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The alchemists of Wall Street are at it again.
April 20, 2013 11:15 AM   Subscribe

Wall Street begins playing again with the same matches that burned the economy in 2008 From the New York Times: "The banks that created risky amalgams of mortgages and loans during the boom — the kind that went so wrong during the bust — are busily reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street. " (View article on a single page)

This is getting fairly little coverage. Here's another piece from the University of Pennsylvania.
posted by Sleeper (57 comments total) 26 users marked this as a favorite

 
They're just doing right by their shareholders. The whole thing was, after all, massively profitable for the banks last time.
posted by Tell Me No Lies at 11:17 AM on April 20, 2013 [14 favorites]


Surprise!
posted by Rustic Etruscan at 11:20 AM on April 20, 2013 [5 favorites]


Boy, you'd think they'd have learned their lesson from the prosecutions, the forced break-ups, the clawbacks, the re-regulation, and our simple, pitiless lassez-faire approach of simply letting the worst of them fail.
posted by George_Spiggott at 11:25 AM on April 20, 2013 [119 favorites]


The revival partly reflects the same investor optimism that has lifted the stock market to new heights. With the real estate market and the economy improving, another financial crisis seems a distant prospect.

These people are about as connected to reality as Nero and his pals were when Rome burned.

(Tacitus also said that Nero playing his lyre and singing while the city burned was only rumor.[100])
posted by bukvich at 11:33 AM on April 20, 2013 [1 favorite]


Don't worry guys, someone will be along shortly to condescendingly explain why everyone is foolish for being concerned about this.
posted by feloniousmonk at 11:34 AM on April 20, 2013 [21 favorites]


Well if you believe the crash will repeat, buy credit default swaps, effectively shorting the market. Only about 10 investors had the foresight in 2007-2008 and they made what has been described as the greatest trade in the world earning billions (see The Big Short).
posted by stbalbach at 11:39 AM on April 20, 2013 [6 favorites]


History repeats itself, first as tragedy, second as farce.
-- Karl Marx
posted by nostrada at 11:40 AM on April 20, 2013 [5 favorites]


Oh for fuck's sake. Hit us with an asteroid already so some other species can have a go at it, this is beyond embarrassing by now.
posted by Iosephus at 11:40 AM on April 20, 2013 [6 favorites]


I think the boom-and-bust approach to life is underrated. Who would want a car that cruises stably and reliably at 50mph when you could have one that alternates between going 200mph and breaking down by the side of the road?
posted by George_Spiggott at 11:41 AM on April 20, 2013 [12 favorites]


My question is - who's buying? I was under the impression that a major part of QE involved buying up mortgage bonds and CDOs by the central banks. Is this accurate?
posted by enamon at 11:44 AM on April 20, 2013


"As for CDOs containing subprime home loans, "they may not be back for another generation.""

So, yeah, same type.

As to the improving RE market, a disproportionate amount of that is investors and REITs building multi-family units, not individual families buying that house in the 'burbs to raise the family. Relative to average income (as traditionally calculated before the oughts made us crazy) and the rent to own ratio, houses are still overpriced. (Yes, I know - location and YMMV.)
posted by IndigoJones at 11:45 AM on April 20, 2013 [1 favorite]


Who would want a car that cruises stably and reliably at 50mph when you could have one that alternates between going 200mph and breaking down by the side of the road?

Oh, come on now. Jaguars are perfectly good cars.
posted by TheWhiteSkull at 11:48 AM on April 20, 2013 [28 favorites]


Bundling many loans into one investment, a process known as securitization, provides an efficient way to channel money to borrowers who might not otherwise get funds.

Maybe they wouldn't otherwise get funds for a good reason.
posted by swift at 11:51 AM on April 20, 2013 [4 favorites]


Bundling many loans into one investment, a process known as securitization, provides an efficient way to channel money to borrowers who might not otherwise get funds.

Sometimes renting is the best option. Taking on a huge amount of debt just because everyone's been told that owning your own house is the way to go, isn't necessarily the right thing to do for your financial well being.
posted by arcticseal at 11:54 AM on April 20, 2013 [1 favorite]


I think the boom-and-bust approach to life is underrated. Who would want a car that cruises stably and reliably at 50mph when you could have one that alternates between going 200mph and breaking down by the side of the road?

Why do you think investment bankers buy Porsches?
posted by Talez at 12:02 PM on April 20, 2013 [1 favorite]


So, to recap: under the tail end of the Bush administration, and all of the Obama administration, we spent uncounted trillions of dollars for nothing. Worse than that: we deployed all those trillions with the explicit purpose of preventing anything in the economy from changing.

So, voila, it worked! Nothing changed. And nothing will change until 'too big to fail' is banished forever from the lexicon. TBTF is, very likely, the single worst economic idea ever, one with unlimited potential to inflict damage.

You're seeing why, right here. These entities are supposed to take risk in exchange for profit, but they're not really taking on risk, not anymore. In truth, you and I and grandma and our kids are taking on the risk, while they get all the profit. They know this.

So the cycle starts anew, precisely as many of us warned you it would.
posted by Malor at 12:09 PM on April 20, 2013 [20 favorites]


Joe Stiglitz Blasts Our Wealthy-Coddling Tax System for Increasing the Returns on Rent-Seeking
The Best Way To Save Banking Is To Kill It
In a previous post, I explained that banks are inherently fragile. One way to make them more robust is to increase equity capital requirements. This is the remedy advocated by Bloomberg View's editors. The banks call it radical but it's really pretty moderate, because it leaves the basic structure of banking alone. The same is true of calls to make the banks smaller. Smaller banks are still banks.
A genuinely radical approach would be to kill banking as we know it. Rip all banks, large or small, in two -- separate deposit-taking from credit-creation. Back the deposits one-for-one with reserves at the central bank. Then fund loans not with deposits or other money-like liabilities but by tapping investors who understand they've put their savings at risk.
posted by the man of twists and turns at 12:10 PM on April 20, 2013 [10 favorites]


History repeats itself, first as tragedy, second as farce.


Which is why Karl Marx wrote "Yakkity Sax." True story.

The Dodd-Frank regulatory overhaul is forcing banks to take extra steps in the process of bundling loans, but it does not change the basic approach.

The credit ratings agencies seem as subjective as hack film reviewers. Bundle a cartload of junk paper together with one vaguely stable looking star security and serve up the right gifts at the premiere and you get the equivalent of Rex Reed calling something like "Howard the Duck" a "delightful summer romp."
I don't know if that makes S&P Gene Shalit or Shawn Edwards. The metaphor kind of gets away from me there.
posted by Smedleyman at 12:14 PM on April 20, 2013 [8 favorites]


precisely as many of us warned you it would.

"You" warned "us"? Anybody who isn't blind could see that nothing significant was changing.
posted by Justinian at 12:30 PM on April 20, 2013 [6 favorites]


In truth, you and I and grandma and our kids are taking on the risk, while they get all the profit. They know this.
So the cycle starts anew, precisely as many of us warned you it would.


I'm not an economist but I have read a lot of Tolkein.

...no, really, wait, it works, hear me out - one of the things that didn't hit me as a kid that hit me on reading the "Lord of the Rings" books as an adult is that Tolkein was a fairly astute observer of human nature.
Everyone wants the One Ring. No one, except a very rare few, are willing to give it up. Even then, ego is a problem (for example Denethor's big problem is that he things he's the main guy set against Sauron.)
I mean, even the guys who might not want it for themselves, and even know they shouldn't use it, still aren't too keen on destroying it.

So it seems like an analogous situation with greed here. Everyone seems to think they can use the system without succumbing to corruption and destruction.

And one of the things that strikes me as an adult is that Tolkein really glossed over a few basic truths. One of which is when asked why they don't just chuck the ring into the ocean, Gandalf says that they can't pawn the ring off onto another age.
But no one really champions the other position. I mean, "screw the next age" seems to be the m.o. in Middle Earth and in reality.
Granted LOTR is about exceptional beings and acts. But Denethor seems to have been the scapegoat for the "screw the future" position that seems to be on the default switch for most of humanity.

We really should seek permanent change as a good in and of itself and as something to give to posterity from whom we borrow the Earth.
I say that to myself whenever I'm back home urinating into perfectly clean, fresh water. I still haven't taken care of that though.
I suspect the same kind of human inertia is at work with this.
posted by Smedleyman at 12:43 PM on April 20, 2013 [11 favorites]


I see "Jaguar" and "Porsche". I will raise you with Ferrari.
posted by mr_crash_davis at 12:44 PM on April 20, 2013


precisely as many of us warned you it would

*looks around, sees no one there, points at self*

Me?
posted by Hicksu at 12:46 PM on April 20, 2013 [1 favorite]


I see "Jaguar" and "Porsche". I will raise you with Ferrari.

Lotus FTW.
posted by arcticseal at 12:47 PM on April 20, 2013 [1 favorite]


Obama administration pushes banks to make home loans to people with weaker credit
"...The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place."
posted by republican at 12:53 PM on April 20, 2013 [3 favorites]


Lotus FTW.

As an aside, I love reading "FTW" as both "for the win" and "fuck the world".
posted by Hicksu at 1:04 PM on April 20, 2013 [5 favorites]


You guys are clearly stuck in the small bank way of thinking! Bugatti Veyron is the way to go: According to AutoCar, a routine service for a Veyron costs a whopping £12,866 ($21,033 USD), whereas an annual service for a Ferrari Enzo is £1680 ($2,746 USD). A set of new tires will run you £23,500 ($38,417 USD), and that’s because they have to be capable of handling a top speed of 253 mph. Moving forward, every fourth tire change, the Veyron’s wheels must be replaced, leaving you with a bill of £7050 ($11,525 USD) per wheel.

You see how only this car truly reflects the way the TBTF banks operate?
posted by nostrada at 1:04 PM on April 20, 2013 [1 favorite]


Don't forget about the rhino horn shift knob and the orphan-tear windshield washer fluid.
posted by George_Spiggott at 1:07 PM on April 20, 2013 [2 favorites]


Except who are they expecting to sell these instruments to? Greece? Some school district in Wisconsin? Perhaps an ETF comprised of same?
At this point in Wall St. history, it would seem that anyone dumb enough to buy these investment products sort of deserves to be taken out of the game, darwin style.
posted by Fupped Duck at 1:10 PM on April 20, 2013


Except who are they expecting to sell these instruments to?

You know that handful of weird generic funds that are your only choice for your 401K? They'll hide them in those. The "finance industry" as we are now expected to call it, is an extractive industry, basically mining helpless shmucks.
posted by George_Spiggott at 1:20 PM on April 20, 2013 [10 favorites]


skeptics say could open the door to the risky lending that caused the housing crash in the first place

It was second (or third, or fourth, etc.) Jumbo-sized mortgages given to wealthy people and CDOs traded between banks that caused the last crash, right?
posted by Blazecock Pileon at 1:20 PM on April 20, 2013 [3 favorites]


To be fair, the whole CDO and Credit Default Swap thing can work if all parties involved are honest and (more importantly) not insane.

The Big Short was linked above, and it goes into great detail how 99% of the people doing that kind of thing were completely fucking delusional when it came to: A) The market eventually going down, and B) Some people might not be 100% truthful in their dealings.

This thing can work, there isn't really any part of it that guarantees failure. But, since everyone in that business is a liar and out of their minds, we all know it will in fact fail.
posted by sideshow at 1:21 PM on April 20, 2013 [2 favorites]


Lotus FTW

i love reading it as "fot the whuck"
posted by quonsar II: smock fishpants and the temple of foon at 1:28 PM on April 20, 2013 [3 favorites]


You know that handful of weird generic funds that are your only choice for your 401K? They'll hide them in those.

Yep. My 401K guy once drew me a map of the chain of fees and middlemen between me, him, and my money. It looked like something out of the Gambino trials.
posted by RobotVoodooPower at 1:48 PM on April 20, 2013 [2 favorites]


"The Aristocrats!"
-Lloyd Blankfein, testimony to congress, February 2014
posted by qxntpqbbbqxl at 1:59 PM on April 20, 2013 [15 favorites]


This is a massively stupid article. It is not about the structure, it is about the risk. The financial crisis derived from a failure to properly weigh the risk of simultaneous home price decline and surging unemployment on other-than-prime mortgages. Anyone with a good model for the risk did fine, because the structures, by and large, performed as they were supposed to do. The "2.0" versions of structured credit deals are even more robust, building on the learning of the past few years.

Get worried if you start seeing mortgages being offered for 5% downpayments or developers throwing up casinos on spec or LBOs going off at 10x EBITDA multiples ... because then you'll know somebody's funding big risk back into the system.
posted by MattD at 2:11 PM on April 20, 2013 [5 favorites]


It is not about the structure, it is about the risk.

So it'll all be fine as long as no-one in the financial industry is reckless, selfish or greedy?

Phew.
posted by howfar at 2:47 PM on April 20, 2013 [12 favorites]


I take issue Smedleyman's characterization of 'Howard the Duck' as a substandard movie. Whomever played Howard, earned an Oscar for that performance.

I work for a ratings agency.
posted by sfts2 at 3:03 PM on April 20, 2013 [2 favorites]


At least they're not investing in Bitcoins.
posted by ymgve at 3:27 PM on April 20, 2013 [1 favorite]


It is not about the structure, it is about the risk.

More citing less hand-waving please.
posted by AElfwine Evenstar at 3:42 PM on April 20, 2013


It is not about the structure, it is about the risk.

No, it's about greed heads trying to get money for nothing. Whatever the details, in the long run, the bubble bursts and somebody takes the fall. Usually it's those with the least clout - poor schmucks like me with a 401K, a mortgage on a double wide, or a factory job on its way to China.

The financial crisis came from writing irresponsible mortgages and selling fraudulent financial instruments - otherwise known as money for nothing.
posted by tommyD at 4:14 PM on April 20, 2013


We really should seek permanent change as a good in and of itself and as something to give to posterity from whom we borrow the Earth.

Smedlyman, this is kind of my take on Tolkien as well. Building your economy, and ultimately your life, on greed is crazy because the outcome is entirely predictable.
posted by sneebler at 5:31 PM on April 20, 2013 [1 favorite]


Where the Hell's Mutant when you need him?
posted by ZenMasterThis at 6:26 PM on April 20, 2013 [1 favorite]


This is getting fairly little coverage.
Is the New York Times no longer considered a Major News Provider?

"...The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place."
posted by republican

Eponysterical.
Who among us does not remember the GOP claims that the whole crash of '08 was caused by Clinton Administration efforts to expand home ownership? I guess some liars (excuse me: "skeptics") always get to recycle the same old lies.
posted by oneswellfoop at 6:36 PM on April 20, 2013 [2 favorites]


You know what the profit motive is great for? Allowing individuals (and groups of individuals that team up together) to find ways to make money for themselves. It's great. Absolutely top notch. For that.

You know what the profit motive is bad for? Ensuring those individuals limit themselves to pursuits that won't hurt their neighbors and harm society when risky bets go south.

We would not be here today -- with our Internets and our iPhones and our Whole Foods and our Kickstarter-funded-widgets -- without the wonders of capitalism. But, please, can we stop expecting profit seeking capitalists to regulate themselves? And getting upset when they fail to? They won't. They can't.

So let's as a society decide we need to regulate the financial sector more effectively. Let's define the point at which businesses become too big to let fail and make sure they stay small enough that they can fail. And then let them fail.

Letting Lehman Brother's fail was the right decision but it really, really, really sucked. Like, really. This time let's avert the crisis. Let's all agree to a better set of rules to play by, instead of ending up on a Sunday afternoon in New York trying to decide if the government should send a message to bankers that taxpayers will subsidize risk or if the government should let the economy take its biggest financial hit in 80 years. That sucked.
posted by ztdavis at 7:29 PM on April 20, 2013 [4 favorites]




This is getting fairly little coverage.
Is the New York Times no longer considered a Major News Provider?
posted by oneswellfoop at 6:36 PM on April 20
I meant that there are relatively few sources talking about it. Yes, the New York Times is a major paper (and to their credit, this was on the front page).

But the apparent backsliding to the precarious 2008 position is still somehow escaping from being a story that multiple papers will cover simultaneously and treat as important (the Boston bombing suddenly became the top story in the nation, for example). The "agenda-setting" role that news media typically play has yet to focus its spotlight on the path that we're taking back to where we were.
posted by Sleeper at 10:06 PM on April 20, 2013


But, please, can we stop expecting profit seeking capitalists to regulate themselves? And getting upset when they fail to? They won't. They can't.

This is important, and it's important to understand that this is not because they're bad people. It's because short-term profit necessarily trumps long-term stability. People who think for the long-term, in a competitive system, are less likely to survive into that long-term than those who out-compete then by thinking only of immediate gain. Long-term thinking is just bad business from an individual perspective. Of course, it is absolutely vital from a societal perspective. Which is why we need robust and effective regulation.
posted by howfar at 7:31 AM on April 21, 2013 [6 favorites]


Get worried if you start seeing mortgages being offered for 5% downpayments...

Well thank God no one with influence is promoting that, then.
posted by cromagnon at 8:09 AM on April 21, 2013


I see "Jaguar" and "Porsche". I will raise you with Ferrari.

Lotus FTW.
No love for MGB? Oh, wait: you said it had to reach "200". I only read the "0" part.
posted by IAmBroom at 8:34 AM on April 21, 2013 [1 favorite]


You know that handful of weird generic funds that are your only choice for your 401K? They'll hide them in those.

Yep. My 401K guy once drew me a map of the chain of fees and middlemen between me, him, and my money. It looked like something out of the Gambino trials.
Sure, but this statement is inherently misleading. I don't care AT ALL how many people make money off of my investments. I only care how much of the returns from those investments I get to keep.

Now, my company offers me a fund with a 1% expense ratio. I take home 99% of the returns. Not bad, except THE EXACT SAME FUND is offered under a different name at a 0.5% expense ratio on the free market - but of course our 401k management company doesn't want to cut themselves out of half of their take.

That is the problem - not the number of people dipping into the 1%/0.5%.
posted by IAmBroom at 8:35 AM on April 21, 2013


> This is important, and it's important to understand that this is not because they're bad people.

I'm sorry, this is because they are bad people - if by "bad" you mean "has no respect for the law and doesn't care if they hurt other people".

Any one who thinks that these people aren't bad people should go and listen to the energy traders at Enron laughing about destroying the economy of California and putting old ladies in the dark - and this is things they said when they knew they were being recorded..

If there's one thing we've learned from all these meltdowns, from Enron through HSBC, it's that they absolutely knew that they were breaking the law, that people were getting hurt, and they simply didn't care.
posted by lupus_yonderboy at 2:44 PM on April 21, 2013 [1 favorite]


> Sure, but this statement is inherently misleading. I don't care AT ALL how many people make money off of my investments. I only care how much of the returns from those investments I get to keep.

But you also care about accountability, do you not? If a bunch of your investment just vanishes, or even just dramatically underperforms for a long period, you want to be able to find out what happened, don't you?

That's why the previous collapse happened - people were getting good rates of return (for a while) and didn't care that their securities were put together with multiple levels of disintermediation.

The fact that there are many levels of ownership or control is a strong red flag. You should be very careful with such investments...
posted by lupus_yonderboy at 2:47 PM on April 21, 2013


I'm sorry, this is because they are bad people - if by "bad" you mean "has no respect for the law and doesn't care if they hurt other people".

I'm not suggesting at all that many people in the financial sector aren't very wicked indeed. My point is that market forces, without proper regulation and law enforcement, make it inevitable that they will be so. The badness of individuals involved is an incidental accident of the system that selects and rewards them for badness.
posted by howfar at 3:28 PM on April 21, 2013 [1 favorite]


NY Times: Seeking Relief, Banks Shift Risk to Murkier Corners
Citigroup, Credit Suisse and UBS have recently completed such trades. Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.

The loans then look less worrisome — at least to the bank and its regulator. As a result, the bank does not need to hold as much capital, potentially improving profitability.

via Mother Jones: Regulatory Arbitrage Once Again A Growth Industry
posted by the man of twists and turns at 6:51 AM on April 22, 2013 [2 favorites]


I guess some liars (excuse me: "skeptics") always get to recycle the same old lies.

I thought I had asked that person a pretty fair question about that, and it is telling that this same person did not come back to address that fair question. We can't get them to answer for their lies, but at least we can point them out. At least we get that much.
posted by Blazecock Pileon at 10:56 AM on April 22, 2013 [1 favorite]


lupus_yonderboy: > Sure, but this statement is inherently misleading. I don't care AT ALL how many people make money off of my investments. I only care how much of the returns from those investments I get to keep.

But you also care about accountability, do you not? If a bunch of your investment just vanishes, or even just dramatically underperforms for a long period, you want to be able to find out what happened, don't you?
OK, that's a good argument. An infinite chain of middle men (to take it to an absurd point) would be completely opaque to scutiny, and therefore to real risk calculation; a one-deep investment is rarely possible (and probably less controlled than most non-penny-stock investments).
posted by IAmBroom at 12:43 PM on April 22, 2013 [1 favorite]




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