Posts Tagged ‘sub prime crisis


great article on early-adopter hedge fund guy who made millions off real estate bubble


It surprised him that Deutsche Bank didn’t seem to care which bonds he picked to bet against. From their point of view, so far as he could tell, all subprime-mortgage bonds were the same. The price of insurance was driven not by any independent analysis but by the ratings placed on the bond by Moody’s and Standard & Poor’s. If he wanted to buy insurance on the supposedly riskless triple-A-rated tranche, he might pay 20 basis points (0.20 percent); on the riskier, A-rated tranches, he might pay 50 basis points (0.50 percent); and on the even less safe, triple-B-rated tranches, 200 basis points—that is, 2 percent. (A basis point is one-hundredth of one percentage point.) The triple-B-rated tranches—the ones that would be worth zero if the underlying mortgage pool experienced a loss of just 7 percent—were what he was after. He felt this to be a very conservative bet, which he was able, through analysis, to turn into even more of a sure thing. Anyone who even glanced at the prospectuses could see that there were many critical differences between one triple-B bond and the next—the percentage of interest-only loans contained in their underlying pool of mortgages, for example. He set out to cherry-pick the absolute worst ones and was a bit worried that the investment banks would catch on to just how much he knew about specific mortgage bonds, and adjust their prices.

Once again they shocked and delighted him: Goldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. “This was shocking to me, actually,” he says. “They were all priced according to the lowest rating from one of the big-three ratings agencies.” He could pick from the list without alerting them to the depth of his knowledge. It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.

The market made no sense, but that didn’t stop other Wall Street firms from jumping into it, in part because Mike Burry was pestering them. For weeks he hounded Bank of America until they agreed to sell him $5 million in credit-default swaps. Twenty minutes after they sent their e-mail confirming the trade, they received another back from Burry: “So can we do another?” In a few weeks Mike Burry bought several hundred million dollars in credit-default swaps from half a dozen banks, in chunks of $5 million. None of the sellers appeared to care very much which bonds they were insuring. He found one mortgage pool that was 100 percent floating-rate negative-amortizing mortgages—where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it. Goldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on Wall Street or off, ever to buy insurance on that particular item. “I’m educating the experts here,” Burry crowed in an e-mail.


arab investors lost 2.5 TRILLION in market meltdown

the napkin math on this must roughly equal the premium they made on $100+ barrel oil over last few years…..


60 Minutes story on banks & hedge funds driving summer-2008 oil bubble

Vodpod videos no longer available.
Here’s a good in-depth article following up on this video:


great financial crisis wrap-up


funny bailout parody

For Immediate Release:

Statement by Treasury Secretary Henry M. Paulson, Jr., following  Congress’s passage of today’s rescue package:

“As we all know, lax writing practices earlier this decade led to irresponsible writing and irresponsible reading. This simply put too many families into books they could not finish. We are seeing the impact on readers and neighborhoods, with 5 million readers now behind on their reading. Some are just walking away from novels they should never have been reading in the first place. What began as a sub-prime reading problem has spread to other, less-risky readers, and contributed to excess inventories.

These troubled novels are now parked, or frozen, on the shelves of libraries, bookstores, and other reading institutions, preventing them from financing readable novels. The inability to determine the worth of these novels has fostered uncertainty about novels in general, and even about the cultural condition of the institutions that own them. The normal buying and selling of nearly all types of literature has become challenged.

The role of the ratings agencies cannot be overlooked in the creation of this crisis. The Pulitzer, Booker and the National Book Foundation continued to award these novels their top ratings, even as unread copies piled up all over America.

These unreadable novels are clogging up our literary system, and undermining the strength of our otherwise sound literary institutions. As a result, Americans’ personal libraries are threatened, and the ability of readers to borrow, and of libraries to lend, has been disrupted.

To restore confidence in our book markets and our literary institutions, we must address the underlying problem – the loss of confidence in our nation’s writers. That collapse in confidence is choking off the flow of ideas that is so vitally important to our literature. When the literary system works as it should, ideas flow to novelists and poets who create novels and poems, ensuring an uninterrupted flow of literature to households and businesses. But stresses in our leading writers have led to the current severe and systemic writers’ block that threatens to undermine access to books for working Americans.

This bill contains a broad set of tools that can be deployed to strengthen writers, large and small, that serve businesses and families. Our writers are varied – from large novelists headquartered in New York, to regional novelists that serve multi-state areas, to community poets and short story writers that are vital to the lives of our citizens and their towns and communities. The challenges our writers face are just as varied – from full-scale writers’ block, to restructuring failed novels, to simply facing a crisis of confidence.

We must implement these new programs with a strategy that allows us to adapt to changing circumstances, and attract the private inspiration which has always made our cultural system so resilient and innovative.

In these difficult times, leadership – and sacrifice – must start at the top. Fed Chairman Ben Bernanke and I are agreed it is imperative we take the bad books out of the system, and slowly work our way through these toxic assets. Yes, it will be painful; it will be difficult; but at times like this, the Government must step in and perform its duty, as reader of last resort.”


I’ve got to say, there were tears in my eyes when Hank took to the podium and read out our statement. But the crisis is not over yet, and there’s more hard work to come. Banks, insurance, cars, steel, books… the contagion just keeps spreading. I probably shouldn’t tell you this, but we’re currently putting the finishing touches to a fifty billion dollar bailout of the imperilled ballroom dancing industry…

Here’s the link to the New York Times version of our statement. They’ve illustrated it with a  cartoon by R. O. Blechman, which betrays a typically frivolous New York Times attitude to these serious financial matters.

And here’s a link to the Treasury Department website. They haven’t put up our statement yet, but they’ve put up plenty of previous ones just as good, like this one. And check out the Treasury’s fun stuff, like their great auctions, for stuff like this seized yacht. Tip: I recommend the Florida auctions. Great yachts, furs, SUVs, Bentleys, and Rolls-Royces, all hardly used.
And… hang on in there, ballroom dancers of America. We are riding to the rescue… hold on…


ny times article on the mess that-is u.s. banking


great visual explanation of financial meltdown

fincrisis1from The Big Picture

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