Comments on: The $103,000 shack: a perfect explanation of why housing is a mess

By: George Gast

George Gast — Thu, 09 Jul 2009 05:34:00 +0000

A classic case of greed from the buyer to CEO of the investor group.
The buyer knew she couldn’t continue paying the note, the appraiser knew the house was not worth but half of loan (illegal I assume in AZ),
the mortgage broker obviously made a predatory loan, Wellsfargo knew the loan was trash, HSBC Holdings knew it was crap, the investors (your pension fund probably, your money!!) was kicked in the groin (bottom line). The American dream,work hard, pay your bills, save your money, get screwed big-time.

By: Wag the Dog

Wag the Dog — Wed, 28 Jan 2009 20:35:37 +0000

Yet they still competed with each other for business, as Bill Ackman explains on Charlie Rose:
http://www.charlierose.com/view/interview/9498“target=”_blank”>http://(8” target=”_blank”>http://www.charlierose.com/view/interview/9498(8minutes in)

See also this transcript for Raiter's take:
http://www.pbs.org/now/shows/446/transcript.html“target=”_blank”>http://” target=”_blank”>http://www.pbs.org/now/shows/446/transcript.htmlS&P didn't want to lose the transaction and told their analysts to make a guess even though the models didn't apply due to lack of historic data.

By: Graphite

Graphite — Wed, 28 Jan 2009 02:38:54 +0000

"That's what you get when there's a healthy dose of free market competition amongst the rating agencies"

Actually, they were cartelized and explicitly granted government favor.

By: John Creighton

John Creighton — Mon, 05 Jan 2009 00:13:31 +0000

@2162. Wag the Dog,

That tipple AAA rating magic video didn’t make scene to me. Reading about CDOs on wikipedia:
http://en.wikipedia.org/wiki/Collateralized_debt_obligation and securitzation:
http://en.wikipedia.org/wiki/Securitization

conforms somewhat what I thought. A debt product that is rated less then AAA cannot be rated more then AAA unless the the credit is enhanced somehow.
http://en.wikipedia.org/wiki/Securitization#Credit_enhancement_and_tranching

Perhaps in the waterfall example given in the video the top tranches could be considered credit enhanced because they are structured so that the top traches will be paid out before the bottom ones. Of course for this credit enhancement to be well structured the risk of failure between assets in the CDO should be as independent as possible.

By: Wag the Dog

Wag the Dog — Sun, 04 Jan 2009 15:48:33 +0000

The bright side is the MBS owners now know the value of their toxic debt. Senior editor of Marketplace Radio, Paddy Hirsch, goes into more detail on how a rotting wooden shack can end up with a triple AAA rating, thanks to the "magic" of the capital structuring of the collateralised debt obligation: http://marketplace.publicradio.org/videos/whitebo... Brilliant, eh? ... Not! Even more unbelievable is the CDO squared and CDO cubed derivative products that investors got conned into including in their portfolios, all thanks to the AAA rating. That's what you get when there's a healthy dose of free market competition amongst the rating agencies, who were incentived to grant the AAA rather than to be honest or accurate about it. No wonder people took out insurance (or more correctly, a CDS) against default. Thing is, the same securitization techniques (of slice, dice, tranch and tier) have been applied to credit card debt: http://marketplace.publicradio.org/videos/whitebo... I wonder how that's going to turn out.

By: Edward Harrison

Edward Harrison — Sun, 04 Jan 2009 04:44:28 +0000

you read my mind on credit cards. Don't forget auto loans too. More writedowns will be coming as a result.