GAAAWDDDAMMN WORLD WIDE CREDIT BUBBLE


It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it.

Lest We Forget: Why We Had A Financial Crisis - Forbes


The big lie of the financial crisis, of course, is that troubling technique used to try to change the narrative history and shift blame from the bad ideas and terrible policies that created it.

What caused the financial crisis? The Big Lie goes viral - The Washington Post




Examining the big lie: How the facts of the economic crisis stack up

Examining the big lie: How the facts of the economic crisis stack up | The Big Picture




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.



The American mortgage market was nearly $1 trillion in 2000, ...The real surge in the mortgage market began in 2001 (the year of the stock market crash). From 2000 -2004, residential originations the U.S. climbed from about $1trillion to almost $4 trillion.

About 70% of this rise was accounted for by people refinancing their conventional mortgages at lower interest rates


http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst of Disaster_0.pdf



Affordable Housing Goals

While the GSEs were likely attracted to the same extra yield on “safe” securities that made AAA PLS tranches attractive for other classes of investors, it seems reasonable to believe that affordable housing goals motivated these purchases
.
As explained by FHFA, PLSs were a major channel through which the GSEs fulfilled their affordable housing goals.

They had high ratings and were seemingly well protected by subordination.

They were goals intensive, and they were short term. Because the goals were set in terms of the flow purchases, rather the stock held, they could get credit for housing goals by what was essentially rolling over of the existing stock of what were essentially bridge loans

As a result they could buy 30% to 40% of the amount issued, but only hold around 15% of the outstanding stock


http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf



That the GSEs invested in AAA tranches is significant because it largely undercuts claims that their purchases had a significant effect on subprime mortgage origination or the pricing of these securities. A common theme among research that has examined the causes of the financial crisis is the “insatiable demand” that existed for safe, dollar - denominated debt. Acharya and Richardson (2009) emphasize that securitization existed to create AAA tranches, which appealed to many classes of potential investors. As explained by Brunnermeier (2009), some of those investors were money market and pension funds limited by law or investment policy to invest only in AAA assets, while others were leveraged hedge funds attracted to AAA securities
because of their low haircuts and potential for greater leverage (Shleifer and Vishny, 2009).

http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf





The dramatic growth in PLS issuance was the capital markets manifestation of the increase in the origination of nontraditional mortgage products outside of the GSE channel. According to the Government Accounting Office (GAO), “nonprime” mortgage loans (subprime plus Alt-A) accounted for 34% of the overall mortgage market in 2006. From 2001 to 2005, the dollar volume of subprime mortgages increased from $100 billion to $600 billion, while Alt - A mortgages grew from $25 billion to $400 billion over roughly the same period

http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf

Because you blogged about it you're an expert?

ROFLMAO!!!

You delivered the NYT's? So you had a paper route?

You take the cake, dam I knew someday I would run into a expert, UFB...

You're nothing close, novice, maybe? Even that would be a stretch to say the least...

Oh and BTW, Nehemiah was the first one to do DPA in '97...

But I forgot you're an expert

In 1997, Nehemiah designed and introduced the first privately funded down payment assistance program in the US, the Nehemiah Down Payment Assistance Program. This program offered down payment assistance for low- to moderate-income families who had sufficient credit and income to qualify for a conventional loan but needed funds for a down payment.

The Nehemiah Down Payment Assistance Program has helped over 325,000 families achieve homeownership and delivered gift funds of over $1.5 billion to households that would otherwise have not been able to afford a down payment on a new home. As part of the Nehemiah Down Payment Assistance Program, homebuyers have received valuable education courses that include financial management skills, budgeting, and credit management principles

About Us | NEHEMIAH - Corporation of America

Here is American Family Funds...

About American Family Funds

American Family Funds, Inc., located in Mobile, Alabama, is the administrator for The Dove Foundation, a 501(c)3 non-profit charity that provides nationwide downpayment and/or closing cost assistance to qualified American home buyers.

By working with lenders, real estate agents, builders, buyers, and sellers, American Family Funds helps families who can afford a monthly home mortgage payment, meet the lenders credit requirements, but do not have the cash to make a downpayment.

American Family Funds gives buyers the assistance they need in obtaining a down payment through our simple, non-governmental, down payment gift program.

Down Payment Gift Assistance works best with an FHA insured loan.

With an approved FHA lender, the buyer with a few credit slips or high ratios may qualify for a loan and receive 100% of their required down payment from American Family Funds Down Payment Gift Program.

AFF meets the HUD requirements to participate in down payment assistance as a non-profit charity set forth in the HUD guidelines in section 4155.1, REV 4, CNG 1 Chapter 2, Section 3C.


I suggest you broaden your scope because your research has no clue when DPA started, I am pretty sure I already told you, but you seem to have missed that...

And your research sucks bad, I thought you said you're an EXPERT? But you have no clue when DPA was initiated or how many DPA loans where done?

Genesis was another popular DPA Non Profit, hell there was a whole slew of them...

Hey I know you feel like your special and all, but seriously you don't have a f'ing clue little one...

I am having too much fun with this

Better call CPS...

 

[Dad2three]

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?

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

Collateralized Debt Obligations (CDOs): CNBC Explains



The Role of ABS, CDS and CDOs in the Credit Crisis and the Economy



The credit derivatives - ABS, CDS, and CDOs - played a significant role in the Financial crisis affecting both the financial and real economy


Second, an unusual excess demand for subprime mortgage credit derivatives (ABS, CDOs, CDO^2) held by Financial institutions and investment funds occurred. This excess demand generated, in turn, an increased supply of funds available for subprime mortgages through the credit derivative creation process


http://www.russellsage.org/sites/all/files/Rethinking-Finance/Jarrow ABS CDS CDO 2.pdf

 

[Dad2three]

So you think copy and pasting this drivel is meaningful?

You have no clue of what you copy & paste...

Do you have any idea how many Zero Down FHA DPA loans were done over the 10 year span it was around?

This is a subject I have done for a living so I suggest you stop while you're behind...

Take sometime, bury your bias and figure out what really happened...

Helping low income first time homeowners is all I have done for 20+ years, what our GSE's, Fed Regs, Congress and Admins did is set people up for failure, I assure you they knew this when they set this crap in motion...

But I am sure you will continue to copy & paste more crap that you have no knowledge of...

Got it, YOU are part of the problem. Sorry, I AM AN EXPERT, I've read and blogged on this subject for over 7 years, been part of a NYTimes article about it, and YOU can't refute a gaaawddamn thing I post! ALL you have is Wallison/Pinto/AEI talking points devoid of FACTS


GAAAWDDDAMMN WORLD WIDE CREDIT BUBBLE


It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it.

Lest We Forget: Why We Had A Financial Crisis - Forbes


The big lie of the financial crisis, of course, is that troubling technique used to try to change the narrative history and shift blame from the bad ideas and terrible policies that created it.

What caused the financial crisis? The Big Lie goes viral - The Washington Post




Examining the big lie: How the facts of the economic crisis stack up

Examining the big lie: How the facts of the economic crisis stack up | The Big Picture




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.



The American mortgage market was nearly $1 trillion in 2000, ...The real surge in the mortgage market began in 2001 (the year of the stock market crash). From 2000 -2004, residential originations the U.S. climbed from about $1trillion to almost $4 trillion.

About 70% of this rise was accounted for by people refinancing their conventional mortgages at lower interest rates


http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst of Disaster_0.pdf



Affordable Housing Goals

While the GSEs were likely attracted to the same extra yield on “safe” securities that made AAA PLS tranches attractive for other classes of investors, it seems reasonable to believe that affordable housing goals motivated these purchases
.
As explained by FHFA, PLSs were a major channel through which the GSEs fulfilled their affordable housing goals.

They had high ratings and were seemingly well protected by subordination.

They were goals intensive, and they were short term. Because the goals were set in terms of the flow purchases, rather the stock held, they could get credit for housing goals by what was essentially rolling over of the existing stock of what were essentially bridge loans

As a result they could buy 30% to 40% of the amount issued, but only hold around 15% of the outstanding stock


http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf



That the GSEs invested in AAA tranches is significant because it largely undercuts claims that their purchases had a significant effect on subprime mortgage origination or the pricing of these securities. A common theme among research that has examined the causes of the financial crisis is the “insatiable demand” that existed for safe, dollar - denominated debt. Acharya and Richardson (2009) emphasize that securitization existed to create AAA tranches, which appealed to many classes of potential investors. As explained by Brunnermeier (2009), some of those investors were money market and pension funds limited by law or investment policy to invest only in AAA assets, while others were leveraged hedge funds attracted to AAA securities
because of their low haircuts and potential for greater leverage (Shleifer and Vishny, 2009).

http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf





The dramatic growth in PLS issuance was the capital markets manifestation of the increase in the origination of nontraditional mortgage products outside of the GSE channel. According to the Government Accounting Office (GAO), “nonprime” mortgage loans (subprime plus Alt-A) accounted for 34% of the overall mortgage market in 2006. From 2001 to 2005, the dollar volume of subprime mortgages increased from $100 billion to $600 billion, while Alt - A mortgages grew from $25 billion to $400 billion over roughly the same period

http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf

Because you blogged about it you're an expert?

ROFLMAO!!!

You delivered the NYT's? So you had a paper route?

You take the cake, dam I knew someday I would run into a expert, UFB...

You're nothing close, novice, maybe? Even that would be a stretch to say the least...

Oh and BTW, Nehemiah was the first one to do DPA in '97...

But I forgot you're an expert

In 1997, Nehemiah designed and introduced the first privately funded down payment assistance program in the US, the Nehemiah Down Payment Assistance Program. This program offered down payment assistance for low- to moderate-income families who had sufficient credit and income to qualify for a conventional loan but needed funds for a down payment.

The Nehemiah Down Payment Assistance Program has helped over 325,000 families achieve homeownership and delivered gift funds of over $1.5 billion to households that would otherwise have not been able to afford a down payment on a new home. As part of the Nehemiah Down Payment Assistance Program, homebuyers have received valuable education courses that include financial management skills, budgeting, and credit management principles

About Us | NEHEMIAH - Corporation of America

Here is American Family Funds...

About American Family Funds

American Family Funds, Inc., located in Mobile, Alabama, is the administrator for The Dove Foundation, a 501(c)3 non-profit charity that provides nationwide downpayment and/or closing cost assistance to qualified American home buyers.

By working with lenders, real estate agents, builders, buyers, and sellers, American Family Funds helps families who can afford a monthly home mortgage payment, meet the lenders credit requirements, but do not have the cash to make a downpayment.

American Family Funds gives buyers the assistance they need in obtaining a down payment through our simple, non-governmental, down payment gift program.

Down Payment Gift Assistance works best with an FHA insured loan.

With an approved FHA lender, the buyer with a few credit slips or high ratios may qualify for a loan and receive 100% of their required down payment from American Family Funds Down Payment Gift Program.

AFF meets the HUD requirements to participate in down payment assistance as a non-profit charity set forth in the HUD guidelines in section 4155.1, REV 4, CNG 1 Chapter 2, Section 3C.


I suggest you broaden your scope because your research has no clue when DPA started, I am pretty sure I already told you, but you seem to have missed that...

And your research sucks bad, I thought you said you're an EXPERT? But you have no clue when DPA was initiated or how many DPA loans where done?

Genesis was another popular DPA Non Profit, hell there was a whole slew of them...

Hey I know you feel like your special and all, but seriously you don't have a f'ing clue little one...

I am having too much fun with this

Better call CPS...

Got it, you FINALLY know more about the SAFE HUD programs started under Clinton's HUD. THANKS. Now about your false premise that CRA ot GSE's caused Dubya's subprime crisis? ANYTHING? LOL




“The idea that they were leading this charge is just absurd,” said Guy Cecala, publisher of Inside Mortgage Finance, an authoritative trade publication. “Fannie and Freddie have always had the tightest underwriting on earth…They were opposite of subprime.”



Some 6 percent of Fannie- and Freddie-sponsored loans made during that span were 90 days late at some point in their history, according to Fannie and Freddie’s regulator, the Federal Housing Finance Agency. By contrast, the FHFA says, roughly 27 percent of loans that Wall Street folded into mortgage-backed investments were at least 90 days late at some point.


Wall Street, Not Fannie and Freddie, Led Mortgage Meltdown - The Daily Beast


CRA



The first point is a matter of timing. The current crisis is rooted in the poor performance of mortgage loans made between 2005 and 2007. If the CRA did indeed spur the recent expansion of the subprime mortgage market and subsequent turmoil, it would be reasonable to assume that some change in the enforcement regime in 2004 or 2005 triggered a relaxation of underwriting standards by CRA-covered lenders for loans originated in the past few years. However, the CRA rules and enforcement process have not changed substantively since 1995. This fact weakens the potential link between the CRA and the current mortgage crisis.


In total, of all the higher-priced loans, only 6 percent were extended by CRA-regulated lenders (and their affiliates) to either lower-income borrowers or neighborhoods in the lenders' CRA assessment areas, which are the local geographies that are the primary focus for CRA evaluation purposes. The small share of subprime lending in 2005 and 2006 that can be linked to the CRA suggests it is very unlikely the CRA could have played a substantial role in the subprime crisis.



To the extent that banking institutions chose not to include their affiliates' lending in their CRA examinations, the 6 percent share overstates the volume of higher-priced, lower-income lending that CRA examiners would have counted.



https://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136&


Financial Crisis Inquiry Commission: "The CRA Was Not A Significant Factor In Subprime Lending Or The Crisis."


Federal Reserve: "We Find Little Evidence That Either the CRA Or The GSE [Government-Sponsored Enterprise] goals played a significant role in the subprime crisis."



Bernanke: The CRA Was Not "At The Root Of, Or Otherwise Contributed In Any Substantive Way To, The Current Mortgage Difficulties."




SF Reserve Bank's Yellen: "tudies Have Shown That The CRA Has Increased The Volume Of Responsible Lending To Low- And Moderate-Income Households."

 

[Toddsterpatriot]

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?

You don't realize CDO'S are derivatives? lol



A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO. The main difference between CDO's and derivatives is that a derivative is essentially a bilateral agreement in which the payout occurs during a specific event which is tied to the underlying asset.

Other more complicated CDOs have been developed where each underlying credit risk is itself a CDO tranche. These CDOs are commonly known as CDOs-squared.


MBIA claimed, among other things, that Merrill defrauded MBIA about the quality of these CDOs, and that it was using the complicated nature of these particular CDOs (CDOs squared and cubed) to hide the problems it knew about in the securities that the CDOs were based on.

https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf


Merrill’s Synthetic CDOs

Even when Merrill had a shortage of actual subprime assets to securitize it could still maximize its revenue stream from the poorly underwritten subprime mortgages that it was securitizing by irresponsibly cr
eating numerous “synthetic” CDOs. These synthetic CDOs
consisted of complex derivative securities, the performance of which was inextricably tied to the performance of the underlying subprime mortgage's

Unlike cash CDOs, which use the cash flows from the underlying ABS/RMBS to service debt, synthetic CDOs use cash from premium payments on CDS contracts either to purchase low-risk securities or to service the synthetic
CDO’s debt directly



These highly-leveraged devices enabled Merill to multiply the volume of CDOs it issued from the pool of subprime mortgages that it originated and/or purchased from other originators, thus increasing its own fees. Typically, only 10% of the assets of a synthetic CDO are actual RMBS. The remaining 90% of th
e assets comprising the CDO are speculative derivative contracts, such as CDS. With the CDS nat issue in this case, the hedged securities were certain notes issued by CDOs, which entitled Merrill to payments of interest and principal based
on a specified schedule.


The CDS contracts were little more than unregulated wagers on the performance of the underlying mortgages.



Merrill would be effectively wagering the $1.26 billion that the underlying $140 million of RMBS would perform as required by the CDO. Obviously, these undisclosed and irresponsible bets — made at the very time that the housing market was collapsing and the rate of mortgage defaults was escalating — only multiplied the risks of poorly underwritten subprime mortgages.



https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf


An April 16, 2008 Wall Street Journal article gave the following description of Merrill’s “de-risking” strategy:


Merrill set out to reduce its exposure, in an effort innocuously re
ferred to as ‘de-risking.’ It could have sold off billions of dollars’ worth of mortgage-backed bonds that it had stockpiled
with the intention of packaging them into more CDOs. But with the market for such bonds slipping, Merrill would have had to
record losses of $1.5 billion to $3 billion on the bonds. . . . Instead, Merrill tried a different strategy: quickly turn the bonds into more CDOs. . . . As the CDO business slid, Merrill’s top
managers embarked on a new plan, referred to as the ‘mitigation strategy.’ The aim was to find ways to hedge exposures through deals with bond insurers.


https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf




The Story of the CDO Market Meltdown: An Empirical Analysis

http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf



AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds.



How the Thundering Herd Faltered and Fell



The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).



Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.

Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.




Although Merrill had a scant presence in the C.D.O. market in 2002, four years later it was the world’s biggest underwriter of the products.

The risk in Merrill’s business model became viral after A.I.G. stopped insuring the highest-quality portions of the firm’s C.D.O.’s against default.

For years, Merrill had paid A.I.G. to insure its C.D.O. stakes to limit potential damage from defaults. But at the end of 2005, A.I.G. suddenly said it had had enough, citing concerns about overly aggressive home lending. Merrill couldn’t find an adequate replacement to insure itself. Rather than slow down, however, Merrill’s C.D.O. factory continued to hum and the firm’s unhedged mortgage bets grew, its filings show.



The number of mortgage-related C.D.O.’s being produced across Wall Street was staggering, and all of that activity represented a gamble that mortgages underwritten during the most manic lending boom ever would pay off.


http://www.nytimes.com/2008/11/09/business/09magic.html?pagewanted=all


SURE, DERIVATIVES DIDN'T BRING THEM DOWN *SHAKING HEAD*


As former Goldman Sachs CMBS surveillance expert Mike Blum explains: Wall Street reaped huge profits from “creating filet mignon AAAs out of BB manure.

You don't realize CDO'S are derivatives? lol

CDOs are bonds, not derivatives. LOL!

A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO.

Your claim was CDOs, not synthetic CDOs.

 

[Contumacious]

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset.]

Collateralized debt obligations and credit default swaps

it’s hard to invest in individual mortgages. They’re easier to invest when thousands of individual mortgages are bundled together to form a mortgage bond. The mortgage bonds were packaged by agencies like Fannie Mae and Freddie Mac,

'nuff said

 

[Toddsterpatriot]

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.

Yeah sorry. CDO - Collateralised Debt Obligation They are basically a complex amalgamation of parts of mortgage backed securities (MBS).


MBSs are home loans that have been transformed into financial products so the original home loaner is able to sell them to others. So CDOs are derivatives of home loans. They are very hard to accurately value because of how complex they are.

CDS - Credit Default Swap

Are basically an insurance product that people giving credit (ie the buyers of CDOs or MBSs) can purchase. The seller of the CDS offers to pay the value (or part of the value) of the credit if borrower defaults.


As one journalist (Gretchen Morgenson) put it, CDOs became "the perfect dumping ground for the low-rated slices Wall Street couldn't sell on its own."


CDO managers "didn't always have to disclose what the securities contained" because the contents of the CDO were subject to change. But this lack of transparency did not affect demand for the securities. Investors "weren't so much buying a security. They were buying a triple-A rating," according to business journalists Bethany McLean and Joe Nocera.


As underwriting standards deteriorated and the housing market became saturated, subprime mortgages became less abundant. Synthetic CDOs began to fill in for the original cash CDOs. Because more than one—in fact numerous—synthetics could be made to reference the same original, the amount of money that moved among market participants increased dramatically.


The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going


According to the analysis, 96 percent of the Magnetar deals were in default by the end of 2008, compared with 68 percent for comparable CDOs.

At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar.

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going - ProPublica

So CDOs are derivatives of home loans.

No they aren't.
A CDO is pool of bonds that gets sliced into tranches.
A slice of a bond is still a bond.

 

[Toddsterpatriot]

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.

Yeah, you know how lawyers and multi millionaires are confused by that stuff right Bubba? lol

More than half of the highest-rated (Aaa) CDOs were "impaired" (losing principal or downgraded to junk status), compared to a small fraction of similarly rated Subprime and Alt-A mortgage-backed securities. (source: Financial Crisis Inquiry Report


Don't REALLY know the difference of CDO's versus MBS's, just say so, don't keep proving how ignorant you are

Yeah, you know how lawyers and multi millionaires are confused by that stuff right Bubba? lol

Obama is a lawyer and multi millionaire, there are many things he's confused about.

More than half of the highest-rated (Aaa) CDOs were "impaired" (losing principal or downgraded to junk status),

Yes, many bonds were impaired.

 

[Toddsterpatriot]

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?

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

Collateralized Debt Obligations (CDOs): CNBC Explains



The Role of ABS, CDS and CDOs in the Credit Crisis and the Economy



The credit derivatives - ABS, CDS, and CDOs - played a significant role in the Financial crisis affecting both the financial and real economy


Second, an unusual excess demand for subprime mortgage credit derivatives (ABS, CDOs, CDO^2) held by Financial institutions and investment funds occurred. This excess demand generated, in turn, an increased supply of funds available for subprime mortgages through the credit derivative creation process


http://www.russellsage.org/sites/all/files/Rethinking-Finance/Jarrow ABS CDS CDO 2.pdf

Thanks. That was funny. And wrong.

 

[Dad2three]

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?

You don't realize CDO'S are derivatives? lol



A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO. The main difference between CDO's and derivatives is that a derivative is essentially a bilateral agreement in which the payout occurs during a specific event which is tied to the underlying asset.

Other more complicated CDOs have been developed where each underlying credit risk is itself a CDO tranche. These CDOs are commonly known as CDOs-squared.


MBIA claimed, among other things, that Merrill defrauded MBIA about the quality of these CDOs, and that it was using the complicated nature of these particular CDOs (CDOs squared and cubed) to hide the problems it knew about in the securities that the CDOs were based on.

https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf


Merrill’s Synthetic CDOs

Even when Merrill had a shortage of actual subprime assets to securitize it could still maximize its revenue stream from the poorly underwritten subprime mortgages that it was securitizing by irresponsibly cr
eating numerous “synthetic” CDOs. These synthetic CDOs
consisted of complex derivative securities, the performance of which was inextricably tied to the performance of the underlying subprime mortgage's

Unlike cash CDOs, which use the cash flows from the underlying ABS/RMBS to service debt, synthetic CDOs use cash from premium payments on CDS contracts either to purchase low-risk securities or to service the synthetic
CDO’s debt directly



These highly-leveraged devices enabled Merill to multiply the volume of CDOs it issued from the pool of subprime mortgages that it originated and/or purchased from other originators, thus increasing its own fees. Typically, only 10% of the assets of a synthetic CDO are actual RMBS. The remaining 90% of th
e assets comprising the CDO are speculative derivative contracts, such as CDS. With the CDS nat issue in this case, the hedged securities were certain notes issued by CDOs, which entitled Merrill to payments of interest and principal based
on a specified schedule.


The CDS contracts were little more than unregulated wagers on the performance of the underlying mortgages.



Merrill would be effectively wagering the $1.26 billion that the underlying $140 million of RMBS would perform as required by the CDO. Obviously, these undisclosed and irresponsible bets — made at the very time that the housing market was collapsing and the rate of mortgage defaults was escalating — only multiplied the risks of poorly underwritten subprime mortgages.



https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf


An April 16, 2008 Wall Street Journal article gave the following description of Merrill’s “de-risking” strategy:


Merrill set out to reduce its exposure, in an effort innocuously re
ferred to as ‘de-risking.’ It could have sold off billions of dollars’ worth of mortgage-backed bonds that it had stockpiled
with the intention of packaging them into more CDOs. But with the market for such bonds slipping, Merrill would have had to
record losses of $1.5 billion to $3 billion on the bonds. . . . Instead, Merrill tried a different strategy: quickly turn the bonds into more CDOs. . . . As the CDO business slid, Merrill’s top
managers embarked on a new plan, referred to as the ‘mitigation strategy.’ The aim was to find ways to hedge exposures through deals with bond insurers.


https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf




The Story of the CDO Market Meltdown: An Empirical Analysis

http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf



AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds.



How the Thundering Herd Faltered and Fell



The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).



Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.

Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.




Although Merrill had a scant presence in the C.D.O. market in 2002, four years later it was the world’s biggest underwriter of the products.

The risk in Merrill’s business model became viral after A.I.G. stopped insuring the highest-quality portions of the firm’s C.D.O.’s against default.

For years, Merrill had paid A.I.G. to insure its C.D.O. stakes to limit potential damage from defaults. But at the end of 2005, A.I.G. suddenly said it had had enough, citing concerns about overly aggressive home lending. Merrill couldn’t find an adequate replacement to insure itself. Rather than slow down, however, Merrill’s C.D.O. factory continued to hum and the firm’s unhedged mortgage bets grew, its filings show.



The number of mortgage-related C.D.O.’s being produced across Wall Street was staggering, and all of that activity represented a gamble that mortgages underwritten during the most manic lending boom ever would pay off.


http://www.nytimes.com/2008/11/09/business/09magic.html?pagewanted=all


SURE, DERIVATIVES DIDN'T BRING THEM DOWN *SHAKING HEAD*


As former Goldman Sachs CMBS surveillance expert Mike Blum explains: Wall Street reaped huge profits from “creating filet mignon AAAs out of BB manure.

You don't realize CDO'S are derivatives? lol

CDOs are bonds, not derivatives. LOL!

A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO.

Your claim was CDOs, not synthetic CDOs.

Weird how SO many things so you are full of it start here


CDO - Collateralised Debt Obligation They are basically a complex amalgamation of parts of mortgage backed securities (MBS).


MBSs are home loans that have been transformed into financial products so the original home loaner is able to sell them to others. So CDOs are derivatives of home loans. They are very hard to accurately value because of how complex they are.



As one journalist (Gretchen Morgenson) put it, CDOs became "the perfect dumping ground for the low-rated slices Wall Street couldn't sell on its own."

 

[Dad2three]

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset.]

Collateralized debt obligations and credit default swaps

it’s hard to invest in individual mortgages. They’re easier to invest when thousands of individual mortgages are bundled together to form a mortgage bond. The mortgage bonds were packaged by agencies like Fannie Mae and Freddie Mac,

'nuff said

Private sector loans, not Fannie or Freddie, triggered crisis


The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets

Private sector loans, not Fannie or Freddie, triggered crisis | Economics | McClatchy DC


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






“The idea that they were leading this charge is just absurd,” said Guy Cecala, publisher of Inside Mortgage Finance, an authoritative trade publication. “Fannie and Freddie have always had the tightest underwriting on earth…They were opposite of subprime.”

 

[Dad2three]

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?

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

Collateralized Debt Obligations (CDOs): CNBC Explains



The Role of ABS, CDS and CDOs in the Credit Crisis and the Economy



The credit derivatives - ABS, CDS, and CDOs - played a significant role in the Financial crisis affecting both the financial and real economy


Second, an unusual excess demand for subprime mortgage credit derivatives (ABS, CDOs, CDO^2) held by Financial institutions and investment funds occurred. This excess demand generated, in turn, an increased supply of funds available for subprime mortgages through the credit derivative creation process


http://www.russellsage.org/sites/all/files/Rethinking-Finance/Jarrow ABS CDS CDO 2.pdf

Thanks. That was funny. And wrong.

Sure, that's why Lehman is gone but JP Morgans still around

 

[Dad2three]

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.

Yeah sorry. CDO - Collateralised Debt Obligation They are basically a complex amalgamation of parts of mortgage backed securities (MBS).


MBSs are home loans that have been transformed into financial products so the original home loaner is able to sell them to others. So CDOs are derivatives of home loans. They are very hard to accurately value because of how complex they are.

CDS - Credit Default Swap

Are basically an insurance product that people giving credit (ie the buyers of CDOs or MBSs) can purchase. The seller of the CDS offers to pay the value (or part of the value) of the credit if borrower defaults.


As one journalist (Gretchen Morgenson) put it, CDOs became "the perfect dumping ground for the low-rated slices Wall Street couldn't sell on its own."


CDO managers "didn't always have to disclose what the securities contained" because the contents of the CDO were subject to change. But this lack of transparency did not affect demand for the securities. Investors "weren't so much buying a security. They were buying a triple-A rating," according to business journalists Bethany McLean and Joe Nocera.


As underwriting standards deteriorated and the housing market became saturated, subprime mortgages became less abundant. Synthetic CDOs began to fill in for the original cash CDOs. Because more than one—in fact numerous—synthetics could be made to reference the same original, the amount of money that moved among market participants increased dramatically.


The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going


According to the analysis, 96 percent of the Magnetar deals were in default by the end of 2008, compared with 68 percent for comparable CDOs.

At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar.

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going - ProPublica

So CDOs are derivatives of home loans.

No they aren't.
A CDO is pool of bonds that gets sliced into tranches.
A slice of a bond is still a bond.

Sorry bubba, those guys on wall street say you are full of it, CDO's were derivatives of MBS's, AND treated as such...

 

[Dad2three]

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?

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

Collateralized Debt Obligations (CDOs): CNBC Explains



The Role of ABS, CDS and CDOs in the Credit Crisis and the Economy



The credit derivatives - ABS, CDS, and CDOs - played a significant role in the Financial crisis affecting both the financial and real economy


Second, an unusual excess demand for subprime mortgage credit derivatives (ABS, CDOs, CDO^2) held by Financial institutions and investment funds occurred. This excess demand generated, in turn, an increased supply of funds available for subprime mortgages through the credit derivative creation process


http://www.russellsage.org/sites/all/files/Rethinking-Finance/Jarrow ABS CDS CDO 2.pdf

Thanks. That was funny. And wrong.

Q&As on accounting for some collateralised debt obligations (CDOs) – prepared by the staff of the IASB


The following questions and answers (Q&As) summarise some key issues regarding the accounting for some CDOs in accordance with International Financial Reporting Standards (IFRSs) and highlights at a summary level how that compares to US generally accepted accounting principles (GAAP).


What is the issue?

Some features of collateralised debt obligations (CDOs) are embedded credit derivatives. The issue is: when do these embedded credit derivatives have to be separated from the CDOs and accounted for at fair value through profit or loss?



The IFRS Foundation is an independent, not-for-profit organisation. Our primary mission is to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRS) based upon clearly articulated principles.

IFRS are developed by the International Accounting Standards Board (IASB), the independent standard-setting body of the IFRS Foundation.

IFRS - About the IFRS Foundation and the IASB

 

[GWV5903]

Because you blogged about it you're an expert?

ROFLMAO!!!

You delivered the NYT's? So you had a paper route?

You take the cake, dam I knew someday I would run into a expert, UFB...

You're nothing close, novice, maybe? Even that would be a stretch to say the least...

Oh and BTW, Nehemiah was the first one to do DPA in '97...

But I forgot you're an expert

In 1997, Nehemiah designed and introduced the first privately funded down payment assistance program in the US, the Nehemiah Down Payment Assistance Program. This program offered down payment assistance for low- to moderate-income families who had sufficient credit and income to qualify for a conventional loan but needed funds for a down payment.

The Nehemiah Down Payment Assistance Program has helped over 325,000 families achieve homeownership and delivered gift funds of over $1.5 billion to households that would otherwise have not been able to afford a down payment on a new home. As part of the Nehemiah Down Payment Assistance Program, homebuyers have received valuable education courses that include financial management skills, budgeting, and credit management principles

About Us | NEHEMIAH - Corporation of America

Here is American Family Funds...

About American Family Funds

American Family Funds, Inc., located in Mobile, Alabama, is the administrator for The Dove Foundation, a 501(c)3 non-profit charity that provides nationwide downpayment and/or closing cost assistance to qualified American home buyers.

By working with lenders, real estate agents, builders, buyers, and sellers, American Family Funds helps families who can afford a monthly home mortgage payment, meet the lenders credit requirements, but do not have the cash to make a downpayment.

American Family Funds gives buyers the assistance they need in obtaining a down payment through our simple, non-governmental, down payment gift program.

Down Payment Gift Assistance works best with an FHA insured loan.

With an approved FHA lender, the buyer with a few credit slips or high ratios may qualify for a loan and receive 100% of their required down payment from American Family Funds Down Payment Gift Program.

AFF meets the HUD requirements to participate in down payment assistance as a non-profit charity set forth in the HUD guidelines in section 4155.1, REV 4, CNG 1 Chapter 2, Section 3C.


I suggest you broaden your scope because your research has no clue when DPA started, I am pretty sure I already told you, but you seem to have missed that...

And your research sucks bad, I thought you said you're an EXPERT? But you have no clue when DPA was initiated or how many DPA loans where done?

Genesis was another popular DPA Non Profit, hell there was a whole slew of them...

Hey I know you feel like your special and all, but seriously you don't have a f'ing clue little one...

I am having too much fun with this

Better call CPS...

Got it, you FINALLY know more about the SAFE HUD programs started under Clinton's HUD. THANKS. Now about your false premise that CRA ot GSE's caused Dubya's subprime crisis? ANYTHING? LOL




“The idea that they were leading this charge is just absurd,” said Guy Cecala, publisher of Inside Mortgage Finance, an authoritative trade publication. “Fannie and Freddie have always had the tightest underwriting on earth…They were opposite of subprime.”



Some 6 percent of Fannie- and Freddie-sponsored loans made during that span were 90 days late at some point in their history, according to Fannie and Freddie’s regulator, the Federal Housing Finance Agency. By contrast, the FHFA says, roughly 27 percent of loans that Wall Street folded into mortgage-backed investments were at least 90 days late at some point.


Wall Street, Not Fannie and Freddie, Led Mortgage Meltdown - The Daily Beast


CRA



The first point is a matter of timing. The current crisis is rooted in the poor performance of mortgage loans made between 2005 and 2007. If the CRA did indeed spur the recent expansion of the subprime mortgage market and subsequent turmoil, it would be reasonable to assume that some change in the enforcement regime in 2004 or 2005 triggered a relaxation of underwriting standards by CRA-covered lenders for loans originated in the past few years. However, the CRA rules and enforcement process have not changed substantively since 1995. This fact weakens the potential link between the CRA and the current mortgage crisis.


In total, of all the higher-priced loans, only 6 percent were extended by CRA-regulated lenders (and their affiliates) to either lower-income borrowers or neighborhoods in the lenders' CRA assessment areas, which are the local geographies that are the primary focus for CRA evaluation purposes. The small share of subprime lending in 2005 and 2006 that can be linked to the CRA suggests it is very unlikely the CRA could have played a substantial role in the subprime crisis.



To the extent that banking institutions chose not to include their affiliates' lending in their CRA examinations, the 6 percent share overstates the volume of higher-priced, lower-income lending that CRA examiners would have counted.



https://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136&


Financial Crisis Inquiry Commission: "The CRA Was Not A Significant Factor In Subprime Lending Or The Crisis."


Federal Reserve: "We Find Little Evidence That Either the CRA Or The GSE [Government-Sponsored Enterprise] goals played a significant role in the subprime crisis."



Bernanke: The CRA Was Not "At The Root Of, Or Otherwise Contributed In Any Substantive Way To, The Current Mortgage Difficulties."




SF Reserve Bank's Yellen: "tudies Have Shown That The CRA Has Increased The Volume Of Responsible Lending To Low- And Moderate-Income Households."

How is it you can be so wrong about DPA's creation and be so right about CRA's influence in the Mortgage Meltdown?

Could it be you don't know as much as you thought?

I find it even more amusing you quote Bernanke...

It is very simple and yet you continue to try and make it complex...

No one is as concerned when they have ZERO invested in the asset...

It is very easy to understand for the simplest minds...

The admission that CRA was the birth right for this bizarre lending practice is political suicide for the Liberal Left...

Tell me how many loans for $150K do you want to fund for someone that has a difficult time paying Sears $25 a month?

What's your answer?

When homebuyers complain about the lenders requirements it is a very simple response "What would you want to know about me if I wanted you to lend me $200K?" Without question everyone's answer has been "EVERYTHING"...

You have no idea what you're talking about...

How many mortgages have you closed?

How many?

Hello?

Are you in there?

 

[MikeK]

I of course am the one vote against bringing back the Glass-Steagal Act.

I have asked this question hundreds of times, and I never get an answer.

Name ONE bank that if Glass-Steagall was still enforced, would have not crashed? And on what basis would you make the claim?

Countrywide? Nope.
IndyMac? Nope.
Bear Stearns? Nope.
Wachovia? Nope.
AIG? Nope.
Washington Mutual? Nope.

The vast vast majority of all the banks that crashed... none of them would have been affected by Glass-Steagall in any way.

So now, if you have a reason to bring back Glas Steagall, what is it?

And don't tell me it is to prevent another sub-prime melt down, because if so, then I want the name of the banks (not one), bank(S) that would have been 'saved' under Glass Steagall, and I want a specific provision of Glass Steagall, and how it applied to those banks, that would have stopped them from crash.

If you can provide me that evidence, I'll consider it.

You've been misinformed.

(Excerpt)

In 1999, Democrats led by President Bill Clinton and Republicans led by Sen. Phil Gramm joined forces to repeal Glass-Steagall at the behest of the big banks. What happened over the next eight years was an almost exact replay of the Roaring Twenties. Once again, banks originated fraudulent loans and once again they sold them to their customers in the form of securities. The bubble peaked in 2007 and collapsed in 2008. The hard-earned knowledge of 1933 had been lost in the arrogance of 1999.

Repeal of Glass-Steagall Caused the Financial Crisis - US News

(Close)

The real question should be how much President Bill Clinton got from the banks for going along with that outrageous betrayal of the People. I'm sure he didn't do it for nothing -- and he is much too smart (slick) to not know what the outcome would be.

Glass/Steagal was critically important protection against chicanery by crooked and irresponsible bankers. There was no good or constructive reason to repeal it.

 

[Politico]

Hell yeah.

 

[Mac1958]

.

I've never understood why the roles played by credit default swaps and the ratings agencies have been so underplayed (at least relatively speaking) in the meltdown. They were huge. Maybe it's because they're a little complicated to explain, and/or don't allow certain folks to just point their fingers at certain other folks for the entire mess.

The CDS's allowed those dealing in those astonishingly complicated -- I wonder how many people know that physicists were brought in by the quants to build them - CMO's were able to take that risk off their books by leveraging them with CDS's. Which, of course, allowed them to get deeper into CMO's.

And I wonder how many people know that the CDS's were virtually unregulated and therefore did not require the same kind of reserves that most other insurance policies require. Where were the fucking regulators when AIG was selling these things? Does anyone care?

And I wonder how the ratings agencies were allowed to get away with assigning AAA ratings to these piles of shit, and how those selling the CMO's were selling them to every type of investor, from municipalities to charities based on those ratings. Now I'm hearing that they're claiming their ratings were never meant to actually be a guide. That wasn't what they were saying BEFORE the shit hit the fan.

And I wonder why consumers were willing to sign on the dotted line for no-doc and low-doc loans knowing quite well they may not be able to make the payments, and consumers who signed on the dotted line knowing quite well that their mortgage payments would explode in X years are being treated as helpless victims, as if they were in third grade when they signed.

But, when you're dealing with a culture that is far more concerned about the new furniture in Kim Kardashian's sister's new house, getting the public to get this deep into such a massive and critical story just ain't gonna happen. Better to just blame this guy over here or that guy over there.

.

 

[Toddsterpatriot]

You don't realize CDO'S are derivatives? lol



A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO. The main difference between CDO's and derivatives is that a derivative is essentially a bilateral agreement in which the payout occurs during a specific event which is tied to the underlying asset.

Other more complicated CDOs have been developed where each underlying credit risk is itself a CDO tranche. These CDOs are commonly known as CDOs-squared.


MBIA claimed, among other things, that Merrill defrauded MBIA about the quality of these CDOs, and that it was using the complicated nature of these particular CDOs (CDOs squared and cubed) to hide the problems it knew about in the securities that the CDOs were based on.

https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf


Merrill’s Synthetic CDOs

Even when Merrill had a shortage of actual subprime assets to securitize it could still maximize its revenue stream from the poorly underwritten subprime mortgages that it was securitizing by irresponsibly cr
eating numerous “synthetic” CDOs. These synthetic CDOs
consisted of complex derivative securities, the performance of which was inextricably tied to the performance of the underlying subprime mortgage's

Unlike cash CDOs, which use the cash flows from the underlying ABS/RMBS to service debt, synthetic CDOs use cash from premium payments on CDS contracts either to purchase low-risk securities or to service the synthetic
CDO’s debt directly



These highly-leveraged devices enabled Merill to multiply the volume of CDOs it issued from the pool of subprime mortgages that it originated and/or purchased from other originators, thus increasing its own fees. Typically, only 10% of the assets of a synthetic CDO are actual RMBS. The remaining 90% of th
e assets comprising the CDO are speculative derivative contracts, such as CDS. With the CDS nat issue in this case, the hedged securities were certain notes issued by CDOs, which entitled Merrill to payments of interest and principal based
on a specified schedule.


The CDS contracts were little more than unregulated wagers on the performance of the underlying mortgages.



Merrill would be effectively wagering the $1.26 billion that the underlying $140 million of RMBS would perform as required by the CDO. Obviously, these undisclosed and irresponsible bets — made at the very time that the housing market was collapsing and the rate of mortgage defaults was escalating — only multiplied the risks of poorly underwritten subprime mortgages.



https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf


An April 16, 2008 Wall Street Journal article gave the following description of Merrill’s “de-risking” strategy:


Merrill set out to reduce its exposure, in an effort innocuously re
ferred to as ‘de-risking.’ It could have sold off billions of dollars’ worth of mortgage-backed bonds that it had stockpiled
with the intention of packaging them into more CDOs. But with the market for such bonds slipping, Merrill would have had to
record losses of $1.5 billion to $3 billion on the bonds. . . . Instead, Merrill tried a different strategy: quickly turn the bonds into more CDOs. . . . As the CDO business slid, Merrill’s top
managers embarked on a new plan, referred to as the ‘mitigation strategy.’ The aim was to find ways to hedge exposures through deals with bond insurers.


https://www.osc.state.ny.us/press/releases/july10/merrill_lynch_complaint.pdf




The Story of the CDO Market Meltdown: An Empirical Analysis

http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf



AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds.



How the Thundering Herd Faltered and Fell



The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).



Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.

Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.




Although Merrill had a scant presence in the C.D.O. market in 2002, four years later it was the world’s biggest underwriter of the products.

The risk in Merrill’s business model became viral after A.I.G. stopped insuring the highest-quality portions of the firm’s C.D.O.’s against default.

For years, Merrill had paid A.I.G. to insure its C.D.O. stakes to limit potential damage from defaults. But at the end of 2005, A.I.G. suddenly said it had had enough, citing concerns about overly aggressive home lending. Merrill couldn’t find an adequate replacement to insure itself. Rather than slow down, however, Merrill’s C.D.O. factory continued to hum and the firm’s unhedged mortgage bets grew, its filings show.



The number of mortgage-related C.D.O.’s being produced across Wall Street was staggering, and all of that activity represented a gamble that mortgages underwritten during the most manic lending boom ever would pay off.


http://www.nytimes.com/2008/11/09/business/09magic.html?pagewanted=all


SURE, DERIVATIVES DIDN'T BRING THEM DOWN *SHAKING HEAD*


As former Goldman Sachs CMBS surveillance expert Mike Blum explains: Wall Street reaped huge profits from “creating filet mignon AAAs out of BB manure.

You don't realize CDO'S are derivatives? lol

CDOs are bonds, not derivatives. LOL!

A CDO only becomes a derivative when it is used in conjunction with credit default swaps (CDS), in which case it becomes a Synthetic CDO.

Your claim was CDOs, not synthetic CDOs.

Weird how SO many things so you are full of it start here


CDO - Collateralised Debt Obligation They are basically a complex amalgamation of parts of mortgage backed securities (MBS).


MBSs are home loans that have been transformed into financial products so the original home loaner is able to sell them to others. So CDOs are derivatives of home loans. They are very hard to accurately value because of how complex they are.



As one journalist (Gretchen Morgenson) put it, CDOs became "the perfect dumping ground for the low-rated slices Wall Street couldn't sell on its own."

So CDOs are derivatives of home loans.

Start with a bond, slice it any way you'd like, the slices are still bonds.

 

[Toddsterpatriot]

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

Collateralized Debt Obligations (CDOs): CNBC Explains



The Role of ABS, CDS and CDOs in the Credit Crisis and the Economy



The credit derivatives - ABS, CDS, and CDOs - played a significant role in the Financial crisis affecting both the financial and real economy


Second, an unusual excess demand for subprime mortgage credit derivatives (ABS, CDOs, CDO^2) held by Financial institutions and investment funds occurred. This excess demand generated, in turn, an increased supply of funds available for subprime mortgages through the credit derivative creation process


http://www.russellsage.org/sites/all/files/Rethinking-Finance/Jarrow ABS CDS CDO 2.pdf

Thanks. That was funny. And wrong.

Sure, that's why Lehman is gone but JP Morgans still around

Lehman is gone because they held a huge number of bonds and they financed their position with overnight money.

 

[Toddsterpatriot]

One of the major culprits blamed for the financial chaos of 2008-2009, were collateralized debt obligations, or CDOs. Like any derivative, the value of a CDO is based on an underlying asset. In the case of a CDO, this asset is a mortgage-backed securities, which is also a derivative. But how are these CDOs constructed and why would people buy them? Salman Khan of the Khan Academy gives a basic explanation of MBS.

Collateralized Debt Obligations (CDOs): CNBC Explains



The Role of ABS, CDS and CDOs in the Credit Crisis and the Economy



The credit derivatives - ABS, CDS, and CDOs - played a significant role in the Financial crisis affecting both the financial and real economy


Second, an unusual excess demand for subprime mortgage credit derivatives (ABS, CDOs, CDO^2) held by Financial institutions and investment funds occurred. This excess demand generated, in turn, an increased supply of funds available for subprime mortgages through the credit derivative creation process


http://www.russellsage.org/sites/all/files/Rethinking-Finance/Jarrow ABS CDS CDO 2.pdf

Thanks. That was funny. And wrong.

Q&As on accounting for some collateralised debt obligations (CDOs) – prepared by the staff of the IASB


The following questions and answers (Q&As) summarise some key issues regarding the accounting for some CDOs in accordance with International Financial Reporting Standards (IFRSs) and highlights at a summary level how that compares to US generally accepted accounting principles (GAAP).


What is the issue?

Some features of collateralised debt obligations (CDOs) are embedded credit derivatives. The issue is: when do these embedded credit derivatives have to be separated from the CDOs and accounted for at fair value through profit or loss?



The IFRS Foundation is an independent, not-for-profit organisation. Our primary mission is to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRS) based upon clearly articulated principles.

IFRS are developed by the International Accounting Standards Board (IASB), the independent standard-setting body of the IFRS Foundation.

IFRS - About the IFRS Foundation and the IASB

Thank you for repeatedly confusing cash CDOs for synthetic CDOs.