Comments on: The unwilling risk-takers http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/ A slice of lime in the soda Wed, 22 May 2013 15:07:22 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: Bill Shoe http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7622 Bill Shoe Tue, 06 Oct 2009 19:49:57 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7622 Best sentence of the financial crisis- "Financial complexity and innovation, on this view, are essentially tools of obfuscation. Best sentence of the financial crisis-

“Financial complexity and innovation, on this view, are essentially tools of obfuscation.

]]> By: Fitz http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7430 Fitz Thu, 01 Oct 2009 20:18:16 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7430 It is the old story of the strong winning out over the weak. This time, strength and weakness is not muscular; it's informational. Also,I think there is a basic defect in the structure of securitizing pools of securities. Put the two together: nobody should ever buy the "equity" tranche of a securitization. Period. I have it on good authority that, if the issuer was to be required to retain that tranche, securitization as we have come to know it would cease. It is the old story of the strong winning out over the weak. This time, strength and weakness is not muscular; it’s informational.

Also,I think there is a basic defect in the structure of securitizing pools of securities.

Put the two together: nobody should ever buy the “equity” tranche of a securitization. Period. I have it on good authority that, if the issuer was to be required to retain that tranche, securitization as we have come to know it would cease.

]]> By: Dollared http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7411 Dollared Thu, 01 Oct 2009 17:26:32 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7411 Imagine this next as spoken by Wilfred Brimley at the end of Absence of Malice: "I'm not sure I can figure out how all this discussion of unwilling risk takers and market equilibrium is any different from how the dumbest rich guy in a small town ends up with a Cadillac that he doesn't know has been rebuilt, a big house that's too close to the river, and a lovely wife who spends two hours every weekday afternoon taking tennis lessons. Can you explain that to me? And then how is it that the used car salesman isn't a crook, the real estate agent isn't a fraud, and the tennis pro isn't eventually going to be looking down a shotgun barrel? Is that what makes high finance so special? Imagine this next as spoken by Wilfred Brimley at the end of Absence of Malice:

“I’m not sure I can figure out how all this discussion of unwilling risk takers and market equilibrium is any different from how the dumbest rich guy in a small town ends up with a Cadillac that he doesn’t know has been rebuilt, a big house that’s too close to the river, and a lovely wife who spends two hours every weekday afternoon taking tennis lessons. Can you explain that to me?

And then how is it that the used car salesman isn’t a crook, the real estate agent isn’t a fraud, and the tennis pro isn’t eventually going to be looking down a shotgun barrel? Is that what makes high finance so special?

]]> By: MichaelB http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7391 MichaelB Thu, 01 Oct 2009 14:23:49 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7391 Frankly, all this talk about complexity seems to profoundly miss-diagnose the problem. Even when the structure of the securities was very complex, the problems were very simple. Mortgage Backed Securities were backed by mortgages that didn't pay as expected. None of this really has anything to do with the complexity - it doesn't matter whether the cash flow is supposed to follow a simple path or a complicated one. If there's not enough cash, someone's taking a loss. If there's not even close to enough cash, lots of people are taking huge losses. A much more basic issue is that the consensus view was that there was a lot less risk than was actually the case. There are feedback effects in that: if all these subprime mortgages are safer because of FICO, the MBS is safer. If the MBS is safer, it's easier to make subprime mortgages. Etc. But the basic problem has nothing to do with the structure of any particular financial product. It's primarily that there was a widespread misunderstanding of the risks in the housing market. Frankly, all this talk about complexity seems to profoundly miss-diagnose the problem. Even when the structure of the securities was very complex, the problems were very simple. Mortgage Backed Securities were backed by mortgages that didn’t pay as expected.

None of this really has anything to do with the complexity – it doesn’t matter whether the cash flow is supposed to follow a simple path or a complicated one. If there’s not enough cash, someone’s taking a loss. If there’s not even close to enough cash, lots of people are taking huge losses.

A much more basic issue is that the consensus view was that there was a lot less risk than was actually the case. There are feedback effects in that: if all these subprime mortgages are safer because of FICO, the MBS is safer. If the MBS is safer, it’s easier to make subprime mortgages. Etc. But the basic problem has nothing to do with the structure of any particular financial product. It’s primarily that there was a widespread misunderstanding of the risks in the housing market.

]]> By: Tom Hickey http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7354 Tom Hickey Thu, 01 Oct 2009 04:11:19 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7354 Except that a lot of these people were pension fund managers and other supposed professionals who should have known better if they hadn't been suckered by the IB's fiduciary reputations and the rating agencies AAA green flag. Look for the civil suits to follow. Except that a lot of these people were pension fund managers and other supposed professionals who should have known better if they hadn’t been suckered by the IB’s fiduciary reputations and the rating agencies AAA green flag. Look for the civil suits to follow.

]]> By: Dan M. http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7340 Dan M. Thu, 01 Oct 2009 00:22:58 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7340 Only the short term T-bills are risk free. For example, if one buys a 10-year T-bill, and inflation rises significantly, the value of that T-bill is reduced. My investments are not without risk; but those risks are minimal. I have a stable value annuity based as most of my retirement, and S&P average as the rest. The latter is an explicit risk/reward strategy. Still, in the last 2 years, I broke even on my investment....which I think isn\'t that bad of a deal. Only the short term T-bills are risk free. For example, if one buys a 10-year T-bill, and inflation rises significantly, the value of that T-bill is reduced.

My investments are not without risk; but those risks are minimal. I have a stable value annuity based as most of my retirement, and S&P average as the rest. The latter is an explicit risk/reward strategy. Still, in the last 2 years, I broke even on my investment….which I think isn\’t that bad of a deal.

]]> By: jdor http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7336 jdor Wed, 30 Sep 2009 22:05:20 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7336 There are plenty of people that bought derivatives and things like ARP's that did it purely for increased yield and forgot week one of finance class. The T-bill rate is the risk free rate. If you are earning more than the T-bill rate then you had better know where your risk is. There are plenty of people that bought derivatives and things like ARP’s that did it purely for increased yield and forgot week one of finance class. The T-bill rate is the risk free rate. If you are earning more than the T-bill rate then you had better know where your risk is.

]]> By: framed http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/comment-page-1/#comment-7333 framed Wed, 30 Sep 2009 21:56:24 +0000 http://blogs.reuters.com/felix-salmon/2009/09/30/the-unwilling-risk-takers/#comment-7333 This sounds a lot like a result on risk sharing from general equilibrium theory stating that in any economy with both risk neutral and risk averse agents, the efficient allocation requires that the risk neutral agents bear all the risk. Chris' extension to an economy made up of the ignorant and the mercilessly greedy has me laughing on the outside and crying on the inside. Nice, very nice. This sounds a lot like a result on risk sharing from general equilibrium theory stating that in any economy with both risk neutral and risk averse agents, the efficient allocation requires that the risk neutral agents bear all the risk.

Chris’ extension to an economy made up of the ignorant and the mercilessly greedy has me laughing on the outside and crying on the inside. Nice, very nice.

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