How to answer "what caused the 08 financial crisis"

During an interview. How should I go about this?

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Comments (90)

Jan 4, 2012

Make sure you know your audience. I remember a story of someone who told an interviewer at a BB that the big banks caused the crisis and the interviewer ripped him apart

Jan 4, 2012
cbcbcb:

Make sure you know your audience. I remember a story of someone who told an interviewer at a BB that the big banks caused the crisis and the interviewer ripped him apart

Lol my friend also went to a super day where a kid said that greedy bankers caused the crisis. Turns out he didn't get the job.

Jan 4, 2012

it was caused by jesus being mad at america for all the homosexuality.

Jan 4, 2012

the housing crisis first and foremost...too much lending to those who couldn't pay off mortgages.

Then you have the complex financial instruments themselves such as mortgage backed securities and derivatives that were royally fucked when the housing market collapses along with Fannie and Freddie

Lastly, firms with too much leverage (debt to equity) think Bear and Lehman

Jan 4, 2012

Then you also have CDS insured by companies like AIG.

AIG's stock value was around $1500, now it's at $25

Born in hell, forged from suffering, hardened by pain.

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Jan 4, 2012

is it ok to blame the Fed for keeping rates too low too long? Ok to blame fannie/freddie?

Jan 4, 2012

Yeah, definitely ok to mention the fed. I had this question also, and I made sure to talk about the rating agencies giving many MBSs/CDOs AAA ratings when they should have been junk.

Jan 4, 2012

size up your interviewer and choose one of the following:

poor people
minorities
congress
fed

Jan 4, 2012

Blame that gay fuck barney frank.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Jan 4, 2012
heister:

Blame that gay fuck barney frank.

say that 10 times fast

Jan 5, 2012

You can include that a line about how the banks were partially to blame without spinning things out of control and losing your chances at getting the job. Basically, you need to take a factual approach to what happened with the banks because Wall Street is as much to blame as everyone else.

Basically... all you need to touch on is is that this was caused by a number of factors - the political drive to allow everyone to own a home, which dates back to the Carter Administration and the legally (read: Lawsuit driven) led movement towards allowing anyone who wants a mortgage to get a mortgage (I want to say this goes back to the mid-90s where a number of banks were sued because they would not give poor candidates for loans access to loans), cheap credit spurred on by the Fed and Greenspan as a result of Tech Crash of 2000 and LCTM's failure, rising home prices and a subsequent bull market, the rise of CDS, wall street's involvement in this, the inter-connectivity of the financial markets and how Too Big To Fail (I'm looking at AIG in particular who insured how much notional as a CDS Counterparty) institutions could have destroyed the world, political lobbying and the like, the quants and broken models - ie your model only assumes a 2% default rate and doesn't account for the off chance that there might be a 12% default rate, especially with everything at the same time. There's a lot to talk about... Just don't get too preachy about one doing more harm than good. Get your facts straight, know what happened and lay it out in a very straightforward manner.

And if anyone says that the banks weren't at fault or thinks that should be glossed over, I have a bridge to sell you in Crooklyn.

Jan 4, 2012
Frieds:

And if anyone says that the banks weren't at fault or thinks that should be glossed over, I have a bridge to sell you in Crooklyn.

Thanks, +1. But I prefer ocean front property - do you have any in the Southwestern US?

Jan 5, 2012

Read "The Quants" and you'll have plenty of ways to answer this. If I wanted to give a slick and succinct answer I would say: how do you price (ie assess the risk) a basket of bad mortgages? Turns out that you can't do it very accurately but we believed we could and that led to the crisis.

Jan 5, 2012

Blaming the government and people spending beyond their means hasn't failed me yet.

Jan 5, 2012

The political structure created an unstable situation that banks and homeowners had a highly leveraged position in, and when the economy went south, everything deteriorated rapidly. The government stepped in to keep things running in the short term while consumers and corporate America restructured their debt habits. The government will, in turn, be required to restructure its own debt habits in the not too distant future.

If they question you further, answer with the same bias they project onto their questions.

DONE

Jan 5, 2012

Simple answer Carter, Clinton and Janet Reno.

President Jimmy Carter sponsored the well-meaning Community Reinvestment Act (CRA) in 1977. It required banks and savings and loans to offer credit to "underserved populations" so they could obtain credit, including home ownership.

In 1991, the Home Mortgage Disclosure Act required lenders to report rejection rates by race. Lenders were informed that their loans would be examined for evidence of bias. Violators would face fines -- get this -- as high as $500,000. The Democratic Congress in 1992 passed the Federal Housing Enterprise Act, providing HUD the hammer to carry out Congressional intent to "meet the mortgage credit needs of all potential home buyers, including those with low and moderate incomes."

The 1992 act was the fuse that lit the largest housing blow-up the U.S. has ever seen, because one provision required that mortgage giants Fannie and Freddie "should accept down payments of 5 percent or less, ignore impaired credit if the blot was over one year old, and otherwise loosen (their) lending guidelines."

If she didn't like the reports on who was getting loans and who wasn't, then Attorney General Janet Reno bullied the banks with quotas and faulty statistics to literally extort millions of dollars from banks by alleging racial discrimination if they didn't play along. This intimidated many banks to agree to pay cash settlements so they could avoid trials and negative publicity

-- http://www.bizpacreview.com/index.cfm?fuseaction=n...

Harvey Specter doesn't get cotton mouth.

Jan 5, 2012

Depends:

--If your interviewer is a sociopathic clown, then blame "big gubermint" and "Barney Frank!"

--If your interviewer isn't a sociopath, you can dive into the real reasons, as follows:

1.) The Fed keeping rates way too low for way too long coupled with assholes like Alan Greenspan telling people to use their home as a credit card (he actually said these things)

2.) Shit bag lending houses like Countrywide and related firms massively shifting their new loan portfolios towards high growth, high margin "products" such as sub-prime and option-ARM loans

3.) Big Banks (or, Too Big To Fail banks) enabling the rapid rise of subprime lending via the creation of MBS and CDO products which "reduced risk" (actually, it just spread the brutal risk all over the place leading to an eventual apocalypse)

4.) Thanks to some collusion between the banks and the ratings agencies, these suspect products were given investment grade ratings (sometimes AAA). Keep in mind that the ratings agencies were incentivized to give the "best" ratings possible in order to grow faster and more profitably

5.) It's important to note that these shitty products were rated investment grade (and sometimes AAA) because it allowed pension funds and mass investment houses to fill their portfolios with "safe" and high yielding products. Think of it this way, these CDO products were often considered as "safe" as US Treasuries, but had a higher yield. So, big investment funds craved these products.

6.) Because of the supposed safety and high yield nature of these products, there was a top down demand for sub-prime mortgages. The demand for these products led to a demand from the banks to the lenders for new fuel for their MBS and CDO products (in the form of sub-prime loans)

7.) This top down demand allowed lending houses to further erode their lending policies, simply because they could participate in a game of hot potato - as soon as the loans were made, they were sold off to the banks who then made "safe" high yielding investment products to sell to investment firms.

8.) Let's be clear, a lot of the investment houses they sold these products to rely on the ratings of the products when making an investment decision. Their portfolios demand that they hold a certain level of investment grade products. Hence, why the demand was so great for them.

9.) In July of 2007, the ratings agencies did something unprecedented. They had two days of mass downgrades for hundreds of previously investment grade MBS and CDO products. This immediately caused the market to freeze up, and rendered these previously investment grade products completely illiquid. The game of hot potato had come to an end, and anyone holding this garbage was in for a world of pain. Oh, and when I say "anyone" I mean "everyone."

To conclude, if anyone wants to be so simple minded as to ignore the facts and blame "liberals" or some other such non-sense, tell them to eat a fat dick. Even though their fantasy world may help them sleep better at night, it's not real and should give you no comfort.

For additional background, I recommend reading any of the following:

--The Levin-Coburn Report on the Financial Crisis (even just the summary, it's incredibly well researched with all source docs available to read)

--Griftopia by Matt Taibbi

--Exile on Wall Street by Mike Mayo

Jan 4, 2012
TheKing:

Depends:

--If your interviewer is a sociopathic clown, then blame "big gubermint" and "Barney Frank!"

--If your interviewer isn't a sociopath, you can dive into the real reasons, as follows:

1.) The Fed keeping rates way too low for way too long coupled with assholes like Alan Greenspan telling people to use their home as a credit card (he actually said these things)

2.) Shit bag lending houses like Countrywide and related firms massively shifting their new loan portfolios towards high growth, high margin "products" such as sub-prime and option-ARM loans

3.) Big Banks (or, Too Big To Fail banks) enabling the rapid rise of subprime lending via the creation of MBS and CDO products which "reduced risk" (actually, it just spread the brutal risk all over the place leading to an eventual apocalypse)

4.) Thanks to some collusion between the banks and the ratings agencies, these suspect products were given investment grade ratings (sometimes AAA). Keep in mind that the ratings agencies were incentivized to give the "best" ratings possible in order to grow faster and more profitably

5.) It's important to note that these shitty products were rated investment grade (and sometimes AAA) because it allowed pension funds and mass investment houses to fill their portfolios with "safe" and high yielding products. Think of it this way, these CDO products were often considered as "safe" as US Treasuries, but had a higher yield. So, big investment funds craved these products.

6.) Because of the supposed safety and high yield nature of these products, there was a top down demand for sub-prime mortgages. The demand for these products led to a demand from the banks to the lenders for new fuel for their MBS and CDO products (in the form of sub-prime loans)

7.) This top down demand allowed lending houses to further erode their lending policies, simply because they could participate in a game of hot potato - as soon as the loans were made, they were sold off to the banks who then made "safe" high yielding investment products to sell to investment firms.

8.) Let's be clear, a lot of the investment houses they sold these products to rely on the ratings of the products when making an investment decision. Their portfolios demand that they hold a certain level of investment grade products. Hence, why the demand was so great for them.

9.) In July of 2007, the ratings agencies did something unprecedented. They had two days of mass downgrades for hundreds of previously investment grade MBS and CDO products. This immediately caused the market to freeze up, and rendered these previously investment grade products completely illiquid. The game of hot potato had come to an end, and anyone holding this garbage was in for a world of pain. Oh, and when I say "anyone" I mean "everyone."

To conclude, if anyone wants to be so simple minded as to ignore the facts and blame "liberals" or some other such non-sense, tell them to eat a fat dick. Even though their fantasy world may help them sleep better at night, it's not real and should give you no comfort.

For additional background, I recommend reading any of the following:

--The Levin-Coburn Report on the Financial Crisis (even just the summary, it's incredibly well researched with all source docs available to read)

--Griftopia by Matt Taibbi

--Exile on Wall Street by Mike Mayo

You refuse to assign any blame on the government. I find that unacceptable. If you hate Wall Street so much why are you here?

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Jan 5, 2012

I forgot to add "The Big Short" for a fun version of things.

Also, if you want, listen to this lecture by Dr. Michael Burry. He made a boatload of money by seeing the causes of the crisis ahead of time. This is a great lecture and only takes about 30 minutes of your time and will leave you incredibly well-informed.

Jan 5, 2012

Heister:

For one, my first point blamed government. Two, if you remove exotic CDO products from the mix which spread risk throughout the system, the crisis wouldn't have been anywhere near as bad. The CDO products were financial AIDS and exacerbated the problem 1,000 fold. Hence my focus on what Wall Street did.

The video I posted with Michael Burry articulates this better than I ever could (and he places more emphasis on government).

Additionally, what a bs response. "If you hate Wall Street so much..." One can point out obvious mistakes and terrible things that were done by the banks and not hate Wall Street. Self-reflection and self-understanding is important in life, though apparently not to many people on Wall Street. Banks do a whole lot of good when the focus on smart lending and advisory. It doesn't mean that there isn't a lot of bad. Plus, I work in fucking middle market PE, it isn't even remotely related to the financial chicanery of CDOs.

Beyond that, i won't argue this anymore. It's a huge time suck and people only hear what they want to hear. Fine, blame government and act as though Clinton / Barney Frank / Nancy Pelosi had a gun to the head of the folks at Countrywide. Be my guest.

Jan 4, 2012
TheKing:

Heister:

For one, my first point blamed government. Two, if you remove exotic CDO products from the mix which spread risk throughout the system, the crisis wouldn't have been anywhere near as bad. The CDO products were financial AIDS and exacerbated the problem 1,000 fold. Hence my focus on what Wall Street did.

The video I posted with Michael Burry articulates this better than I ever could (and he places more emphasis on government).

Additionally, what a bs response. "If you hate Wall Street so much..." One can point out obvious mistakes and terrible things that were done by the banks and not hate Wall Street. Self-reflection and self-understanding is important in life, though apparently not to many people on Wall Street. Banks do a whole lot of good when the focus on smart lending and advisory. It doesn't mean that there isn't a lot of bad. Plus, I work in fucking middle market PE, it isn't even remotely related to the financial chicanery of CDOs.

Beyond that, i won't argue this anymore. It's a huge time suck and people only hear what they want to hear. Fine, blame government and act as though Clinton / Barney Frank / Nancy Pelosi had a gun to the head of the folks at Countrywide. Be my guest.

The FED is a seperate and independent entity. They are not responsible to Congress. You need to address the congressional mandates that caused what you mentioned to happen in the first place. 40 years ago lending was much more strict, and was forceably loosened by government intervention. Banks are in the business of making money. What do you think they are going to do when government gives you two options, one is pay huge fines. Two is to make more money then you are now by doing questionable lending that we as the government fully support regardless of the risk.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Jan 5, 2012

Watch Inside Job, although it blames a lot of the crisis on banks it is a great movie.

http://www.youtube.com/watch?feature=player_detail...

Harvey Specter doesn't get cotton mouth.

Jan 5, 2012

There are mountains of evidence showing the lending houses purposefully shifted their lending habits by choice, not because of government mandates.

That said, sure, government played a role. So lay that out, too. The facts are the facts, and none should be overlooked.

To the OP - best of luck if it ever comes up in an interview.

Jan 5, 2012

I think the safe way to answer this one is by telling the interviewer that 'everyone' played a part.

1) Gov't - By pushing subprime loans on lenders in poor areas that could not afford them.
2) People - By not reading the small print on their ARMortgage; by borrowing more than they could afford
3) Ratings Agencies - For rating subprime tranches AAA. Moreover, the AAA rating is earned based on how deep your tranche is; not the mortgages within. Stupid.
4) Banks/Insurance Companies - For being so nearsighted and letting smarter individuals take out CDS on MBS. This is how AIG got creamed.

And I'm sure the list goes on.. you can't stick the blame on just one person.

Of course you can say Obama. You can never go wrong with that : )

Jan 7, 2012

This is definitely the best answer so far along with TheKing's. Unbiased and succinct.

rothyman:

I think the safe way to answer this one is by telling the interviewer that 'everyone' played a part.

1) Gov't - By pushing subprime loans on lenders in poor areas that could not afford them.
2) People - By not reading the small print on their ARMortgage; by borrowing more than they could afford
3) Ratings Agencies - For rating subprime tranches AAA. Moreover, the AAA rating is earned based on how deep your tranche is; not the mortgages within. Stupid.
4) Banks/Insurance Companies - For being so nearsighted and letting smarter individuals take out CDS on MBS. This is how AIG got creamed.

And I'm sure the list goes on.. you can't stick the blame on just one person.

Of course you can say Obama. You can never go wrong with that : )

BossMode

Jan 5, 2012

Totally forgot about AIG. They sold CDS so recklessly that they could never ever ever ever ever cover them. In fact, I think you can blame the head of AIG FP during the run-up to the crisis more than anyone else on Earth for making the crisis as severe and insane as it was.

What a dick.

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Jan 5, 2012

TheKing, while I may disagree with part of the assessment (Namely the fact that you skipped over a basic "30 years of politics starting with Carter and going through W." for which both parties aided in creating this mess in lieu of a single point discussing the Fed. And, for the record, yes, it was both parties fault. You cannot blame one side or the other for the mess.), you definitely laid things out well. I think you are however, slightly off on one point. While you imply government action caused this vis-a-vis Fed action by keeping the interest rateslow, that's technically not true. The same can be said about what Heister said about the Fed, in that his point is also partially incorrect.

The Fed is a quasi-government agency. They are a private institution with certain governmental oversight and protection. They have this very weird status in that yes, they do report to congress and have congressional oversight, but they can, at the same time, go ahead and do what they want with respect to running the central bank. So when the Fed engages in market action, etc. they are acting as a private institution and the central bank of the US free of involvement by Congress. However, the Fed is still legally bound to the requirement of congressional oversight. Read the Federal Reserve Act - it lays everything out pretty clearly.

So, TheKing, while it may represent and imply government action, it really doesn't. Heister, while the Fed may have the benefit of being a private institution, it is still a quasi-government agency with federal oversight.

Scooby, while I appreciate the zeal to point out that it was a "liberal agenda", it wasn't solely Clinton, Carter and Reno nor would I suggest taking the view of a conservative who happens to own a Financial Services Company as gospel. Take everything with a grain of salt.

Jan 6, 2012

The King is pretty spot on here. A lot of people think it was shit like the CRA or Fannie and Freddie because they hear the talking points being reiterated. The most hard hit areas aren't urban slums, and Fannie and Freddie were pressured into getting into the sub-prime business around '05-'06 because everyone else was making bank.

While a lot of things contributed to the mess, to me, the key piece was the Gaussian copula: http://www.wired.com/techbiz/it/magazine/17-03/wp_...
This enabled sub-prime lenders to get increasingly reckless, as investors and ratings agencies both went with the numbers that said shit didn't matter and that it was cool to buy securities backed by shitty mortgages. CDS compounded the mess.

But in reality, there is no clear answer. Your interviewer probably wants to hear what they think, and plenty of people on the street still don't have the right answer.

Jan 6, 2012

The Fed is a government agency when people want it to be a government agency, an an independent entity when people want it to be an independent entity.

Furthermore, the constant necessity to place blame on either "evil banks" or "evil government" is useless. The two are intertwined in various different ways. Banks hire lobbyists to write rules and regulations to be enforced by government agencies filled with former employees of those same banks. This dance goes on and on.

The idea that corporations are somehow separate from government is idiotic, considering corporations need government in order to exist. Without a charter granted by a government, a corporation would be a lowly partnership, and all the advantages of limited liability would vanish.

The root cause of the financial crisis was a cascading failure of trust from the ground up. In a system built entirely on trust, this caused a panic on a massive scale.

Loans were typically made by mortgage brokers to untrustworthy borrowers. These brokers often used fraudulent paperwork to originate the loan, and often gave them to people with no income.

The banks bought these loans and sold them to investors. When the loans went sour, investors no longer wanted to lend money, not only to the untrustworthy borrowers, but to trustworthy borrowers as well, including banks.

Commercial paper markets dried up, as did other forms of short-term borrowing. Banks were afraid to lend to each other, let alone an individual borrower.

The entire system is built on trust, and the moment the illusion of trust disappears, everyone panics, and everyone loses.

Jan 8, 2012

I agree with TheKing wholeheartedly, I will add into that however a section before his first point, of the US Government (GWB) passing an edict that everyone deserves a chance to own their own home, and if the banks did not lend, they would be penalised.

Jan 4, 2012

the crisis started just as every other financial crisis has started since 1913: massive bubble caused by the fed eventually blowing up. this one was just exacerbated by the current account deficit that managed to move a lot of the MBS debt off shore to gullible german landesbanks and asian SWF dumb money. AIG's CDS writing is incidental. that's just the cream for the likes of Kyle Bass but people are being fucked because the MBS market has collapsed and that was what they were using as Tier I capital in lieu of treasurys and now their balance sheets will be crippled for decades barring massive recapitalizations via the Fed which means grandma is going to get robbed twice, first through bubble implosion of her home equity, and second through inflation which is the main cost of said recapitalization.

Jan 8, 2012

wow all these long ass posts.....here ill make it simple

excessive credit creation(aka feds fault)

Jan 10, 2012

All this and no mention of ratings arbitrage? How about originating banks selling mortgages to GSEs to package as MBS and turn around to sell the AAA tranches back to the originating banks so they could halve their capital requirements? How about doing it again with CDO (and again once more with CDO Squared)? There was just so much leverage! And of course no one understood that you have to use an options pricing model for ABS, or did any kind of meaningful sensitivity analysis of their own risk models. How about the legislation requiring many investors to only buy AAA fixed income products, which led to MBS blowing up in the first place? Why do you think Europe's mortgage sector is only ~20% originate-to-distribute (MBS), while ours is still 60%+?

This is what drove the boom in MBS, which in turn triggered the financial crisis, which wasn't really about MBS at all; it was a systemic interconnectedness unable to tolerate MBS' aggregate shock. It could have been any asset class blowing up, or even just a rumor that Lehman was actually a ponzi scheme... once there was a panic and therefore a run, the die was cast, all of AIG's CDS was going to get called, and credit markets were going to freeze up.

Personally, I blame the cause (MBS boom) on 1) an off the books federal entitlement program for home-ownership, 2) poor ratings standards, 3) irresponsible leadership at the GSEs. Everything else is static.

Jan 10, 2012

I think my strategy would be to start out broadly and then let them ask you specifics. If you give a long detailed response you exhaust all your ammo in one go. For example, on 2008 I might say:
"As the housing market collapsed in 2007 and into 2008, assets backed by mortgages declined drastically in value. A lot of these assets were on bank balance sheets or referenced in off-balance sheet vehicles that bank's had contigent exposure to. A a lack of transparency in the banking system led to panic, as investors were unsure of the total exposure of banks to these products. This created a liquidity crisis wherein banks had difficulty accessing short term funding markets and creditors refused to roll bank paper or agreed to do so only at much higher rates. As funding for banks dried up so did credit to the rest of the economy."

Then let them ask you more specific questions.

Jan 10, 2012

Fed keeping rates too low too long + Fannie/Freddie Intervention + Wall Street securitization food chain

Jan 5, 2012

Blastoise joined joined WSO and the rest was history.

No, but really dude.. was talked about like a week ago

http://www.wallstreetoasis.com/forums/how-to-answe...

Jan 10, 2012

Rothyman,

No but really dude, the 2008 financial crisis was talked about. Where is there anything about the European Crisis?

Fucking Faggot

Jan 10, 2012
Jan 10, 2012

basically banks were too greedy so they offered ppl with low credit rating mortgage loan -- subprime mortgage, so everyone had the money to buy housing which drove the real estate prices up, causing housing bubbles. but problems bursted as those ppl were not able to pay off their loan so banks were screwed. wall street repackaged the loans and sold them to foreign countries, spreading the domestic crisis to the world.
my understanding is limited too, but thats would i heard. you shall read the links from investopedia though, thats a ggod site.

Jan 10, 2012

basically banks were too greedy so they offered ppl with low credit rating mortgage loan -- subprime mortgage, so everyone had the money to buy housing which drove the real estate prices up, causing housing bubbles. but problems bursted as those ppl were not able to pay off their loan so banks were screwed. wall street repackaged the loans and sold them to foreign countries, spreading the domestic crisis to the world.
my understanding is limited too, but thats would i heard. you shall read the links from investopedia though, thats a ggod site.

Jan 10, 2012

That was quite well done.

Jan 10, 2012

would you use someone with a lisp to narrate?

Jan 10, 2012

Short answer: yes.

Long answer: A lot of people (often times investors/speculators) have 3 and 5 year ARMs and/or interest-only loans that are now hitting the end of their fixed period and are switching to the adjustable, higher rate (there was an article in WSJ recently about this, predicting the worst will be 1st half of next year). Many investors are now substantially under water and have a huge liquidity problem (since lending has tightened up and money is flowing out of RE). Both their options are bad: either keep making the payments or drop the price much lower than what they came in for. There were also a lot of Regular Joe's who became "investors" with 0% down interest-only loans who are now looking at a huge increase in the monthly payment when they switch to a variable 30-year (and are regretting they ever watched TLC's "Flip That House"). The foreclosure rates are really just an indicator of a much, much bigger mess.

Jan 10, 2012

Troll.

Jan 10, 2012
Gekko_KKR:

Troll.

I guarantee I can prove to you that bankers were not responsible for the financial crash. Don't hate, appreciate.

Jan 10, 2012

http://www.youtube.com/watch?v=Q0zEXdDO5JU
choke on a bag of dicks froto

Jan 10, 2012

If you wanted someone to write your homework for you Google is a great resource.

Jan 10, 2012
Cardinal:

If you wanted someone to write your homework for you Google is a great resource.

OH snap

Jan 10, 2012

...

Get it!

Jan 10, 2012

I believe this PBS documentary is a "must-see" for anyone in finance, as well as anyone else that cares about the economy, politics, or current events. Take an hour of your time to watch it now; you can always thank me later.

http://www.pbs.org/wgbh/pages/frontline/meltdown/v...
Best,
Numi

Jan 10, 2012

mod edit: Useless spam

Jan 10, 2012

It's a response to a liquidity crunch in the ABCP market after a default and extensions. Repos are an alternative method of funding for these vehicles, so a response through the banks isn't inappropriate. The immediate problem flows from price drops on mortgage assets, deleveraging triggers, and rolling funding, but the generic issue is an asset-liability term mis-match. The CP market is about $2.2 trilion and ABCP is 60% of that. Dislocation in money market mechanics also has wider implications (an understatement), so it's worth central bank attention. I wouldn't just characterize it as a bailout.

I don't know the equity markets, so I can't comment on effects there.

Jan 10, 2012

yes without a doubt. Esp in the CDO/ABS space.

Jan 10, 2012

Depends on where you are. The structured finance space is shrinking because there are less trades and certain sectors are basically closed. For immediate hires, I could see most firms trimming back. There are firms that cashed in big and looking to expand, but in currently, it's probably a decrease in traders in the industry wide basis.

However, if you're looking into summer internships/etc, I would not be worried at all. There is a long time lag between the time you are signed on as an intern and between the time you make money for the firm. Most of the banks/brokers are well capitalized and understand that they need to invest in the future.

Keep in mind the long term prospectives. Quant trading is booming. As computers are more powerful and algorithms become more complex, there is serious money to be made. Flow trading is booming. Think of all the baby boomers appraoching retirment, all their investments in their mutual funds need to come from somewhere. As asset management firms increase their AUM(Assets under managment) there will be more flow in the market, and a higher demand for traders.

Jan 10, 2012

I'm not in trading, however, I think this is a very good question. Would be interested in hearing some perspectives out there...

Jan 10, 2012

interesting question! Anyone?

Jan 10, 2012

Spread widening has been pretty brutal in subprime index land. ABX and TABX (especially for BBB/BBB- references) are really at incredible levels. Doug Lucas put out a very good piece a couple weeks ago on market implied and UBS shadow ratings. Novelty, selection process, refi liquidity, and diversification have also been cited as reasons for spread levels. Of course, there are mitigating characteristics, like doc terms and correlation (with assumed life), but these are usually second order. There seems to be a consensus that volatility results from dealers and hedge funds playing with each other, while those with money seem to be sticking with 'conventional' instruments for now. Single name CDS and ABS CDO are pricing quite differently, and many are experiencing some cognitive dissonance and trying to figure out how & when to react.

Anyway, subprime have been a readily available and popular asset class that many feel will undergo 'corrections' (more recent vintages anyway). With $2tn outstanding, this could be a decent sized basket of risk, though it is being eclipsed by others. In a couple of years, the 'subprime' in this topic heading will probably be replaced with 'levered loans'.

Jan 10, 2012

What effect has this had on origination of products like CDOs? I'd imagine the deal structure has changed quite a bit, but is there still strong demand out there for the product? I know a significant amount of subprime and levered loans were packaged into these things over the past few years. Thanks.

Jan 10, 2012

I think in two-three years, maybe even sooner, the heading of this topic would be 'LBO'.

Jan 10, 2012

Which bank was the one who applied for bankruptcy this week on one of its subprime funds?

Jan 10, 2012
aadpepsi:

Which bank was the one who applied for bankruptcy this week on one of its subprime funds?

Do you mean Accredited? They are a subprime lender, but not a fund.

They join New Century in the subprime graveyard, RIP.

Jan 10, 2012

dude we are fu cked but I do think some members in the financial sector are being unfairly punished, I think GS, BX, and Fortress are buys

I love this kind of market, bargains all over

Jan 10, 2012

I think there is a lot under the hood that is freaking the market out. Ton of lbo financing exposure, prospective sponsor fees way down, mortgage woes, and other prop trading trouble.

Word on the street is that one of Goldman's internal hedge funds is down "significantly" over the past month

Jan 10, 2012

in M&A, debt capital, etc.

Jan 10, 2012

I'm interested to see how some of these banks come out in the 3q, notably Merrill. They have been the top underwriter of CDOs and some of the more exotic stuff (CDO2). There is no bid out there for any abs and clo is halting too. It will be interesting to see if they have marked their warehouses down, or if that is coming.

On another note, anyone got thoughts on shorting Moody's (MCO). I think public outcry over their rating "opinions" can only intensify ... reported strong 2q but probably because tons of deals got rushed through. I think 3q could be a slaughter.

Jan 10, 2012

I know nothing about investing (on a personal basis) in bonds, but it seems to me that some of the high-quality corporate bonds are screaming buys right now. The market is panicking now with good cause, but short a complete meltdown, the AAA bonds are going to be fine...but they've taken huge hits in sympathy with the junk. Anyone buying high-quality bonds now - and how do you even go about buying bonds without investing in a fund? ETF?

Jan 10, 2012

moody's makes a good chunk of their revenue from rating CDOs. If the market drys up so does their revenue stream. i'd short them based on that, not public sentiment.

Jan 10, 2012

That's absolutely correct....there was a good article on CNN the other day from that Harvard economist. If it hadn't been for bad government policy, then this whole mess would never have happened. But it is just so much more convenient to now blame it all on greedy capitalists....communism is lurking just around the corner!!!

Jan 10, 2012

There is a whole string of people to blame for this mess. The borrowers who lied about their income or knowingly took on too much debt, the mortgage brokers who aggressively and dishonestly pushed loans, the regulators who looked the other way instead of discouraging the "originate to distribute" mentality, the investment banks who drank the securitization kool aid and believed they could diffuse and concentrate risk as they please, the investors for buying risky assets at ever-decreasing spreads to Treasuries while levering up to juice returns, the ratings agencies for weak diligence and overconfidence in the assets they rated, and the government for pushing homeownership for low-income families. Everybody is to blame, and at any point along the chain someone could have pulled out and slowed this down. It's not just the government, it's everybody.

Jan 10, 2012

Capitalist: Consumer/Stupid Home Owners
Socialist: Greedy Bankers
Answer: Both

Jan 10, 2012

Alan Greenspan for mistaking a localised problem for a systemic one and still over-reacting, unregulated mortgage brokers, and this mentality (see poster):

http://4.bp.blogspot.com/_eVB4pxYKr-0/SOKnE9rAiUI/...
I think labelling the investment banks as greedy in this whole affair is like labelling a person who stumbles over a $100 bill on the street greedy for picking it up. How many CEOs of commercial banks do you think came knocking on doors in 03, desperate because their balance sheets where getting saturated and begging for some way to get these loans off so they could make new ones? By the same logic, I wouldn't blame those who took out some of these loans when they were so temptingly dangled in front of their noses.

Disclosure: I don't work for an investment bank, nor am I a subprime borrower

Jan 10, 2012

I'll TRY to keep it short and sweet without leaving out any critical details. Well if you remember the recession in 2002, an effort was made to stimulate the economy so interest rates started getting lower no one was buying homes so mortgage companies started coming out with innovative new ways to offer more people loans, thus the popularity of Arm loans, Option-Arms, Hybrids, Interest only, etc, etc. Mortgage companies for the most part created their own guidelines to underwrite to so they choose how flexible they wanted to be or not. In most states to become a licensed broker it would run you around $250 and a weekend course at your local community college, an additional $250 would make you a correspondent broker meaning you could hire other people to close loans under your name without a license, and an additional $500 in some states would earn you the title of "Lender." It was literally that easy for Joe blow to start selling loans.

I'm not trying to judge anyone but literally everyone under the son who wanted to make 6 figures but had sh** for brains, became a broker.

So now you have all these weekend trained people out there soliciting mortgage loans to people who them themselves didn't know the difference between a 30 yr fixed and an Interest only loan. Out of high school I worked in Wholesale Business Dev. for a HUGE player in the subprime arena, at the peak of it our bread and butter was selling a 100% combo loan and we would do it for borrowers with a 580 fico score and a 55% debt ratio, you could have 2 repos and 9 evictions on your credit as long as it wasn't in the last 12 months you were getting a loan!
Here comes the good part...

The company I worked for along with Countrywide Fin., Fremont, First Franklin, and about 100 others ALL made their money buy selling these subprime loans to Wall Street in bulk wholesale, which they would then sell some over seas to China and others, keep some in mortgage backed sec. blah blah, blah.

Merrill Lynch, Morgan Stanley, Bear Sterns, were some of the biggest buyers of these loans, this I know first hand because I personally made the trip to N.Y. with a team of underwriters from my company for what we called "Month End Due Diligence". Here is where we and the buyer (Merrill Lynch etc.) would sit down and re-underwrite "10%" of the bulk of loans we were trying to sell, if we had closed 5,000 loans that month we would underwrite 500 files over a course of a week in N.Y with the buyer, oh and by the way we were re-underwriting to the guidelines that we had created! And if all 10% checked out fine in due dili, then the buyer would buy the entire bulk!

This process continued every month with dozens of lenders from 2002 til about Sept. 2007. OUCH!!!!
So that's why NO ANALYST has been able and WON'T be able to predict when this whole thing will boil over, because NO ONE knows the amount of damage that has been done, Wall Street was buying these loans in bulks of thousands but only checking these bulks by the hundreds so therefore it's impossible to know how much in the bulks were subprime and how much was prime.

It's literally like taking one-hundred quarters and placing them in someone hands and say, "Guess how many quarters I just gave you that were minted from the years 2004-2006?"
It would be impossible to give an exact answer.

That's why Merrill, Bear, etc. keep releasing new write-down losses, they honestly don't know how much bad shit they have. So yes one can argue that Stan O'Neal and others should not have been shown to the door, they weren't trying to hide info on losses, the idiots they put in charge over the mtg div. kept speculating about losses because they themselves had no clue or no real way to put a value on the losses.

There you have it, first hand from a guy who helped create the mess! Sorry about grammar, punctuation, spelling, it's late, I'm beat.
Kind of long but worth the read if you wanted to know how this shit storm came to be.

Jan 10, 2012

to further sobepehopeful's very precise history of the subprime mess - things got much more complicated when these Investment Banks bought these hard to value mortgages. Many of these banks bought these mortgages for the sole purpose of selling them to hedge funds and money managers - here's how:

Investment Banks bought billion of dollars of mortgages from mortgage originators such as American Home Mortgage, New Century Financial and Ownit (all went bankrupt). Many of these mortgages were pooled together into ABS (Asset Backed Securities). These ABS were usually backed by about 100+ mortgages. Depending on the characteristics of the underlying mortgages (FICO, LTV, WAL....) these ABS were assigned rating by rating Agencies (Moody's, S&P and Fitch). Many of these ABS received Investment Grade ratings - ratings that illustrated that many of the underlying mortgages were relatively unlikely to default, thus the ABS was a 'safe' higher yielding investment. Now the investment banks did not want to keep all this collateral on thier books so they made this collateral available in the open market through secondary trading. This collateral was then bought by many Hedge Funds and Collateral Managers. Now these HF and CM wanted to enhance the yields received from these ABS and collect fees (remember since many of these mortgages were originated when interest rates were low, many HF & CM were chasing higher yields then these mortgages gave off) and a great way to do this was to through Leverage. These HF and CM used leverage to repackage pools of ABS and create CDOs (collateralized debt obligations). These HF and CM acted as 'Collateral Managers' for the CDOs, many of these CDOs were structured by Investment Banks - why? Because the Investment Bank collected a structuring fee. Many of these Investment Banks used models to help structure these CDOs. The problem was that many of the models did not account for various factors - why? Since many of the underlying mortgages were new structures there was no historical data available to use in the models. The structures would work with the rating agencies to get these CDOs rated. The creation of CDOs was very advantageous for all parties involved (Investment Banks collect fee for structuring, HF &CM collect performance fee, rating agencies collect fee, and investors gain exposure to diverse group of assets and achieve a higher yield). Now what exactly is a CDO? A CDO is a credit derivative that has two main parts Assets and Liabilities. The Assets as the pool of ABS - which have their own individual ratings, avg WAL, avg FICO - and the liabilities these are the tranches (slices) of this pool of assets that are sold to investors. Each tranche of the CDO received a rating depending on the subordination of each tranche (how much collateral was under each tranche) the tranche with the most subordination was assigned AAA rating and the tranche with the least (or sometimes no) subordination was unrated - this is the equity tranche. The liabilities paid LIBOR plus a sprea (determined by the tranches rating) to the investor usually quarterly. Here's the problem since CDO tranche ratings were determined by subordination a tranche assigned AAA rating would be backed by ABS with an average rating of say BBB-. So during the ramp up period (when the HF and CM managers are buying collateral and looking for investors to buy their soon to be CDO) many Investment Banks warehoused their collateral. When the housing market went south and defaults skyrocketed many of the mortgages backing he ABS stared to default. When defaults reach a certain level the ABS can not pay out interest/principal to the investors and become worthless. The CDOs that hold these ABS also start failing their triggers and are unable to pay interest and principal to investors. Now the HF & CM are supposed to get rid of bad ABS that caused their CDO triggers to fail - problem was when the market went south there was no liquidity. No one could sell this stuff. Investment Banks had to start marking to market these ABS (and mortgages, and CDOs) that they had on there books. Problem was no one really knew where to market these assets because no one was buying or selling. So many of these assets were getting significantly marked down, hence all the write-downs.

ABCP - this was another interregnal part of the subprime mess. ABCP (Asset Backed Commercial Paper) is a money market security issued by corporations usually to fund their day to day expenses. Many issuers of ABCP were banks and financial institutions. ABCP is a collateralized security (back mainly by mortgages or ABS) because these securities are collateralized they 'were' perceived as less risky and usually had a lower yield then non-collateralized CP. CP has always been highly sensitive to credit. Usually many issuers of ABCP and CP 'rollover' their issues - when their current issue matures they pay it off by issuing new issues. When the subprime market went south these issuers were unable to 'rollover' their ABCP and also they had to start marking down the collateral that backed the ABCP. This caused a liquidity crisis and many issuers of ABCP were unable to fund themselves.

-Sorry if I lef some stuff out or did not do a great job of describing all of the moving parts involved. Sorry about grammar and spelling....I tried to type this quickly

Jan 10, 2012
Jan 10, 2012