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POPSWall Street Derivatives: So complex as to be "Computationall intractable" MORE: In principle, an alert buyer can detect tampering even if he doesn't know which asset classes are the lemons: he simply examines all 1000 CDOs and looks for a suspicious overrepresentation of some of the asset classes in some of the CDOs. What Arora et al. show is that is an NP-complete problem ("densest subgraph"). This problem is believed to be computationally intractable; thus, even the most alert buyer can't have enough computational power to do the analysis. Arora et al. show it's even worse than that: even after the buyer has lost a lot of money (because enough mortgages defaulted to devalue his "senior tranche"), he can't prove that that tampering occurred: he can't prove that the distribution of lemons wasn't random. This makes it hard to get recourse in court; it also makes it hard to regulate CDOs. Everyone on Wall Street... UP AGAINST THE WALL, THE LOT OF YOU BASTARDS!
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POPS25 People to Blame for the Financial Crisis
Rebubbacans and Ayn Rand disciples abound. Kathleen Corbet Corbet ran the largest agency, Standard & Poor's, during much of this decade, though the other two major players, Moody's and Fitch, played by similar rules. By slapping AAA seals of approval on large portions of even the riskiest pools of loans, rating agencies helped lure investors into loading on collateralized debt obligations (CDOs) that are now unsellable. Dick Fuld steered Lehman deep into the business of subprime mortgages Lehman even made its own subprime loans. The firm took all those loans, whipped them into bonds and passed on to investors billions of dollars of what is now toxic debt. Marion and Herb Sandler In the early 1980s, became the first to sell a tricky home loan called the option ARM. And they pushed the mortgage, which offered several ways to back-load your loan and thereby reduce your early payments, over the next two decades. pocketed $2.3 billion when they sold their bank to Wac
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POPS AIG's Larceny There is no meaningful transparency anymore, not when investors are pouring hundreds of billions of dollars into junk loans masquerading as triple AAA CDOs and banks are paying off ostensibly independent rating agencies to pimp their products. Today, we are so far from capitalism, in fact, that we have lost even the basic understanding of a contract. It was bad enough that the government-appointed CEO of AIG was foolish enough to believe he was legally obligated to pay a retention bonus to the people who bankrupted the company--i.e., the people who should have been fired once the company posted a $60 billion loss in the last quarter of 2008. But how it is possible that Treasury Secretary Tim Geithner and the rest of the Obama economic team were swayed by this ridiculous argument, when taxpayers own 80% of the company and it was our money paying the bonuses? With more and more damaging facts like this coming out, some of our political leaders have tried to explain away
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POPSMisplaced Anger Megan McArdle, writing in the Atlantic Journal, correctly points out that Jon Stewart's, and those of his frothing fanboys', attentions on Jim Cramer and CNBC are misplaced anger about the current economic crisis. Be sure to read the entire article at the Atlantic Journal .
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POPS Econ 101 ~ ~ ~ ~ Economic Mess for Dummies ~ ~ ~ ~ ~ What is a CDO or CDS? Imagine taking paper debt like mortgages, subprime mortgages, car loans, credit cards loans, and pretty much anything you can imagine. Now combine and mix the paper in a blender, spiking it with worthless rhetorical hyperbole that derivatives are the new paradigm of investments. Then pour the mixture in a pyramid of champagne glasses, to represent the varying levels of return (and risk), with the higher the glass, the lower the risk return and risk. That represents the CDOs. Now as you sell the mess, insure against the risk of the CDOs decreasing in value with CDSs. Presto, $1 trillion of bad loans is transmuted into $62 trillion in faux wealth. An alchemist would be proud. http://nobullbert.blogspot.com/2009/02/economic-mess-for-dummies.html
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POPSHow many loans will wind up bad? The government is weighing another massive bank rescue plan, perhaps as big as $3.5 trillion, to create a bad bank. The trick is deciding just how many bank assets this entity will have to buy. Loans that are just fine now could deteriorate rapidly given the economic conditions.
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POPSCDOs Rise From The Dead These reinvented CDOs are supposed to be less risky...we'll see. Fool me once, shame on you. Fool me twice, shame on me.
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POPSSub-prime a non-event: Lehman The court case is being closely watched by other Lehman clients keen to recover millions of dollars of losses. The documents reveal, for the first time, the extent of the allegations made against Lehman, and claim that the investment bank, which reported $1 billion in global income last quarter, reneged on a verbal agreement to buy back the CDOs.
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POPSBear Stearns /CDOs The FT's Lex column tackles explaining the difficulties of pricing CDOs in the wake of Bear Steans' disclosure that a meltdown in the subprime mortgage market has made the assets from two of its flagship hedge funds almost worthless.
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POPSClayton Holdings Subpoenaed In SEC Subprime Probe The SEC has been looking for potential accounting irregularities in the securitization of subprime mortgages for some months. A suspicion is that firms have been using credit quality ratings as the basis for pricing and marking issues of collaterallised debt obligations (CDOs), which are repackaged pools of debt, in this case subprime mortgages, sold to investors. CDOs are not easy to price as there is not an active market in them. Most times it is a matter of an educated guess. But a credit quality rating is not the same as a valuation. No doubt some investors have taken the two to be the same, and suffered as a result. But who encouraged them to think so? And is it sharp or illegal practice if a firm did encourage them to do so. That is something the SEC is trying to work out. -- PM
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