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Thread: The Big Short

  1. #61
    Join Date
    Mar 2010
    Location
    Cincinnati
    Quote Originally Posted by Jeffrey View Post
    Originally Posted by 77devil
    But the moral hazard that Wall Street banks were/are too big or important for the government to let fail severely distorts incentives and behaviors.
    Please expand on this thought.
    Maybe the notion that the Fed was now in the business of rescuing Wall Street entities got its first solid justification when the New York Fed rescued the hedge fund Long Term Capital Management in 1998, after Russia defaulted on some debt and devalued the ruble. The headline in the New York Times was "Seeing a Fund as Too Big to Fail, New York Fed Assists Its Bailout."

  2. #62
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    Mar 2010
    Location
    Cincinnati

    Déjà vu?

    Fannie Mae has announced a new mortgage program called HomeReady, under which loans are available with a down payment of 3% or 5%, and income from others living in the house can be considered as part of the debt-to-income ratio even though those others are not obligated on the loan. Déjà vu? https://www.washingtonpost.com/news/...tgage-program/

  3. #63
    Quote Originally Posted by swood1000 View Post
    Fannie Mae has announced a new mortgage program called HomeReady, under which loans are available with a down payment of 3% or 5%, and income from others living in the house can be considered as part of the debt-to-income ratio even though those others are not obligated on the loan. Déjà vu? https://www.washingtonpost.com/news/...tgage-program/
    IMO, at this time, interest rate risk is greater than default risk.

  4. #64
    Quote Originally Posted by swood1000 View Post
    Maybe the notion that the Fed was now in the business of rescuing Wall Street entities got its first solid justification when the New York Fed rescued the hedge fund Long Term Capital Management in 1998, after Russia defaulted on some debt and devalued the ruble. The headline in the New York Times was "Seeing a Fund as Too Big to Fail, New York Fed Assists Its Bailout."
    Thanks, I know the who, what, where, and why, since this is my game. I was merely wanting to know the OP's moral hazard position (risk magnitude, cost, prudence, etc.). There are no right or wrong opinions, but one can learn from another. I once debated a very strong financial person (GVTucker), on the old PPB, about the prudence of government intervention in 2008. I thought it was the only way to stop the next Great Depression and Mr. Tucker thought it was a very bad idea. My opinion has not changed, but I learned a lot from Mr. Tucker's insight, perspective, and analysis.

  5. #65
    Join Date
    Mar 2010
    Location
    Cincinnati
    Quote Originally Posted by Jeffrey View Post
    IMO, at this time, interest rate risk is greater than default risk.
    Do you think that the loan terms as described generally result in an acceptable default risk, one that a prudent lender without government backing and which will carry the loan on its own books would probably take?

  6. #66
    Join Date
    Mar 2010
    Location
    Cincinnati
    Quote Originally Posted by Jeffrey View Post
    Thanks, I know the who, what, where, and why, since this is my game. I was merely wanting to know the OP's moral hazard position (risk magnitude, cost, prudence, etc.). There are no right or wrong opinions, but one can learn from another. I once debated a very strong financial person (GVTucker), on the old PPB, about the prudence of government intervention in 2008. I thought it was the only way to stop the next Great Depression and Mr. Tucker thought it was a very bad idea. My opinion has not changed, but I learned a lot from Mr. Tucker's insight, perspective, and analysis.
    Could you summarize your view as to why an orderly bankruptcy of troubled financial institutions was not the route to take?

  7. #67
    Quote Originally Posted by swood1000 View Post
    Do you think that the loan terms as described generally result in an acceptable default risk, one that a prudent lender without government backing and which will carry the loan on its own books would probably take?
    No, I'm a conservative lender. However, I would not book conservative mortgage loans at this price point. IMO, the spread between secured and unsecured loans is currently excessive. Then, factor in the current rather liberal auto lending and, now, moderate mortgage lending and I want neither. Currently, I'm loading up on unsecured loans.

    So, IMO, a consumer should do the opposite. Get a 30 fixed rate mortgage under 4%, only pay minimum payments, and use their excess cash flow to invest in equity index funds. And, no unsecured debt.

    The nice thing is very few listen to me. Case in point, my wife.

  8. #68
    Quote Originally Posted by swood1000 View Post
    Could you summarize your view as to why an orderly bankruptcy of troubled financial institutions was not the route to take?
    Things were much worse than most Americans will ever realize and it would have been anything but orderly! It would have been the Ultimate Short!

  9. #69
    Join Date
    Mar 2010
    Location
    Cincinnati
    Quote Originally Posted by Jeffrey View Post
    Things were much worse than most Americans will ever realize and it would have been anything but orderly! It would have been the Ultimate Short!
    I'm in the process of reading the Paulson book On the Brink so I think I'm going to have this viewpoint explained thoroughly. Of course, it comes down to predicting behavior and the ability to do that will make someone the world's richest person.

  10. #70
    Join Date
    Feb 2007
    Location
    Forest Hills, NY
    Quote Originally Posted by swood1000 View Post
    I'm in the process of reading the Paulson book On the Brink so I think I'm going to have this viewpoint explained thoroughly. Of course, it comes down to predicting behavior and the ability to do that will make someone the world's richest person.
    That was the book I urged my students to read, if they read any of the books I suggested to them. While one must acknowledge the source and agenda (eg, defense of decisions), it was a truly scary book in terms of what was going on behind the scenes and the cliff we were close to falling off.

    Jeffrey has it completely right and the dire situation (whatever the cause) needs to be considered at all times in the analysis.

  11. #71
    Quote Originally Posted by duke74 View Post
    While one must acknowledge the source and agenda (eg, defense of decisions),...
    Absolutely; politics, agendas, affiliations, etc. are all at play. And, by recognizing those, I believe I can prove my point.

    Bush and Paulson have very different political views, agendas, affiliations, etc. than Obama and Geithner. Yet, they utilized basically the same approach. IMO, the second to last thing Obama wanted to do was make the top 1% much wealthier (which adding liquidity did). IMO, the last thing he wanted to do was have his legacy be another Great Depression.

  12. #72
    Join Date
    Mar 2010
    Location
    Cincinnati
    Quote Originally Posted by duke74 View Post
    That was the book I urged my students to read, if they read any of the books I suggested to them. While one must acknowledge the source and agenda (eg, defense of decisions), it was a truly scary book in terms of what was going on behind the scenes and the cliff we were close to falling off.

    Jeffrey has it completely right and the dire situation (whatever the cause) needs to be considered at all times in the analysis.
    Yes, I'm reading the book as a result of your recommendation.

  13. #73
    Join Date
    Feb 2007
    Location
    Forest Hills, NY
    Quote Originally Posted by swood1000 View Post
    Yes, I'm reading the book as a result of your recommendation.
    At last! Someone on this planet listened to me! Be still my heart!

  14. #74
    Quote Originally Posted by duke74 View Post
    At last! Someone on this planet listened to me! Be still my heart!
    Where's the family reunion this year? I'm thinking we married sisters.

  15. #75
    Join Date
    Feb 2007
    Location
    Forest Hills, NY
    Quote Originally Posted by Jeffrey View Post
    Where's the family reunion this year? I'm thinking we married sisters.
    Good one. (I couldn't comment privately.)

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