toxic debt

[reb]

this is, so far, the most succinct, 'layman's language' explanation i have seen:

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[eternaltriangle]

If you want the economic jargon, I believe crapstorm is the proper term.

[LaoTzu]

Thats a great read, I'll prob read it again ;)

It doesn't mention the derivatives market though...doesn't that market multiply the pain?

[reb]

LaoTzu,

the derivatives market is 'shorting/longing' the instruments themselves (this is close to the principle, but not exact-as i understand it, some of the derivatives market amounted to 'insurance' bidding on the instruments themselves-very complex...more than i'm going to try to explain in detail-some of the derivatives guys obviously don't understand that market very well). and, yes, it can multiply the pain. so does having individuals with an agenda messing with business practices (congress, specifically). when the 'rules of business' are short circuited, this brings the law of unintended consequences into play.

'crapstorm'...i like it. cluster fuck? collapse of a house of cards? i could just hop and cuss....reminds me of the movie 'the smartest guys in the room' (enron documentary)

[Indy]

There is an interesting discussion going on whether it is better to fix the bankmess by having a good bank take over a bad bank, such as happened with Merryl Lynch by Bank of America, or if you just create even more problems this way, cause it just gets the good bank into problems, like Citibank and, once again, Bank of America. Having a bank that is too-big-to- fail, it doesn't really help to make it an even bigger bank. Splitting assets from a major bank and create a healthy -good- bank and a 'bad' bank that is then taking over by the government.
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Not allowing a bank to become too-big-to-fail could be considered, due to the moral hazard it creates. But because of the important function banks have in the economy, a bank is considered too-big-to-fail fairly easily.

[Lucid]

There is an interesting discussion going on whether it is better to fix the bankmess by having a good bank take over a bad bank, such as happened with Merryl Lynch by Bank of America, or if you just create even more problems this way, cause it just gets the good bank into problems, like Citibank and, once again, Bank of America. Having a bank that is too-big-to- fail, it doesn't really help to make it an even bigger bank. Splitting assets from a major bank and create a healthy -good- bank and a 'bad' bank that is then taking over by the government.
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I am interested to see how they will handle this. They've been kind of waffling over it for several months it seems. Obviously, the problem with the second option, having the government buy up the bad assets, is that they will do so, of course, with tax payer money. This means that the bank itself unloads all those bad assets and prospers falsely at the expense of the taxpayer, who's left holding a giant bag of flaming dog crap. In addition, this kind of flies in the face of the whole capitalism idea. And the moral hazard here is just unwieldy.

Not allowing a bank to become too-big-to-fail could be considered, due to the moral hazard it creates. But because of the important function banks have in the economy, a bank is considered too-big-to-fail fairly easily.

This is an interesting point. It's not so much moral hazard I'm worried about here, as how much control the government would have and whether having a greater number of smaller banks would affect the economy and how.


...and I just read that they will go with the 'buying up bad assets' option.
This strikes me as a terrible idea. If anyone can convince me otherwise, I'm willing to listen.

[HeyZeus]

I keep hearing these economists talking about "toxic asshats". What the hell is that?

[reb]

you got me with the toxic asshats thing....to me, a toxic asshat is any politician, since they obviously have a head full of shit.

since, from the beginning of this mess, no one has been able to piece out which loans deserve how much risk devaluation, and evidently an army of holy cpa's with massive computers would not be able to do so, why, oh why, would anyone with any fiscal responsibility buy up the 'toxic assets'? with the economy tanking and unemployment increasing, the 'value' of any singular mortgage on day 1 could be changed by day 20, due to worsening conditions in the economy...i.e., the risk is greater that the mortgage holder would be unable to pay the mortgage. and i'm NOT going to go into derivatives...i barely undestand them, and i got an mba.

the only conclusion i can reach logically is what i have thought for about a decade...the economy is a house of cards, and these clowns in congress/washington are scared to death it will collapse and everyone will lose confidence in the u.s.s. of a. dollar. which leads to barter economy and all sorts of anarchist stuff...i love it. anarchy...we are close to it, i believe. the social agreement that we will accept 'green paper' for debts is near to collapse. if the economy collapses, we will have 'nationwide katrina'. and the clowns like bahnee fwank and chris dudd will no longer have any power...they must be taking barbituates to sleep at night.

the toxic debt....they forced these loans, and now no one wants them, and they were stupid enough to allow 'mark to market' to be implemented....duh! they screwed themselves....and us.

how can they convincingly separate out the 'risky debt' from the unrisky if they are so intertwined to make a 'bad bank' and a 'good bank'? if they can separate the bad loans or risky loans, then by god separate them, and set them aside individually for a special group of government accountants to manage to ensure payback. they did these stupid loans through fanny and freddie...the government bureaucracy should be made responsible to have oversight, and congress could set up a committee to review default levels, etc....or am i just too simple minded? yes, i am jsut too simple minded...this is how i always got in trouble negotiating the best price i thought someone could deliver on time for, when i was told to give the company 20% more, because we would have to give anything i saved back....dam....dam.....it's like 'borat' the movie watching the news....

[Lohengram]

I keep hearing these economists talking about "toxic asshats". What the hell is that?

Assuming you were being serious as well as tongue in cheek, a toxic asset is code speak for an asset that's worth little or nothing but that the government wants to buy at an old inflated bubble level price without making it seem that they're doing something awful to the tax payer.

[RBM]

the only conclusion i can reach logically is what i have thought for about a decade...
the toxic debt....they forced these loans, and now no one wants them, and they were stupid enough to allow 'mark to market' to be implemented....duh! they screwed themselves....and us.


From another board, a speculation on the end game:

And I further argue that since the printing presses are private the the issuance of debt is public that the plan is to halt fractional reserve lending to effectively turn fiat currencies into a store of value once all the debt has been transferred to the central government.

This will reverse your above equation with a vengeance and leave the worlds governments broke and completely dependent on the central banks. Right now they are playing the book keeping game required to ensure its the Government left holding the bag.

Bottom line is the plan is to not induce hyperinflation but the reverse massive deflation with high interest rates.

Now whats really interesting is our sweet uncle Ben Bernanke is a student of the Depression I argue that his primary and real purpose is recognizing that the problem during the depression was that the banks went broke because they could not recapitilize if you think about it if the banks had managed to get a bunch of capitol they could have seized the world back in the 1920's. This was a missed opportunity I'd argue because the Fed itself was caught. They don't plan on allowing this to happen again so uncle Bens plan is to simply recreate the conditions of the Great Depression but this time around with the Banks sitting on hoards of cash. Thus the end game is to suspend fractional reserve lending and introduce high interest rates.

Socialize the risk, privatize the profit.

[Lucid]

Socialize the risk, privatize the profit.

Yeah, that's the problem I have with it and I have yet to hear anyone explain why that's not a problem or won't be the case.

[reb]

that's brutal, amoral, and wicked...and likely true.

there will be no hanging onto assets, i suppose. i was in the truck to wally world today, and listened to rush limburger for awhile. he had voice clips of some brit mp wailing on the prime minister...for almost exactly the same thing your quoted part outlines, RBM.

what was really enjoyable (i love the brit intelligensia-the conservative ones, anyway) was the cultured tone and erudite wording used while the scalpel was employed.

[JohnDoe]

Yeah, that's the problem I have with it and I have yet to hear anyone explain why that's not a problem or won't be the case.

The moral hazard we have created is gigantic. But... not socializing the risk is like cutting off your nose to spite your face. Sometimes you have to buckle down and do stuff you don't want to do for the greater good.

[Lucid]

The moral hazard we have created is gigantic. But... not socializing the risk is like cutting off your nose to spite your face. Sometimes you have to buckle down and do stuff you don't want to do for the greater good.

I get that. But how is this not screwing the tax payer in the end and making a lot of people who made some really bad financial choices even more rich? There's no better way?

[JohnDoe]

I get that. But how is this not screwing the tax payer in the end and making a lot of people who made some really bad financial choices even more rich? There's no better way?

It is screwing the tax payer in the end and making a lot of people who made some really bad financial choices even more rich. But the alternative is pretty much letting things play themselves out and seriously fucking the tax payer in the end. There are alternatives, but they all involve various types of serious fucking the tax payer :P

[Lucid]

It is screwing the tax payer in the end and making a lot of people who made some really bad financial choices even more rich. But the alternative is pretty much letting things play themselves out and seriously fucking the tax payer in the end. There are alternatives, but they all involve various types of serious fucking the tax payer :P

Or socializing the banks for a period of time. That's bad too, but I think involves less moral hazard. Don't want your bank socialized? Don't fuck it up.

(Note, I'm not advocating socializing the banks. I'm just bringing it up for discussion. Thanks for playing.)

[JohnDoe]

Or socializing the banks for a period of time. That's bad too, but I think involves less moral hazard. Don't want your bank socialized? Don't fuck it up.

(Note, I'm not advocating socializing the banks. I'm just bringing it up for discussion. Thanks for playing.)

Problem is its not clear that any banks besides citi and maybe BAC needed the TARP infusions. So nationalization wouldn't help encourage lending because banks could sit on their crappy balance sheets until they recovered.

Edit: and if BAC wouldn't have been "encouraged" by the fed to buy ML, its not clear there would have been a problem at all.

[RBM]

It is screwing the tax payer in the end and making a lot of people who made some really bad financial choices even more rich. But the alternative is pretty much letting things play themselves out and seriously fucking the tax payer in the end. There are alternatives, but they all involve various types of serious fucking the tax payer :P

The only place I would beg to differ, is 'bad financial choices' - they got more money as a result of the choices - is bad exactly HOW ?

[JohnDoe]

The only place I would beg to differ, is 'bad financial choices' - they got more money as a result of the choices - is bad exactly HOW ?

Bad if your not them :P Unethical maybe? Choosing to screw everyone to enrich themselves? I'm generally a capitalist but I can't get behind knowingly building a system that you know will collapse.

[RBM]

The moral hazard we have created is gigantic. But... not socializing the risk is like cutting off your nose to spite your face. Sometimes you have to buckle down and do stuff you don't want to do for the greater good.

Baloney !!

Your distorting the concept of the 'greater good' to justify robbery !

[Lucid]

The only place I would beg to differ, is 'bad financial choices' - they got more money as a result of the choices - is bad exactly HOW ?

Well I'd say bad for the rest of us. :laugh:

Problem is its not clear that any banks besides citi and maybe BAC needed the TARP infusions. So nationalization wouldn't help encourage lending because banks could sit on their crappy balance sheets until they recovered.

Here's my question. When Obama went on Leno the other night he mentioned establishing ways of loaning money outside of the banking system. Maybe they're doing this and maybe they aren't, but if they are - if that's a possibility, who cares what the banks do with their balance sheets? And if they can do this... why bother giving the banks all this money?

Bad if your not them :P Unethical maybe? Choosing to screw everyone to enrich themselves? I'm generally a capitalist but I can't get behind knowingly building a system that you know will collapse.

I completely agree and that's one of the reasons this solution bothers me so much.

[JohnDoe]

Baloney !!

Your distorting the concept of the 'greater good' to justify robbery !

Er, no. I'm pretty pissed off. As I said above, I like capitalism, but I absolutely can not get behind what some of the people did in the CDS market. Its one thing to try to make money, its another thing to try to make money when you know the system will eventually collapse. But I recognize that letting it collapse will take more money away then paying off the robbers. So I choose the lesser of two evils.

[RBM]

Bad if your not them :P Unethical maybe? Choosing to screw everyone to enrich themselves? I'm generally a capitalist but I can't get behind knowingly building a system that you know will collapse.

Those were YOUR words. You're dancing, JD.

[JohnDoe]

Those were YOUR words. You're dancing, JD.

You misunderstand my words. I've never been happy about the naked CDS writing, and I've thought it in many cases ethically equivalent to fraud. And its certainly a bad financial decision for the greater good, although it definitely enriched the people who wrote them. Thats what the intent of my statement was anyway.

Edit: My point was its a great financial decision if your the person who made all the money :P

[RBM]

Er, no. I'm pretty pissed off. As I said above, I like capitalism, but I absolutely can not get behind what some of the people did in the CDS market. Its one thing to try to make money, its another thing to try to make money when you know the system will eventually collapse. But I recognize that letting it collapse will take more money away then paying off the robbers. So I choose the lesser of two evils.

And your attachment to money as a capitalist can't admit that money isn't the end all be all.

I diverge at that point; 'lessor of two evils' is a fallacy.

[JohnDoe]

And your attachment to money as a capitalist can't admit that money isn't the end all be all.

I diverge at that point; 'lessor of two evils' is a fallacy.

Lesser of two evils is a fallacy when arguing for morals.. its not necessarily a fallacy when arguing for a course of action.

I admit that money isn't the end all be all. I just happen to think that a well regulated free market is the best of many inperfect systems.

[RBM]

You misunderstand my words. I've never been happy about the naked CDS writing, and I've thought it in many cases ethically equivalent to fraud. And its certainly a bad financial decision for the greater good, although it definitely enriched the people who wrote them. Thats what the intent of my statement was anyway.

Edit: My point was its a great financial decision if your the person who made all the money :P

OK, as far as that goes and that doesn't go nearly far enough cause there WILL be consequences: deflation or inflation.





RBM added to this post, 9 minutes and 37 seconds later...

Lesser of two evils is a fallacy when arguing for morals.. its not necessarily a fallacy when arguing for a course of action.

I admit that money isn't the end all be all. I just happen to think that a well regulated free market is the best of many inperfect systems.

To restate:Lessor of two evils is as simple as one can reduce the choices for action. I see many many more possible choices, with actions that will better approximate 'the greater good'.

Disclosure: I'm not a ideologue.

[Krazy P]

The article is not exactly accurate. There are numbers on the subprime, Alt A and Agency originations and issuance. The numbers are big. There is also a market - nobody likes the price (around 23 cents on the dollar).

It is not that complicated - its just that nobody wants to bite the bullet and recognize the losses (both on and off balance sheet). Everybody is hoping and wishing that the economy will recover before they have to recognize the losses - because it would wipe out the cap at most banks (not mine - we didn't do that).

All the Treasury Plan does is allow firms like Blackrock and PIMCO to make a killing by buying the cream and leaving the crap for the government. Rates of return will be from 17 - 25% guaranteed - and the crap securities will still be there.

I just hope I get some of that action! I am trying to stay in the loop on it.

THe Alt A stuff is going to hit the fan this summer - that's when the resets come and defaults increase. Then commercial RE hits.

Sometime in the next few months they will lift the moratorium on foreclosures (its been on for over 3 months now) - when that happens the RE inventory will go back up from 10 months supply to something over 12 months and the markets will tank again.

Also remember that it was government policy to get subprime started in the first place. Fannie and Freddie used to call us all the time begging us (like weekly) to book the subprime crap because they were getting pressure from the politicians. We said "No way" and since we are not a big player, they didn't get nasty with us. We also are exempt from CRA (Community Re-investment Act), so they couldn't put a lot of pressure on us. The big boys got a lot of pressure - and incentive.

So, it was government policy that got it started and put the pressure on and now government policy is going to make it better?

Right.

[RBM]

The article is not exactly accurate. There are numbers on the subprime, Alt A and Agency originations and issuance. The numbers are big. There is also a market - nobody likes the price (around 23 cents on the dollar).

It is not that complicated - its just that nobody wants to bite the bullet and recognize the losses (both on and off balance sheet). Everybody is hoping and wishing that the economy will recover before they have to recognize the losses - because it would wipe out the cap at most banks (not mine - we didn't do that).

All the Treasury Plan does is allow firms like Blackrock and PIMCO to make a killing by buying the cream and leaving the crap for the government. Rates of return will be from 17 - 25% guaranteed - and the crap securities will still be there.

I just hope I get some of that action! I am trying to stay in the loop on it.

THe Alt A stuff is going to hit the fan this summer - that's when the resets come and defaults increase. Then commercial RE hits.

Sometime in the next few months they will lift the moratorium on foreclosures (its been on for over 3 months now) - when that happens the RE inventory will go back up from 10 months supply to something over 12 months and the markets will tank again.

Also remember that it was government policy to get subprime started in the first place. Fannie and Freddie used to call us all the time begging us (like weekly) to book the subprime crap because they were getting pressure from the politicians. We said "No way" and since we are not a big player, they didn't get nasty with us. We also are exempt from CRA (Community Re-investment Act), so they couldn't put a lot of pressure on us. The big boys got a lot of pressure - and incentive.

So, it was government policy that got it started and put the pressure on and now government policy is going to make it better?

Right.

Out of curiosity what could happen that would turn you ("I just hope I get some of that action! I am trying to stay in the loop on it.") and others in your situation against the prevailing tide.