It's a little gimmicky, but I have to say that it is a clever bit of journalism that really helps to make the whole ordeal a slightly more understandable to less financially literate (like myself).
I'm repeating myself, but Planet Money's podcast is genuinely very good. It was spun out as it's own entity after an episode of This American Life about the financial crisis got really good feedback.
They explain some fairly complicated financial stuff in an easy to understand way, without dumbing it down. They have lots of good, heavy-hitting guests on.
They're dumbing it down, but they are patronizing you so that you will feel smart...so you won't listen to someone who tries to correct the carefully planted misconceptions.
You should avoid everything that requires an expert "explaining" things in an "easy to understand way".
Avoid religion and stocks markets. No one understands either. Both require a great deal of faith. And only a few people (ministers and stock brokers) proclaim to speak expertly on them... the rest of us just have to give them our cash and believe.
Creating government bureaucracy should definitely be avoided. We're stuck with inherently-complex problem domains of global climate and large-scale information manipulation, though.
Global warming.... A hilarious topic you hear a lot of lies about. It is actually a simple topic since the ear is getting cooler and it is easily proven. What's complicated is the extensive lengths the global warming religion will go to to try and pretend like this totally politically motivated movement has a relationship with science.
It is amazing what you can get people to believe by constantly repeating unscientific claims and the mantra that "all scientists agree" even though in grade school you should have learned that this is not how science works.
PT Barnum was right... I didn't believe it myself, until I tried to talk about global warming with NPR programmed automatons.
That may be true. Haven't looked into it myself. (I didn't downvote you BTW).
I think the problem is that the world simply cannot sustain the entirety of its population living with first-world standards. Better medicine in developing countries makes this worse since they now have as many children as before, but more of them survive - taking up resources. The global warming alarmists are probably keen to bring down the standards of the first world and handing it over to the rest of the world via carbon credits and the like. That strikes me as a traitorous view to take given that most of them are from the first world.
A good test of journalism is how it reads when you are an expert in the the topic. It usually comes off sounding a little awkward. If there are no outrageous mistakes, then count it as a good article. After all, it is written by people who need to have expertise a mile wide and an inch deep.
Yep, all the best propaganda makes you think you're learning something while actually feeding you a careful set of lies to keep you from realizing the truth. Like the fact that Clinton and Bush causes this catastrophe, not the wall street banks, and at the federal reserve is a private bank ownd by the likes of goldman Sachs-- and that this whole thing was a scam to loot the public with the government and banks profiting handsomely from it for decades, while at the same time creating a crisis that allowed unprecedented illegal takeovers of competitors and now the federal reserve - a private corporation gets to regulate it's industry and force banks to merge on terms it dictates.
But you will argue with me, even though you haven't studied finance or economics because you are yet another ignorant american leftist who listened to npr and now you think your educated. Indoctrinates is more like it.
And while none of you can present counter arguments to my claims, which are factual and thus not disputable, I'm sure you will attack me personally and mod this post down, like you do every post of mine that doesn't agree with the herd mentality ....and go to sleep thinking you exercised your critical thinking skills.
Here's a clue you will certainly ignore: if you engage in critical thinking, you can't stand to listen to NPR because it is such blatant and obvious political propaganda that doesn't stand up to scrutiny on the face of it.
Of course you think that is an absurd thing to say, because the Matrix has you. You can't imagine a free life.
Of course, not the guy I'm directly responding to, who mows,maybe his mind is not far gone.... But in general, this is the situation we fing ourselves in.
And being totally mislead about the 2008crisis, you're ready to be fucked by the 2012 crisis.... Just like you knew nothing out enron but were certain there was no housing bubble in 2005.... Because you believed the lies NPR, et. Al. Told you about enron and your friends got rich flipping houses.
I'm not sure if you think that this form of debate that you are engaging in is meant to attract people to your side, but as libertarian that leans towards the Austrian school of economics, I ashamed to have anyone like you on my side.
Ironically mortgage bonds were invented to solve the opposite problem: mortgages getting paid off (when moving or refinancing). People tend to do those things when interest rates go down. Investors didn't want to buy a bond that paid low rates of return when interest rates were high (as most bonds do) and then might get repaid in full with no penalty when the rates lowered.
The answer, of course, was to roll a bunch of mortgages together into a special purpose vehicle (SPV) then sell bonds to fund it, then divide those bonds into tranches such that the lower tiers got repaid in full when the refinancings started. Kind of hard to believe now that investors used to be worried about people paying their mortgages off too soon.
It looks a little complicated at first glance, but it's an excellent visualization, especially once you get the relationship between the "How we are doing" and "How long we have left" graphs (the left not mattering until January 2010). Watching the right one throughout the history of the asset is actually a little horrifying.
Yeah the thing that I don't understand is, so it is dead with no payments but their is collateral behind that asset so what happens when the foreclosures are sold. Do they receive a check for their portion of the asset sale? That would offset the the numbers I should imagine. So if they have collected roughly $450 of their $1000 investment and then receive a $300 check from the asset sale. that is $750 of their principal returned. In regards to the banks that hold these assets they received a bailout so I would assume that they still see a profit on these "Toxic"assets due to the bail out. As well this asset was purchased in the middle of the housing fall out while some of the other assets had been producing returns for some time before this whole mess. Also what about that PMI they make people buy if they finance more than 80% that is supposed to protect the mortgage holders principal, in the event of a default. One of the reasons I love math is one of the reasons I hate it the numbers are so easy to skew, to someone who does not know what variables to look for. I am not accusing NPR of anything here after all they are journalist by trade not economists or bankers, but I think there are some missing variables here.
There are different classes of bond holders within their bond fund. Toxie was a lower ranked class that was assuming more risk, and we've now reached a point where a sufficient number of mortgage holders within the bond fund have defaulted, that there will never be enough mortgage payments coming in to pay the holders of Toxie-class bonds within this fund. Other people within the fund are still getting paid.
If I recall correctly from earlier Planet Money podcasts, this was part of the problem. The overall fund would receive a low-risk rating, and those parts would be bought up by the really big institutional investors. The crappier bits of the same funds would then be sold to your local teachers retirement fund or similar, bought by investors who were savvy enough to realise they were assuming more risk.
(I've almost certainly got some of that wrong - someone correct me!)
Regardless: listen to Planet Money - it's 12-20 minutes 3 times a week, and they make a lot of complicated stuff relatively easy to understand and accessible.
Start
100M mortgages.
100M bonds (in reality for "safety" it was more like 95M in bonds.)
80M was part of the upper class.
20M was part of the lower class.
If 30M of mortgages went busto without EVER paying a single payment and houses sold were worth 20M then 100% of the lower class got destroyed. Assuming the other 70M worth of mortgage holders kept paying until principle was returned the upper class never saw a single cent of loss and the lower class never gets paid a single cent of principle or interest.
It is a clever piece of financial engineering that allows risky loans to be "safe." It is also why writeoffs can be complete for the lower class even though the asset (house) is sold with a positive value.
From what I can tell, this is after the write-downs from sold assets: someone walks on their mortgage, the bank sells it in a foreclosure sale, some of the proceeds are distributed to the bond holders by tranches, and then that asset is removed from the bond. The way tranching works, lower tranches like this one lose assets that way disproportionately quickly. Their bond now has no remaining assets on which it has any claims left, so any cash they've already gotten is the full value of the security.
Thanks, for clearing that up but from the charts I saw on the site, there where still assets in bankruptcy which temporarily stays the asset sale, I could be totally misreading the info (it happens) but it did look to me that their where still unsold assets under the umbrella protection of bankruptcy proceedings. As well I still do not see how PMI plays into their return.
My understanding of these things is that this kind of debt is mostly unsecured. If a house is repossessed and sold at a loss after the mortgage has fallen into arrears by more than a certain percentage, the unsecured creditors get nothing. Of course, now nearly every repo is sold at a loss, and there are 2x as many empty properties sitting on the books as are advertised for sale, so that's not going to change for a while.
Remember that the toxic asset is not a collection of salami slices from different mortgages - there are laws against dividing up a mortgage or loan interest that way, I believe. The slices were claims on the profit - the sum of mortgage payments minus cost of capital, and were paid out in exchange for cash up front.
Holding these assets seemed like a good idea at the time they were issued, because even if Joe Blow lost his job or whatever, the rising property market meant that he or the loan service company just had to be patient for a few months - then the house could be sold for more than the value of the debt, the unsecured creditors would be OK. Joe Blow himself would have a clean slate unless he was truly incompetent, because before the bubble burst it was fairly easy to offload the property and look like a responsible individual who serviced debt promptly. I heard of people doing that and ending up with a better credit rating as a result, because on paper they were now the sort of person that does profitable 6-figure real estate transactions. The smart ones gave classes, the stupid ones believed their credit reports and started thinking they were financial wizards.
On the issue side, it worked like so: I give Joe Blow a $500k mortgage, he is supposed to give me back $1m over 20 years or whatever the compound interest + principal amounts to. Well great, but now I have to wait a decade before I start actually making money on the deal. Traditionally, banks' business model is to control enough capital and manage risk well enough to play that long game, in fact to play a longer game than anybody else on the market. But in recent decades, so much money had gone into the stock market via retirement funds etc. that bringing in your profit over a 10-30 year period looked rather tame. Sure, there were big profit multiples in the credit card business, but it takes time for most people to run up substantial credit card debt, and the kind of people who rack up house-size debts quickly are unfortunately the sort of people who tend to pay them off too because they understand how to use credit effectively, so they are not generating any profit. And in a rising market, those long-term profits seem to have a very high opportunity cost, because although they are secured by property, I could probably double my money faster by investing it in some dot com thing, whatever that means...
Meanwhile, I'm out the $500k I just gave to Joe Blow, and my competition across the street is just celebrating an IPO of clueless,com that paid off at 32:1. Damn! But wait - YOU look like a smart guy. Look, I have this mortgage on Joe Blow's house, and 99 others just like it. Houses - lovely solid assets, not like those inflationary stocks. They're even better than gold, because you can't live in a goldbrick, amirite? And who invests in gold, that's no way to make money any more, the 70s were a long time ago.
I'm gonna collect $500k from Joe over the next 20 years! He'll pay because it's his house, duh. My cost of capital from the federal reserve? Cheap, they only want $100k in interest, God bless Alan Greenspan. No, you can't raise capital there, you need a banking license like I have but they're like taxi medallions, you gotta wait years to get one. But look, about this $400k profit I make after I pay the Fed off. Times 100 mortgages that I've issued, that's $40 million dollars of pure profit - and this profit is on debt secured with $50 million worth of houses...at today's prices. And they're not making any new land, heh heh!
Oh, you wish you could get in on this? Yeah, too bad you don't have a banking license like me...but come to think of it, don't a lot of taxi guys rent out their cab, and everybody wins? Yeah! How about this: you give me $50 million, and I'll split the $40m profit with you, even Stevens, $20 mil each and I'll do all the hard work of collecting the payments each month and I'll hold all the risk. What's in it for me? Well, I'll issue some more mortgages, I got people trying to buy property faster than the hired help can build it. What's in it for you? $20 million my friend, and peace of mind. How long do you think this bank has been here?
OK, it was more complicated than that - there was an investment bank in the middle giving the sales pitch and gift-wrapping the item, and they were getting paid a commission up front. But this was the basic transaction that both sides suckered themselves into, and on which both sides lost money while the investment bank kept its cash commission.
"My understanding of these things is that this kind of debt is mostly unsecured."
The debt is secured by the home itself. It is a mortgage-backed security. In some places it is a non-recourse loan which means that once you hand over your house the lenders have no claim to the rest of your assets unlike a credit card loan.
It is complicated. You are correct in that when the house is sold investors get a recovery. Not all investors are created equal though. Difference pieces of a deal were paid different interest rates (according to risk) and as such they get allocated recoveries in a specific order. If you notice Toxie stopped getting payments a few months in and is declared dead a few months afterwards. This happens when the amount of losses eats through your piece of the pie. When the house gets sold is is sold for something less than the mortgage was worth. The losses get allocated to the riskier pieces of the deal which protects the lower interest rate/more "protected" higher pieces of the deal.
Also banks got bailouts which cushion them against losses but do not prevent losses. A loss on an asset is a loss on an asset. The federal reserve buying mortgage bonds was not considered a bailout per say but are helping to prop up prices which indirectly help the banks.
The way that these deals are structured is that a bundle of loans are aggregated in a broad river of money over a period of time, and then the money is sliced by time into bonds. (Not entirely by time, it is usually structured so that later bonds get appropriate interest payments.) If you're in one of the later time slices and money doesn't come in, you don't get paid. If you're in one of the earlier time slices, you still get paid. This means that every deal generates bonds with a range of risk from extreme to AAA. (Unless the risk models are wrong, in which case the "AAA" can turn out to be risky. As happened.)
When you have a loan modification, the principal owed drops. That means that the total amount of money coming into the deal goes down. Those losses hit the bottom bonds first. As you reduce principal, you reduce interest. Once enough money has gone out of the deal, those bonds won't pay anything more, and the bond is dead.
(I haven't been in finance for several years, but I used to be in the CMBS world.)
I am not in finance. This is a second-hand explanation. Tablespoon of salt and all that.
These sorts securities were structured in such a way that some people get a lower ROI, but better risk profile. The way that works is that whoever accepts the lowest rate of return gets their portion first. When the money runs out, the assets that would have the highest rate of return miss out entirely.
There are two major ways that a loan can change: default (where the debtor simply does not pay; this typically leads to foreclosure and the bank often takes a loss) and renegotiation (where the debtor negotiates a reduction in how much the debtor will eventually need to pay on the theory that the lower amount will make default less likely). Both of these reduce the amount of money coming in (and, indeed, the amount that is ever going to come in).
What happened is that the amount of money coming in (and expected to come in) dropped to the point where, after paying every asset promising a lower rate than Toxie, there was no money left to pay Toxie. As there is no means by which this situation can change, Toxie no longer has value.
Loam modifications are post-signing agreements to alter the terms of a loan, most commonly to reduce principal, waive interest, or alter the interest rate going forward. They are historically considered highly abnormal for residential mortgages.
They have very negative effects for lower tranches of mortgage backed securities.
When a house is sold at a loss that particular stream of mortgage payment dries up entirely. Essentially all of the non-paid off loans had their collateral (houses) sold and were declared closed. At the point no money will ever flow into the asset ever again. It's dead.
It seems to me that a modification to the interest rate or amount owed should not be allowed when the debt is owned by a third party - at least without that third party's consent. When a bunch of loans are rolled up in to a security, it's not practical to get the consent of all the shareholders.
it's not practical to get the consent of all the shareholders
Well, you get that when they buy the security. "By signing, you agree to accept..."
Except unlike for DVDs, this sort of thing is actually legally binding. Part of the whole subprime crisis was that nobody actually read these things, and they were caught by surprise when conditions changed. ("If 3 people default on their loans, your 50 billion investment is worthless." That's kind of bad when it's your own money, but really bad when you borrowed those 50 billion from someone else. Hence, a recession.)
And then the homeowners will declare bankruptcy and the third parties get nothing instead of possibly something. The risk of this happening is supposed to be encoded in the risk rating of the loan, but that didn't happen in a very useful fashion.
Do on scale. When people purchase, send them a high-quality plush toy representing their toxic asset, with crossed stitching for eyes, and a username and password.
This login accesses an online app that tracks their asset. You can link it to your facebook account, so that progress updates will appear like farmville messages.
If the asset gets profitable, they receive the eyes for the plush toy. Either way, once it's wound up they get a framed certificate to celebrate their participation in helping America out of deep financial shit.
Imagine buying a close relative a toxic asset pack for Christmas. It's a bit like giving someone a plant. You get to watch it after the day. But it's more edgy gift, because of the faint chance it will make money.
don't forget guys that toxic mortgage bonds (say totaling X) were "covered" by something like 10X of CDS (sold for the price of 0.01X), so whenever toxic bold holder (state teacher pension fund) lose the X, the CDS holders (smart Wall St guys like Paulson) make 9.99X. So the failure of the toxic bonds was historically necessary and thus unavoidable. The more toxic the toxic bonds are, the better it is for the CDS holders.
So the failure of the toxic bonds was historically necessary and thus unavoidable.
Why? There were lots of people on the other side of the transaction, too. The money paid to the collectors of the CDSes did not come out of thin air, after all.
"There were lots of people on the other side of the transaction, too. "
Absolutely. When you look into the current crisis, you'll notice that it isn't a crisis of "net loss". This crisis is just redistribution of money - for each loser there is a winner. No money or value was "net lost", instead it was redistributed. For each homeowner "B" who bought overpriced house, there is a previous owner "A" who made nice profit which is pretty much equal on average to what mortgage note holders lost when "B" foreclosed.
" The money paid to the collectors of the CDSes did not come out of thin air, after all."
Again, absolutely right. The CDSes were paid by taxpayers - government bailout of AIG and others. So what taxpayers lost, CDS holders won (as they are just better politically connected, surprise!). No net loss again.
In some cases those profiting from the earlier higher priced sale of a property, and the commissions, were committing fraud. One of the story links indicates that Toxie was connected to a known case.
A realtor flipped a property back and forth between friends multiple times, it being sold for a higher price each time. The banks were happy to make the loans on the property that was increasing in value. The people involved shared the gains along the way, then the last one defaulted. The selling back and forth could happen normally... it seems the fraud was in the parties obtaining loans for an owner occupied property. It was apparently empty the whole time.
These people didn't need an economic downturn to default. It was planned.
