Obama is the worst president since WWII

[sunmaster14]

Indeed. We went through this recently and I posted this link:

http://fcic.law.stanford.edu/

This is the official congressional report on how the 2008 crisis occurred. Note that Fannie and Freddie were late to the game in terms of subprime mortgages and were actually losing market share. Any theory of the crisis that does not include CDOs and CDSs is complete BS.

CDSs? CDS had almost nothing to do with the buildup of the housing bubble. Anybody who says so is proving his ignorance.

CDS did play a huge role in the popping of the bubble though. It was the creation of the ABX index in early 2007 which allowed the smart hedge funds to finally short the mortgage market in a way which was transparent, liquid, and marked-to-market every day. This caused the non-conforming mortgage execution channel to close completely in July 2007, and to this day, it is closed except for super-prime stuff.

As for CDOs, CDO^2 (even CDO^3), they played an important role, but just plain vanilla private label alt-A and subprime securitizations were sufficient to blow the bubble sky high.

 

[Unabogie]

CDSs? CDS had almost nothing to do with the buildup of the housing bubble.

Did I say they were behind the housing bubble? I don't think I did. I did however point out that even the conservative dissent disagrees with you that Fannie and Freddie caused the crash.

Anybody who says so is proving his ignorance.

My Bayesian analysis says there's an 86% chance you're projecting.

The housing bubble was caused by the simple innovation of bundling bad mortgages into CDOs while the ratings agencies failed to downgrade them. Bad loans were suddenly good loans. This led to lenders looking for anyone they could find to sell a mortgage to (NINJA loans, anyone?), which created more buyers, which drove up prices world wide. Remind me again, if the housing bubble was global, how did Fannie and Freddie become the PRIME reason for people buying houses in France?

The crisis was caused because there was an insane amount of money to be made on risky loans (which included lenders, banks, Wall Street, and home buyers), and people scooped it up thinking it would last forever. When the risky home buyers predictably defaulted on their mortgages, the CDSs came due. The CDOs were shown to be worthless. The liquidity dried up. The market tanked. The end.

<snip>

 

[sunmaster14]

Did I say they were behind the housing bubble? I don't think I did. I did however point out that even the conservative dissent disagrees with you that Fannie and Freddie caused the crash.

Did I say that you said they were behind the housing bubble? By the way, I don't mean to imply that you are saying that I said that you said that they were behind the housing bubble.

If you're going to throw a whole report at me in rebuttal, please do point to a relevant section. I read those reports a long time ago, and although I felt they were written by people who had a very shallow understanding of the mortgage market and the financial system in general, I don't think it actually contradicts my belief that Fannie and Freddie were prime drivers of the bubble. The credit rating agencies of course facilitated the process, and as their official name implies (Nationally Recognized Statistical Rating Agencies), they are effectively creatures of government too.

<snip obnoxious reference to the fact that I often use math in my arguments>

The housing bubble was caused by the simple innovation of bundling bad mortgages into CDOs while the ratings agencies failed to downgrade them. Bad loans were suddenly good loans. This led to lenders looking for anyone they could find to sell a mortgage to (NINJA loans, anyone?), which created more buyers, which drove up prices world wide. Remind me again, if the housing bubble was global, how did Fannie and Freddie become the PRIME reason for people buying houses in France?

You have a tenuous understanding of what happened (CDOs were not technically where the real action was, and nobody thought that bad loans became better by bundling them together into securitizations), but, yes, once the securitization machinery got going and the real money investors became addicted to "AAA-rated" paper with "juicy" 30bps spread over LIBOR, the real loan fraud commenced. This helped drive home prices higher which in turn resulted in better than expected performance on risky (even fraudulent) loans which encouraged even riskier (and more fraudulent) loans. Was Fannie/Freddie a direct cause of a housing bubble in France? No, of course not. But indirectly it was. What happens in the US has effects everywhere. The US real estate bubble helped drive real estate prices higher everywhere, as well as credit spreads tighter. In the financial world everything is connected.

The crisis was caused because there was an insane amount of money to be made on risky loans (which included lenders, banks, Wall Street, and home buyers), and people scooped it up thinking it would last forever. When the risky home buyers predictably defaulted on their mortgages, the CDSs came due. The CDOs were shown to be worthless. The liquidity dried up. The market tanked.

I suspect you don't really understand what a CDS is. CDSs were responsible for AIG's collapse, but they weren't responsible for Bear Stearns' or Lehman's collapse. They simply weren't important except to the extent they created a mechanism for everybody to see that the AAA-rated emperor wasn't wearing any clothes.

As for the crisis being caused by an insane amount of profit potential, there always has been on Wall Street, and there always will be. Bubbles form, expand, and then they pop. It had actually happened in the stock market 7 years prior.

The end.

It didn't have to be the end. The government, being the monopoly provider of a fiat currency, has it within its power to solve any financial crisis, no matter how big, without letting it bleed into the real economy. Obama handled the aftermath poorly. He should have cut taxes quickly and deeply (as Bush did after the tech stock bubble burst), and he should have facilitated the foreclosure process rather than impeded it. Bush made some errors in responding too. The first stimulus (in early 2008) should have been much bigger, he shouldn't have tried to bankrupt Bear Stearns stockholders, he should have saved Lehman Brothers, and he shouldn't have given a tax incentive for homeowners to default.

 

[Regnad Kcin]

When I posted that list of "occurences", it wasn't my intention to explicitly blame Bush for any of them, but merely to point out that they happened on his watch, and to make that same criterion available for anyone who wished to demonstrate that Obama was an objectively worse president that Bush.

The tsunami of rationalization from Bush-apologists was to be expected, but still missed the point.

What we are left with - it seems to me - is a lot of bitter, angry conservatives who always despised Obama and are now reveling in the fact that they have a poll that validates them, the legitimacy or significance of that poll be damned.

It's the same mentality and maturity level as teenage girls arguing about their favorite boy band.

Well put.

 

[Travis]

I think it would have been interesting to have forced the respondents to name at least two major policy positions of each of the presidents they ranked. Those unable to do so would have their input discarded.

Because you know what this is? It is the spoiled kid who thinks his parents must be the worstest evar because they won't let him stay up past 9PM. That petulant little child has absolutely no basis of comparison to make that determination but he believes it with great conviction nonetheless. Because he wants to stay up!

So now here we have the conservatives who want abortion illegal, the gays dead or in prison camps, women reduced to baby factory slaves and lots of freedom for the corporations to do whatever the hell they want. But that meany, Obama, won't let them! So he must be the worstest president evar!

*stamp* *pout*

 

[Francesca R]

The implicit government backing of Fannie and Freddie was THE key driver of the financial crisis, in my opinion. The original sin, if you will. Private financial institutions simply could not compete with Fannie and Freddie in the market for conforming mortgage loans, so they were forced to look for business elsewhere, mainly in the subprime and alt-A sectors.

They weren't forced. However they weren't stopped either.

The Federal Reserve is pretty impotent when it comes to managing the economy. It can only tinker around with interest rates, which of course captures the attention of bond traders, but has little effect on the real economy. Fiscal policy is paramount.

Would not have had you down as a Keynesian.

 

[Francesca R]

CDSs? CDS had almost nothing to do with the buildup of the housing bubble. Anybody who says so is proving his ignorance.

Were you actually in investment at the time? Credit default swaps protect (supposedly) exposure to mortgages (among other things), which were themselves obtained through CDOs. The more protection you can buy, the more long exposure you're likely to buy all else equal. CDSs were one of the reasons people thought CDOs were safer.

Now--more tradeable markets that allow more complete risk hedging are a good thing (per Kenneth Arrow, Robert Shiller, others). But they also allow more leverage, and one way or another (actually "and" another) leverage is what culminated in the financial crisis.

(You don't have to accept the FCIC's view, you could also try Raghuram Rajan's book, himself currently running India's central bank and one of those generally regarded as having warned of the crisis correctly some years before)

 

[Jules Galen]

http://www.washingtontimes.com/news/2014/jul/2/obama-worst-president-wwii-new-poll-shows/

"“Over the span of 69 years of American history and 12 presidencies, President Barack Obama finds himself with President George W. Bush at the bottom of the popularity barrel,” said Tim Malloy, assistant director of the Quinnipiac University Poll."

​

Man...if we could bring back Richard Nixon or Ronald Reagan...people would sure as hell start to appreciate Obama in short order!

 

[Gawdzilla Sama]

Man...if we could bring back Richard Nixon or Ronald Reagan...people would sure as hell start to appreciate Obama in short order!

I wonder why they're not selling "I MISS W!" t-shirts in Iraq?

 

[Francesca R]

When the risky home buyers predictably defaulted on their mortgages, the CDSs came due. The CDOs were shown to be worthless.

I suspect you don't really understand what a CDS is.

The statement before yours is a correct understanding of what a CDS does.

CDSs were responsible for AIG's collapse, but they weren't responsible for Bear Stearns' or Lehman's collapse.

You are aware that Lehman failed due to its risk exposure to mortgages including CDOs, right?

You are aware that investors bought gob loads of CDS protection specifically written on the default of mortgages including CDOs, right?

And you are aware that AIG failed (was bailed out) two days after Lehman brothers went bust, right?

And you agree that:

In the financial world everything is connected.

So I dunno why you're trying to disconnect parts that you don't want to "blame".

 

[sunmaster14]

The statement before yours is a correct understanding of what a CDS does.

No, it's not actually. CDS was written on particular bonds. Not counting marked-to-market collateral arrangements, no money is due from the seller of the CDS until the bond takes either principal loss or an interest shortfall. Depending upon where the bond resides in the capital structure, this could be years after the deal turns to crap and the bond drops precipitously in value.

You are aware that Lehman failed due to its risk exposure to mortgages including CDOs, right?

Lehman failed because it couldn't roll over its repurchase agreements, i.e. financing arrangements. It was akin to a run on a bank. CDOs are securitization trusts where the components are actual bonds, rather than individual loans as in a plain vanilla securitization. They did not generally involve CDS. There were things called synthetic CDS which were CDOs composed of nothing but CDS on bonds. These were created mainly so hedge funds could construct short positions on the housing market. As far as I remember or understood at the time, CDS was not Lehman's problem. It was its inability to finance. I suppose to the extent that their cash portfolio was hedged with CDS, that would have created a cash flow problem because the CDS did not go down as much as the cash bonds and wouldn't have provided a sufficient marked-to-market collateral flow to match what was needed to meet margin calls on their repos.

You are aware that investors bought gob loads of CDS protection specifically written on the default of mortgages including CDOs, right?

It paled in comparison to the size of the mortgage bond market, and, in general, the investment banks Bear, Lehman, Merrill, Morgan Stanley, and Goldman, were long CDS, not short CDS. That is, the CDS was helping to stanch their losses.

And you are aware that AIG failed (was bailed out) two days after Lehman brothers went bust, right?

Well, AIG failed because Lehman failed. Once Lehman failed, the market went into free fall, and all of AIG's CDS got marked against them enormously, which exceeded their cash on hand. It was unnecessary to bail out AIG, by the way. It was done at the behest of European banks and Goldman Sachs who stood to lose tens of billions if AIG couldn't meet their collateral calls.

Regardless, the point is that CDS was rather late to the game in helping facilitate the housing bubble. The main driver was the securitization machinery which helped create $3T of so-called AAA spread product, which didn't deserve to be rated AAA.

And you agree that:

So I dunno why you're trying to disconnect parts that you don't want to "blame".

Because I feel most people don't understand CDS (I suspect you don't for example) and malign it unfairly. I was there at the start of the CDS market in the late 1990s (it started with Emerging Market debt trading), and it is a very useful tool. Interestingly, when Lehman failed there was a lot of worry that the CDS market on Lehman would break down because there was an enormous "float" of CDS written on Lehman. In the event (and I fully expected this at the time), the market cleared beautifully. Participants in the market had for the most part kept their net positions manageable.

CDS is not a fundamental risk in finance. Leverage is a fundamental risk. CDS can be used to create implicit leverage, but they are still less risky than an equivalent amount of explicit leverage using financing. Your lenders can always pull your financing (as they did with Lehman) and force you to sell at an inopportune time. They can't do that with CDS.

 

[sunmaster14]

<snip>

Would not have had you down as a Keynesian.

I thought I had mentioned a couple of times here that I am a neochartalist/MMT guy and am a follow of Warren Mosler. This isn't the first time that I have linked to his site.

 

[sunmaster14]

Were you actually in investment at the time?

Yes, I was in the middle of this mess, although I was a victim of it, not a perpetrator of it. It has since worked out very well for me, but the period from July 2007 to Sept 2008 was the most difficult time of my life.

Credit default swaps protect (supposedly) exposure to mortgages (among other things), which were themselves obtained through CDOs. The more protection you can buy, the more long exposure you're likely to buy all else equal. CDSs were one of the reasons people thought CDOs were safer.

CDS is a zero sum game. For everybody who buys CDS protection, somebody must be selling it. It does not alter the aggregate risk of investors to mortgages or housing. Yes, it could allow an individual bank or hedge fund to buy more mortgage bonds than it would ordinarily be able to and stay within risk limits, but it has to buy CDS from somebody else who then has to buy fewer mortgage bonds. The CDS market might have increased liquidity somewhat and greased the securitization machinery a little, but ultimately it was the creation of trillions of dollars of AAA-rated pieces of real but crappy bonds that created a financial crisis.

Now--more tradeable markets that allow more complete risk hedging are a good thing (per Kenneth Arrow, Robert Shiller, others). But they also allow more leverage, and one way or another (actually "and" another) leverage is what culminated in the financial crisis.

Yes, leverage was key, but I don't think CDS played a prominent role here. The credit ratings were sufficient. We were able to finance AAA-rated crap with 2% haircut (i.e. 50x leverage). No CDS involved at all. The haircut on various bonds didn't depend on whether or how you had the bonds hedged. Your lenders only saw the bonds you were financing, and all they cared about was that they had enough margin so as to cover any losses incurred in selling them in the event you defaulted. I think I can argue persuasively that the financial crisis would have been just as bad without CDS. In fact, CDS may have mitigated the crisis.

 

[Francesca R]

Not counting marked-to-market collateral arrangements

Well not counting the drop in prices, equities and houses never lose money either. Yeah.

no money is due from the seller of the CDS until the bond takes either principal loss or an interest shortfall.

Is this still not counting M2M?

As far as I remember or understood at the time, CDS was not Lehman's problem.

I just said risky mortgages were, which include CDOs.

in general, the investment banks Bear, Lehman, Merrill, Morgan Stanley, and Goldman, were long CDS, not short CDS. That is, the CDS was helping to stanch their losses.

I referred (as did you) to AIG. I hope you don't think AIG was net long protection. They were short.

Because I feel most people don't understand CDS (I suspect you don't for example) and malign it unfairly.

Except I didn't malign them, I praised them so maybe you just don't understand me. Which is odd since I am not normally unclear.

CDS is not a fundamental risk in finance. Leverage is a fundamental risk. CDS can be used to create implicit leverage

Dunno what "fundamental risk" is, but when you apparently say essentially what I said to you, at the same time as accusing me of not understanding derivatives, I gotta wonder where you're getting this from.

They can't do that with CDS.

This still your hypothetical where one disregards mark to market and collateralisation. . . ?

 

[Francesca R]

Yes, [the existence of CDSs] could allow an individual bank or hedge fund to buy more mortgage bonds than it would ordinarily be able to and stay within risk limits [ . . . ]

So increased leverage, yes?

You seem to be agreeing that CDSs allow increased leverage, and agreeing that too-high leverage was a problem. Seems like you kinda have to agree that CDSs played a pretty critical role here.

 

[sunmaster14]

Well not counting the drop in prices, equities and houses never lose money either. Yeah.

You cannot be forced out of your house as long as you keep making the monthly payments. Even if your loan balance is $500K, and the identical house across the street just sold for $150K.

Depending on the collateral arrangements for the CDS, there might not be any mark-to-market cash flow due either, even with a big price drop. AIG didn't have to post any collateral until certain very loose triggers were hit. This was because it was AAA-rated. In any case, as long as you can meet the collateral call (which is based on a marked-to-market which can be disputed, even litigated, for opaque markets like private label RMBS and CDOs), you can hold your position. Not so with cash bonds that you're financing. If the lender is nice enough, he'll send you a mark and ask for more margin. If you dispute the mark and tell him he's asking for too much, he can always say, "well, tell you what. how about you just pay me back in full and you take your bonds back and go find somebody else to repo them?" That leads to forced selling.

<snip>

I referred (as did you) to AIG. I hope you don't think AIG was net long protection. They were short.

In my original post that you were responding to, I claimed that AIG was killed by CDS exposure, but not Lehman and not Bear. I thought you were disputing that.

Except I didn't malign them, I praised them so maybe you just don't understand me. Which is odd since I am not normally unclear.

Ok, I misunderstood you I guess.

<snip>

This still your hypothetical where one disregards mark to market and collateralisation. . . ?

See explanation above. Marking down the price of bonds in an illiquid market is self-fulfilling because it causes forced selling by leveraged investors which then pushes prices down. There is positive feedback in explicit leverage that doesn't exist with implicit leverage using CDS.

 

[Francesca R]

You cannot be forced out of your house as long as you keep making the monthly payments.

And you can't be forced out of your shares at all even if they decline to nothing and you have no income. So stock market crashes should never matter I guess.

I suspect your reductionism is hindering your analysis.

 

[sunmaster14]

So increased leverage, yes?

You seem to be agreeing that CDSs allow increased leverage, and agreeing that too-high leverage was a problem. Seems like you kinda have to agree that CDSs played a pretty critical role here.

You missed the part about how there is an offsetting decrease in leverage on the other side of the CDS transaction because a CDS is a zero-sum game. Added risk on one side means reduced risk on the other side. But, yes, I would agree that in general the CDS market facilitates leverage modestly since it allows more flexibility to the market participants who are more inclined to use leverage. I don't think this effect contributed materially to the housing bubble, however. Like I said before, use of CDS for mortgage bonds and CDOs came very late in the game. In fact, I'm pretty sure that a lot of the long CDS positions that the investment banks built up at the end was due to their inside knowledge that the bubble was about to burst. They had intimate knowledge of the crap that was in these bonds, and they desperately tried to make money off of that knowledge. The people on the other side of these CDS trades were their sucker clients, including AIG.

 

[sunmaster14]

And you can't be forced out of your shares at all even if they decline to nothing and you have no income. So stock market crashes should never matter I guess.

I suspect your reductionism is hindering your analysis.

Huh? Of course you can be forced out of your shares if you borrowed money to buy them. Why are you comparing an unleveraged position with a leveraged position? Your lender can never force you out of an unleveraged position because you haven't actually borrowed anything and therefore have no contractual obligations to him.

Stock market crashes happen in large part because there are big players who are using leverage who are then forced to liquidate as prices drop. The crash in 1987 happened because of synthetic portfolio insurance which required fund managers to sell as the market went lower. It wasn't a forced liquidation per se, but it had the same effect.

 

[Francesca R]

You missed the part about how there is an offsetting decrease in leverage on the other side of the CDS transaction because a CDS is a zero-sum game. Added risk on one side means reduced risk on the other side.

Well no there isn't. Or no there wasn't. I can write you more and more CDSs and you can buy them all and our net position is flat but we have multiplied leverage. Why don't you know that?