Category Archives: Toxic Assets

No market for you products? Then create a “fake” market!

Posted on by Robert Sticha
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Simply disgusting

bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:
They created fake demand.”

The best thing we could do is to rid ourselves of all regulations, knowing that when left to their own  self governance, corporate managers will always do the right thing. Sure they will!
This story, while not the least bit surprising, should blow another hole in any (libertarian) theory that the players in a “free market” will choose to be honest and will be preeminently concerned about maintaining their reputations in order to attract more (voluntary) business.

On the financial crisis: Why isn’t anyone in prison?

Posted on by Robert Sticha
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I’m so tired of hearing about how we have to help get the banks and Wall Street on their feet in order to provide a solid foundation for an economic recovery. By doing so…we are supporting the very thieves that got us into the worst financial crisis since the great depression….how does that make any sense?  If it was anyone else but a Wall Streeter…rather than receiving tax payer  support…they would be wearing an ankle bracelet and put in a witness protection program.

The financial game was rigged…the field was tilted in favor of the financial and political elites that make their own rules. And what  rules existed are so incomprehensibly complex and opaque that it makes a normal human’s eyes glaze over. Also  it seems that any regulation that could have mitigated any of this mess was flatly ignored…

This article should be mandatory reading for anyone interested or concerned about how/why we ended up in our current financial crisis/mess…and how/why very little is being done to correct the system.

One: Economists and media pundits — themselves mostly gentlemanly elites anxious to please corporate America — are slow to make the accusation that what happened here was truly criminal, and so miss the real story. The American people understand that when a group of bankers shuffle some paper unproductively and get away with hundreds of billions of dollars in bonuses, yet cause a loss of $40 trillion in global wealth and cause approximately 100 million people to become unemployed worldwide, there is only one word to describe it: criminal. We don’t have to argue about whether their actions were technically illegal or violated existing statutes, as in this conspiracy the crooks were writing their own regulations and legislation through their control of the government through lobbying.

Two: There has been no criminal investigation to date, so evidence supporting criminality has not been uncovered — no one is looking for it. Liberals hate to think that Obama, led by Geithner and Summers, is part of a grand cover-up scheme, but that is exactly what is going on. How else can you explain the lack of criminal investigations? Why isn’t the FBI breaking down the doors of the commercial and investment banks and grabbing computers so as to preserve incendiary e-mails that will most definitely implicate executives? Why are managements that caused this still in their jobs and still receiving bonuses? Are the bonuses paid to the folks at AIG that caused its collapse nothing more than hush money? How can the rating agencies still be in business? Why don’t we make one arrest and lean on the bankster to see if he will fold like the cheap suit that he is and name other conspirators? The FBI spends more time investigating $2,000 drug buys than they have to date investigating the biggest heist in the history of the world: $40 trillion, that’s trillion with a T, that’s 40 million bags each containing $1 million.

The third reason that we have not had an easy-to-understand explanation from economists as to the cause of this mess: I think we’re all trying to fit the facts as we know them into one simple story of causation. I believe there are actually three different storylines occurring contemporaneously, and all of them criminal. It is similar to what Winston Churchill said about trying to forecast Russia’s next moves in 1939: “It is a riddle, wrapped in a mystery, inside an enigma.”

Toxic assets are hard to clean up!….oh really??

Posted on by Robert Sticha
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What’s happening to this world when the Wall Street Journal allows an article to be publsihed that calls for “mandatory tranparency?” More importantly…how in god’s name did we allow the entire financial system to become dependent on the mad scientists of Wall Street?

Despite trillions of dollars of new government programs, one of the original causes of the financial crisis — the toxic assets on bank balance sheets — still persists and remains a serious impediment to economic recovery. Why are these toxic assets so difficult to deal with? We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.

The bulk of toxic assets are based on residential mortgage-backed securities (RMBS), in which thousands of mortgages were gathered into mortgage pools. The returns on these pools were then sliced into a hierarchy of “tranches” that were sold to investors as separate classes of securities. The most senior tranches, rated AAA, received the lowest returns, and then they went down the line to lower ratings and finally to the unrated “equity” tranches at the bottom.

But the process didn’t stop there. Some of the tranches from one mortgage pool were combined with tranches from other mortgage pools, resulting in Collateralized Mortgage Obligations (CMO). Other tranches were combined with tranches from completely different types of pools, based on commercial mortgages, auto loans, student loans, credit card receivables, small business loans, and even corporate loans that had been combined into Collateralized Loan Obligations (CLO). The result was a highly heterogeneous mixture of debt securities called Collateralized Debt Obligations (CDO). The tranches of the CDOs could then be combined with other CDOs, resulting in CDO2.

Each time these tranches were mixed together with other tranches in a new pool, the securities became more complex. Assume a hypothetical CDO2 held 100 CLOs, each holding 250 corporate loans — then we would need information on 25,000 underlying loans to determine the value of the security. But assume the CDO2 held 100 CDOs each holding 100 RMBS comprising a mere 2,000 mortgages — the number now rises to 20 million!