Quote from: Cindi Jones on October 14, 2008, 06:55:02 PM
We knew in the early nineties that derivativs were bad. Remember that this very thing happened back then, albeit on a smaller scale? Yup. May unions, cities, and funds tanked when the derivatives they were investing in, went south. Seriously, no one remembers?
Orange County bankruptcy, hopefully people remember that...and many other examples of derivatives trading. When times are good, those involved in those investment make a lot of money. When they turn the wrong way, then bankruptcy and financial collapse follow. Even derivatives traders and PhD's say they don't fully understand many of the derivatives pools. I've traded variations of them and lost a lot of money and made some good money too. In the end, if it's a personal decision and one has the $, then I say go for it. I have an issue when institutions have large pools of der. in their portfolios, but what's done is done.
Quote from: Cindi Jones on October 14, 2008, 06:55:02 PM
See? There's the problem. We don't care to remember. We don't even pay attention.
The market has a short-term memory. You know there are people making tons of money right now modifying the SAME LOANS they wrote to people in the last few years. There are senior level executives running companies making money right now by buying portfolios of loans THEY packaged 2-5 years ago. So, let's see...they make 7% on a bundle of loans in 2003...the company goes under because the underlying collateral is overpriced. Then they start another company in 2008 where they buy those SAME loans back for .20 on the dollar? They hold those loans a while, get the clients to pay their payments (reduced because they renegotiated the debt with the lender) and then when the market turns a little or they find a buyer, they rebundle them and sell them again. You'll read about that in a few years I'm sure.
Quote from: Cindi Jones on October 14, 2008, 06:55:02 PM
Yes, sub prime mortgages are part of the recipe, but it is the derivative trading that bundled them up to something unrecognizable.
I don't think they (CDO's) were that unrecognizable to people who knew what they were looking at. The problem with subprime was the insurance guaranteeing the eventually buyer of the security backed by the loans would not lose their investment. Hmm, I'm going to take a pool of 100% LTV loans (split into a first at 80% and a second at 20%) where the buyer puts NO money down in a market where values are rising 25% a year with no end in site. It was a gamble many were willing to take. You don't really foresee values dropping 50%+ in two years. 10% sure, but it's a risk you take PLUS you are insured right? Well, wrong. When every single mortgage insurance company goes under then you are in trouble...and that's exactly what happened. You could clearly understand the financial principles of what were behind the CDO's and securitized collateral. The problem was in whether those principles would stand the test of time, whether your doomsday, worst-case scenario was realistic. I was involved in many of those projection meetings and most of the #'s worst-case called for 15% depreciation. A little short, huh?
Quote from: Cindi Jones on October 14, 2008, 06:55:02 PM
The big firms took their smaller mistakes of the early nineties, cleaned up their packaging, and issued the same radioactive paper in new binders.
Kind of messed up how it happened in the 80's with S & L's (overpriced collateral and investors who didn't understand what they were buying and getting garbage in their supposedly fixed income securities), then again in '98-'99, now again, with this mess. It will happen again, just depends on how long it'll take someone to figure out how to sell the public on something "safe."
Quote from: Cindi Jones on October 14, 2008, 06:55:02 PM
I am SO glad that I moved all my holdings to cash a year ago.
Nice move Cindi, if only so many others would have done that, but why would they? You obviously learned a lot and had a built-in skepticism, which is great! This market will, no doubt, create some skepticism and I think that's a good thing. In the end, we sit around and try to cut our expenses, drive less, don't buy so many clothes, etc. We keep our fingers crossed that we don't lose ours jobs if we have them or that we find one if we don't. We have one life, we need to learn from our past. Unfortunately, and Cindi, you really spoke to this, I have my doubts that collective society ever really does learn from it.
