Comments on: How to fix the US financial system A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: paty_cool Mon, 25 Oct 2010 18:51:20 +0000 Obama he promised to straighten Bush’s mess out Two Wrongs don’t make a right, By the way I found a website that give you prizes for your opinions and 4 play games here is a topic about this: do-you-blame-for-the-economic-crisis1

By: David Sucher Thu, 12 Nov 2009 04:49:12 +0000 I am a little confused by your use of the term “securitization.” Could you please define it?

And explain how securitization differs in substance from loan “participation?” In both cases the original lender sells off parts of a loan to others, thus recouping their capital so as to make more loans. What’s wrong with that?

As well you seem to imply that securitized loans are not collateralized? Do I read you correctly? But isn’t it true that the problems in securitized loans are in real estate, which by its nature is collateralized. The only question is whether the collateral is correctly valued.

My own take is that securitization in theory simply broadens the ability of people, who are (we hope) skilled in judging risk, to make loans. It would seem that if “lenders” were forced to keep significant skin in the game by limiting their ability to sell loan packages to, say, 95% of the loan, then that would limit the risk to the buyers of that securitized loan.

Felix, you have written before with great doubt about securitization and I hope you will expand on your concerns. It is a very interesting subject. FHA and VA, for example, have securitized loans for the past 60 years and I think that the default rate has been very low. So what’s wrong _in theory_ with securitization?

By: onthetimes Tue, 10 Nov 2009 19:25:59 +0000 “…also thinks that AIG Financial Products should declare bankruptcy, perhaps along with the parent company, which would give its counterparties a lot of incentive to settle their claims at say 70 or 80 cents on the dollar.”

That would have been a great idea, about a year ago. Before the government stepped in and paid off hundreds of billions of dollars in claims, at 100 cents on the dollar. Now that the government owns 80% of AIG, how would that help recoup the money it gave to companies like Goldman Sachs?

Pozen also says ““if all you do is make traditional loans, you will lose money and you will go bankrupt”. How did banks exist for centuries doing just that? They borrow money at 3% (or even less, now thath govt provides capital for almost free) and lend it out at 5%. They increase their profits by making larger loans, and doing a good job of picking out borrowers that won’t default. Or is Pozen implying that it’s impossible for anybody now to make loans without less than 1% of them defaulting with no recourse? If banks required 20% down on mortgages, they wouldn’t have lost anywhere near as much as they have in the last few years.

“What’s pretty obvious though is that most of Pozen’s recommendations will not be enacted. Which raises the obvious question: if we don’t do this, what’s going to happen to the financial system and the economy? Pozen’s answer: we will have more crises, they will be increasingly severe, and they will be increasingly frequent. I agree.”

It’s guaranteed. The financial system has way too many positive feedback loops, which ultimately lead to instability. There is more money in the economic system then ever before, which means the magnitude of corrections will be greater, and since communication is virtually instant, the time between cause and effect, and the second order response, is almost instant, which increases the frequency of spikes and noise.

“We can’t afford the trillions of dollars it would cost to rescue the world from the next crisis”. Well, since money is just printed up by all of the major economies, we (the world) can actually afford every crisis. All it does it revalue currencies and assets. People with assets won’t like it, but those without assets aren’t going to be as affected by it. Which is the way it should work, as the problems are mostly caused by the people with assets, who are constantly playing games (they call it financial innovation) to get more assets.

I haven’t read the book, and probably won’t. It doesn’t matter, even if Pozen is 100% right, his suggestions would never get implemented by Congress. Congress doesn’t really care about solving problems, they only care about appearing to trying to solve problems, so they can brag about it when running for re-election. And you want to eliminate crisis risk? What politician would want to do that? Crisis’s give them their reason for existence.

By: Uncle_Billy_Slumming Tue, 10 Nov 2009 19:09:20 +0000 That’s a lot of bandaids.

By: Gaute Tue, 10 Nov 2009 18:29:33 +0000 “My view is that the rates of return targeted and required by private-equity investors are far too high for banking, which should be a boring industry”

I think you miss an important point here. If his proposal should make any sense, those on that board would be those who took home the lions share of the bonuses to their PE. That way ownership and competence would once again be presumed to be on one hand instead of split between owners who knows nothing and managers who takes the lions share.