[ExI] Financial Crisis

Frank McElligott Frankmac at ripco.com
Fri Feb 19 17:52:47 UTC 2010

For a complete discussion of the past financial crisis one must read pages 199 to the end of the recent book "THIS TIME IT IS DIFFERENT" by REINHART and ROGOFF.  Great read and if the government does not stop spending your money the crisis will rise from the grave and spit fire and brimstone again at you.

First CDO and CMO's have been around since the early 80's of the last century. It was not their fault that the crisis began, it was the PhD's who used faulty REASONING, who created this crisis. When you create computer models which use historical information that is flawed, an example Sub-prime mortgages default at a rate of 7% on the high end, and when instead of 7% it goes to 40% you have a problem.  Second credit swaps(insurance) based again on these wrong numbers was easy money at AIG. If you were in their shoes it looked like a no-brainier chance of a life time.

The chance of AAA bonds(tranches of CMO and CDO'S) going to default were 1 in 200, and by writing insurance(credit swaps) against that number and getting a 8% premium would you not take those odds. And they did to the tune of 500 billion.  The people who brought the insurance were Goldman and other wall street firms. So when Lehman Bros after 150 years in business went belly up, AIG was on the hook, as the AAA Bonds(Lehman Bros) defaulted and they too were leveraged to the hilt(they had sold their insurance policies from AIG to other banks who also thought it was easy money without risk too.  Well when AIG threaten to default  this house of cards would collapse as they at AIG did not have the money(500 billion) to pay off their credit swaps(insurance) of Lehman Bros and others. If AIG went down, Goldman would have went down and most of the core banking industry would have failed.  It had it's greed factor true, but it was just a case of bad numbers sold to a group of people who did not understand the risks. If these PhD's had found jobs teaching, instead of Wall Street, there probably would have still been a crisis, a lot smaller though.  It was all ok with the laws as there were and still none which were broken. Can't break what does not exist.

What would make these PhD's use wrong numbers,  again because they were taught that method at major colleges in this country. They believed in their numbers, but they did not take into account what is now referred to a NINJA loan, brokered by some high school graduates in the real world who found a gold mine in sub prime loans:) Taleb calls it  a  "Black Swan event", I call it "to smart for their own good".

Bye the bye, Wall street bonuses were ok with me. They figured out that with the Gov't backing everything and was printing money like it was some game being played, they have re-inflated the stock market by 4000 points in the greatest bull run since 1930.  

In May of last year, at a reflection point I asked on this list is this a bear market rally or a bull rally. At that time I picked the former, and have watched the marker as it rose and rose, it was the safe choice as I am old and can't afford to lose, but on Wall Street the pro's picked the latter and now receive those wonderful bonuses for being right. They used our money true, but their is no law against that is there?

What smells is that  H. Paulsen former CEO of Goldman brokered the deal which save Goldman and the economy.  Was he saving us, or Goldman?

One person makes a mess, but it takes a PHD to make a crisis:)


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