Comments on: Notes for a speech to the Regional Bond Dealers Association A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: ebay india coupons Tue, 07 Oct 2014 05:08:13 +0000 Enormous breakfast with ready to vist web page while carries types of information which got seacrching

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By: educated investor Wed, 06 May 2009 21:55:44 +0000 Felix, I’m supporting dWj over here. Sadly you’re creating wide-sweeping realisations without truly understanding what you’re talking about. Just about every paragraph is written convincingly, but the data that supports your argument is mostly false. For example: first CDO late 1990s. Um, no. AAA means only interest rate risk? Um, no. Also this had very little to do with Gaussian copula back in those days. I could go on and on but does it really matter. Anybody who can criticize somehow has an equally unsophisticated, applauding audience.

By: Dominic Sayers Fri, 24 Apr 2009 08:47:24 +0000 I can hear the standing ovation now…

By: dWj Thu, 23 Apr 2009 20:01:11 +0000 Incidentally, I never heard the notion that AAA was “risk free” until about two years ago, even in the sense in which treasuries are “risk free”. (I may be crazy wrong here, but I believe GM was rated AAA at the beginning of this decade, and it was certainly clear by 2005 that long-dated debt held four years earlier was not “risk free”, even in the approximate sovereign sense.) I also had never heard until a year or two ago that U.S. Treasuries were even rated, though I have since read on occasion that it’s AAA, and have read the complaint that therefore other AAA rated bonds are rated as “as safe as treasuries”. (This is like saying that, because Einstein had a high school diploma, anyone with a high school diploma has been rated “as smart as Einstein”. The mechanism simply doesn’t make the distinction; it’s a bit of a leap to then say that the mechanism is asserting that the distinction doesn’t exist.)

I very much doubt that, even when GM was AAA, its bonds ever traded at as low a yield as comparable treasuries.

By: Ginger Yellow Thu, 23 Apr 2009 19:44:32 +0000 I have to quibble with the Bistro description. They didn’t persuade the rating agencies that they had hedged all the credit risk. JP Morgan retained the first loss of the pool as well as the super senior risk. What they did was hedge the risk above the first loss position to some level well above the expected loss, gaining capital relief on the difference between the threshold percentage and 8%. If they persuaded anyone, it was the regulators.

Also, anyone who thinks they aren’t taking much credit risk on a BBB bond is insane.

By: Don the libertarian Democrat Thu, 23 Apr 2009 19:23:21 +0000 “Of course, on Wall Street, if everybody is making the same trade, that’s a tried-and-true recipe for bubbles and crashes, which is exactly what we got.”

At the risk of constantly being the one kid in class who never gets it, as regards David Li’s Gaussian copula function, is it:

1) The 1st user thought that he was making money, which led people to follow him, but he was actually losing money. Eventually, the losses added up to a figure that was a very substantial loss to society.

2) The users were making money until a certain money-losing number of users was reached.

As for stocks, I’m having a problem understanding how everybody can be doing the same thing. For every buyer, doesn’t there have to be a seller?

I sold my house last year. I made money. Even though that house has probably gone down in value, the people who bought it are still in it because they can afford the payments, taxes, etc. When I bought that house, the price fell 10% to 15%, but I could afford the upkeep. I even petitioned for a decrease in my property taxes.

The problem has to be that people took out loans that they can’t afford to pay, and lenders gave out loans to people who can’t afford to pay. In other words, the problem was the amount of debt as against the resources that people had.

In the case of CDOs, surely the bottom line has to do with the situation that I just described. The problem is that people don’t have enough resources to make good on the claims against them. Again, it’s not really the model, it’s the lack of resources. People were trying to get in on a rising market on the cheap. That is, they were investing more and more with less and less backing, and lending to people with less and less backing. I’m sorry, that’s absolutely clear, whatever your models tell you about the future.

Suppose the investors had used an eight ball, a ouija board, a medium, etc., claiming that they believed that it worked. Would we be as forgiving of their mistakes? What is it about a math model that leads people to conclude that it mirrors or predicts reality? In that sense, what differentiates the people who invested in Madoff as opposed to AIG? They both simply trusted people and the methods that they claimed that they were using.

If the mis-interpreters of Li were followed because they believed that they were right, what possible law can stop people believing in other people.Laws could only help if the managers invested against sensible criteria or were committing fraud. There’s no law capable of stopping people from making bad investments or loans with people that they trust.

Bottom line, isn’t all that bond dealers are marketing is trust?

By: DCreader Thu, 23 Apr 2009 18:45:37 +0000 Wow, I give you credit for be willing to deliver bad news. The temptation with these things is always to find a crowd-pleasing silver-lining. Kudos for sticking to your guns.

I think there’s an interesting question here about the magnitude of AIG’s role in all this. AIG became the toxic waste dump where all the unwanted credit risk was buried. Clearly some of the insiders knew that they had real risk, which is why they wanted CDS on AAA MBS in the first place. If AIG hadn’t been there to take all the risk, wouldn’t the system have backed up to the point the bubble would have been smaller?

While I (hopefully) have your attention, I think there’s an interesting parallel here to the “Winner’s Curse” phenomenon with auctions where the bidder who most overestimates the value of an item places the highest bid and thus wins the auction. When risk becomes tradeable, the bidder who most underestimates the risk involved will be the one who winds up holding the risk. Coupled with policies that allowed firms to essentially determine their own reserve requirements — this seems like a recipe for creating blow-ups.

By: tikno Thu, 23 Apr 2009 17:49:10 +0000 Felix, you exactly true.
“One of the biggest mistakes that we all made during the credit boom was that everybody overestimated the demand for risk, when in reality there was much more demand for safety.”

I think, safety for our next burden.

By: Chris Thu, 23 Apr 2009 17:35:47 +0000 Might want to put some chicken wire up before telling them their business is not going to be picking up anytime soon ;-)