$648 Trillion Derivatives Market Faces New Collateral Concentration Risks

[SEE3772]

http://www.zerohedge.com/news/648-tr...ntration-risks

[joe bloe]

That seems like an insanely high number. I wonder what the sum total of all wealth on Earth is. I wonder if this total doesn't exceed that number.

[Whirlaway]

If I owe you $100 dollars it's my problem; If I owe you $1trillion it's your problem......we will default...it is inevitable...and the best thing we could do.......

Otherwise, the FR will devalue our dollar, ruin middle class wealth, and drag the American public thru decades of misery............

Get it over with now, the quicker the better....and less pain as well...better of us to go thru an orderly default process than wake up one morning and have the world going to shit around us.

http://www.youtube.com/watch?v=NJ6xB...ature=youtu.be

[SEE3772]

Originally Posted by joe bloe

That seems like an insanely high number. I wonder what the sum total of all wealth on Earth is. I wonder if this total doesn't exceed that number.

According to the World Bank the global Gross Domestic Product is around $70 trillion.
http://www.google.com/publicdata/exp...n&q=global+gdp

The derivatives market (Gambling) is the real problem. Not the US deficit or the debt. Mortgage Backed Securities for example (a derivative) is what imploded the housing market. The Federal Reserve still holds about &2.7 trillion worth of Mortgage Backed Securities on their balance sheets. Credit Default Swaps, Over The Counter Derivatives and Synthetic Collateralized Debt Obligations are the largest in value and the most destructive.

Want to bet on the weather? There's a derivative for that.
http://www.cmegroup.com/trading/weather/

[Guest032516]

Originally Posted by SEE3772

The derivatives market (Gambling) is the real problem. Not the US deficit or the debt. Mortgage Backed Securities for example (a derivative) is what imploded the housing market.

No, it didn't. You've got the cause and effect backwards.

The housing market imploded because home values were grossly inflated. When the 2008 recession hit and lots of people lost jobs and/or took pay cuts, incomes could no longer keep up with mortgage payments and home prices. We were left with a gross overstock of homes and greatly diminished demand. And prices collapsed accordingly.

For YEARS, far too many people borrowed as much money as they could to buy the biggest home they could. Home prices had been rising seemingly forever and the built-in assumption was that they would keep going up. Mortgage lending was built on that assumption.

Banks would require little or no down payment and minimal proof of income on a $400K home. As long as housing prices kept going up, this was a reasonably safe bet. If the homeowner defaulted after 3 or 4 years, the value of the house would probably have risen to $440K by then, so the bank could foreclose on the house and sell it for at or even slightly above the $400K on the note and walk away without a loss.

And all those derivatives that were tied to bundled home mortgages were also a reasonably safe bet - AS LONG AS HOME PRICES KEPT GOING UP. That's why some many institutions and countries bought them. They were betting on the US real estate market, which was thought to be rock solid.

All of the turned to shit when home prices did not, in fact, keep going up.

Now, when the homeowner defaulted on the $400K mortgage note, the house was NOT worth $440K - it was worth $325K. So when the bank foreclosed, it could not even get its money back.

And since lot and lots of homeowners were defaulting, the banks were losing lots and lots of money. The home lending banks collapsed and all those derivatives pulled down the big investment banks as well.

[Whirlaway]

How did home values get over inflated ?

Easy credit....hence the MBS market (and by extension the derivatives) made it happen...

[Guest032516]

Originally Posted by Whirlaway

How did home values get over inflated ?

Easy credit....hence the MBS market (and by extension the derivatives) made it happen...

I think that is still confusing cause and effect, but perhaps less so. The money chases the (assumed) safe investment. It doesn't create it.

Yes, easy credit was a problem. But, as I mentioned, that was largely caused by the "no down payment" rules and the ridiculous income verification.

If every home owner had been required to put down 20%, we wouldn't be in this mess. For starters, folks wouldn't be buying $400K homes if they had to put down $80K. They would be buying homes for $250K or $300K. This country would have a LOT more apartments, condos, and 2,200 Sq.Ft homes and a LOT less McMansions and suburban sprawl. Those things bring up a host of other problems, including energy consumption and commuting, but that is a discussion for another thread.

And if the homeowner DID put down $80K and defaulted, the bank could make its money back if the house dropped in value from $400K to $320K because they only loaned $320K. The first $80K of the price drop comes out of the down payment, not the principal of the loan.

And the income verification was just as bad, if not worse. Traditionally, you proved your income by showing your tax filings and pay stubs from previous years. However, that cut a lot of low-income families out of the home ownership market. Under not so subtle pressure from the federal government, home lending companies allowed people to report what they COULD make from their type of job, rather than prove what they actually made.

So a hair dresser who made $50K per year could put down $75K a year and the bank would only ask if a hairdresser in that market COULD make $75K. Well, assuming the hair dresser worked in a high-end salon in a good neighborhood, worked 50 hours and week and had a full clientele, it might very well be possible to make $75K. But that may be the rare exception, not the rule. Nonetheless, the bank would accept the $75K number, not the reality of $50K per year.

The do-gooders in government from BOTH parties thought this was a grand arrangement. And they were willing to back it up with Fannie Mae and Freddie Mac.

If low-income earners could get into the housing market and the houses went up in value, then they would have a little real estate nest egg when retirement came around. They could sell their home at a profit, move into a smaller condo in some retirement community and pocket the profit. Yeah! Every man a king!

It was social engineering at its finest. Building responsible citizens through home ownership.

Until it all came crashing down.

[i'va biggen]

+1

[Laz]

Originally Posted by Whirlaway

How did home values get over inflated ?

Easy credit....hence the MBS market (and by extension the derivatives) made it happen...

Companies approving loans without evaluating the risk properly was the source of the problem. All the other things were contributing factors that made it profitable temporarily. Had loans only been approved to financially stable people the problems that occurred when the economy slowed would have been manageable. Also the housing bubble would not have occurred.

[WTF]

Originally Posted by ExNYer

Yes, easy credit was a problem. But, as I mentioned, that was largely caused by the "no down payment" rules and the ridiculous income verification.

. .

None of that would have happened without being able to rebundle those crappy loans as triple A.

It was basically fraud across the board.

But make no mistake, had investment banks not been able to sell this crap as AAA, the housing market would not have blown up.

People should be in jail over this...

[CJ7]

I watched program about the derivatives market ... 99% of the people that get involved dont understand them and neither do the people that dream them up ... at least they couldnt explain them anyway .. they do understand how to $oak the poor bastards with seemingly sucker bets ...

easier to find than I thought ... next time you get an hour of free time


http://www.pbs.org/wgbh/pages/frontl...s/derivatives/

[Submodo]

Originally Posted by WTF

None of that would have happened without being able to rebundle those crappy loans as triple A.

It was basically fraud across the board.

But make no mistake, had investment banks not been able to sell this crap as AAA, the housing market would not have blown up.

People should be in jail over this...

Right on point. If the ratings agencies don't commit fraud, the whole thing stops at the low level.

[Guest032516]

Originally Posted by WTF

None of that would have happened without being able to rebundle those crappy loans as triple A.

How so? The no-down payment BS and loose income verification came first. The MBS fed off those conditions. It didn't create them.

Originally Posted by WTF

But make no mistake, had investment banks not been able to sell this crap as AAA, the housing market would not have blown up.

Nope. Same cause and effect mistake as at the top of the thread.

The housing bubble burst because the 2008 recession caused big layoffs and a huge drop off in home prices. See my first post above. The housing bubble would have burst even without all the MBS stuff. it would have happened no matter what. Housing prices cannot keep going up at twice the rate of inflation forever. People just didn't care. Or thought they could get their money out before the shit hit the fan.

The only way to have stopped the housing bubble would have been to require significant down payments and rigid income verification. The problem with that is that growth in the economy in the preceding 15-20 years would have been less because a big chunk of that growth was tied to a robust home-building industry. So you have to pick you poison. But I personally don't think that any benefit we got in growth in the GDP in previous years comes close to the damage we suffered from the housing bubble.

The problem with all those mortgage backed securities was that it allowed the wildfire to spread beyond just the housing industry and the home-lending institutions.

If the MBS and other derivatives hadn't existed, the big investment banks would have been insulated from the housing crash. That doesn't mean they would have suffered no losses in the 2008 recession, because other sectors of the economy in which they were invested were also in recession. But the crash would not have been near as bad.

We have had other recessions before. The Savings and Loan crash in the late 80s-early 90s did not bring down the investment banks. The Tech Bubble burst in 2000 and that also did not bring down the investment banks. But then, the investment banks were not tied to the S&Ls and to tech companies by derivatives (or at least not to the degree they were in 2008).

I'm NOT trying to say investment banks are innocent. But too many people are invested in the idea that a handful of big Wall Street banks are entirely responsible for all the shit we have gone through the last few years.

That's not true and it hides an even more uncomfortable truth. A big chunk of our economy (the housing market) was rotten to the core, largely due to government policy feeding people's greed.

[BigLouie]

Romney and the Republicans want to do away with laws governing derivatives and let them do what they want.

[Submodo]

The banks KNEW they could bundle up the the fugazi morgages, pay Moodys to rate the bundle as AAA, and sell the bundle at a premium because it had the AAA rating.

If the banks knew they couldn't get their bundle of crap rated higher and sell it off, they wouldn't have originated the loans to people who couldn't tote the note.

Yes, there was fraud at many levels.

Many got to live in a bigger house than they could afford, and cash-out refied to buy Corvettes. But at least some of those ended up on the street.

Let me know when anybody from Moodys is held accountable for their fraud.