the Stock Market
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HarmonicaBruce
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I'd like to thank everyone for their prayers. Yesterday UCO hit 10.57, making me feel pretty stupid. Well, right now it's at $12.18. Yes, oil is back!HarmonicaBruce said:
Seraphim
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Not looking for bargains. My asset allocation is established. When bond yields get back there, it might be time for some purchasing. Mostly now I just spend my time studying the market and the economic factors affecting it.
vanman2300
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Just an FYI. Congress recently passed a funding bill of 1.1 trillion that included relaxing the rules on derivative trading. You probably remember that was the main reason the economy hit the crapper in 2008. So be aware that in the future we are set up for the same problems. Keep your eye on the banking industry for trouble down the road.
HarmonicaBruce
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"Liar's poker" is a great book that talks about bundling mortgages. It's written by Michael Lewis, who claims to have been the guy who first created bundled mortgages as a financial security.
How about UCO? It's up 6% today. It wasn't too hard to figure out that oil was going back up.
How about UCO? It's up 6% today. It wasn't too hard to figure out that oil was going back up.
vanman2300
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Mac J said:
No. I'm talking about the law now allows the banks about the same latitude to package loans and deal in derivatives as they had pre-2008. So if you are the CEO of a large bank and paid huge bonuses for profitability then your no-brainer is to risk it all to chase profits. The more risk taken brings in the highest profits of course. Plus even if another collapse happens they know the taxpayer will come to the rescue because they have to. It's really like going to Vegas and told that if you lose any money you'll get it back so why not risk everything you have.
Point is I'd watch the banks because they will certainly go right back to business as usual at some point.
Seraphim
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A derivative's return is based on the performance of the underlying asset. They're often used as a hedge against poor performance, and generally used to pass higher risk onto those who can stomach it. More risk, more potential for profit. Companies like Lehman were highly leveraged - they didn't have assets to cover their losses ( someone else with more knowledge may get into better detail here), while others like JPMorgan had disciplined themselves a bit better.
I have little sympathy for the investors buying these assets, as they knew - or should have known - they were taking on high levels of risks. That's why they were looking at higher returns.
When the underlier of a derivative crashes, such as the housing market, the derivatives crash also. EVERYONE looked at the housing market as something almost indestructible and kept building upon it. When the bottom washed out, and the recession began, it was catastrophic to many. Like a pyramid built out of cards, but the pyramid was built upside down. So much investment was built on top of too few underliers.
The above is 'to the best of my understanding', if anyone else can explain it better
As van man pointed out, the government came to the rescue with bailout money, and the Fed jumped in with QE to free up cash for the banks.
Sorry - the above post was in response to Mac's question.
I have little sympathy for the investors buying these assets, as they knew - or should have known - they were taking on high levels of risks. That's why they were looking at higher returns.
When the underlier of a derivative crashes, such as the housing market, the derivatives crash also. EVERYONE looked at the housing market as something almost indestructible and kept building upon it. When the bottom washed out, and the recession began, it was catastrophic to many. Like a pyramid built out of cards, but the pyramid was built upside down. So much investment was built on top of too few underliers.
The above is 'to the best of my understanding', if anyone else can explain it better
As van man pointed out, the government came to the rescue with bailout money, and the Fed jumped in with QE to free up cash for the banks.
Sorry - the above post was in response to Mac's question.
vanman2300
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Derivatives are very ethereal in nature and therefore almost impossible to understand completely. I know someone who worked indirectly with the derivative gurus at Bank of America and had an MBA and extensive knowledge of banking. Even they were not sure they fully understood them.
Seraphim, according to the lengthy discussion I had with that person and the understanding I got from it all this is what I think. There were many loans that should never have been given, the if you could breathe you got one type. They were packaged with good loans so they could raise the grade of the loan since the package was graded not the individual loans. So everyone buying the packages never understood there were a lot of assets in the package that had tremendous risk. That's also why we had to pay the same people who made the mess to straighten it out because only they knew what was in those packages to be able to unwind them. Ironic we had to pay these unscrupulous people to undo the damage they themselves made. Derivatives come in later and are sort of a way of betting on these packages and their performance while eliminating a lot of risk of actually owning them. Very complicated after this so I won't continue further.
Seraphim, according to the lengthy discussion I had with that person and the understanding I got from it all this is what I think. There were many loans that should never have been given, the if you could breathe you got one type. They were packaged with good loans so they could raise the grade of the loan since the package was graded not the individual loans. So everyone buying the packages never understood there were a lot of assets in the package that had tremendous risk. That's also why we had to pay the same people who made the mess to straighten it out because only they knew what was in those packages to be able to unwind them. Ironic we had to pay these unscrupulous people to undo the damage they themselves made. Derivatives come in later and are sort of a way of betting on these packages and their performance while eliminating a lot of risk of actually owning them. Very complicated after this so I won't continue further.
HarmonicaBruce
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I don't know anything, but I think what happened is that the government, trying to make homes available to everyone regardless of their ability to earn a living and pay a mortgage, extended credit to people who weren't really "credit worthy" (or at least guaranteed those loans). This caused the market price of houses to be inflated, as there were lots of buyers. It was a sellers market. People who should have never been given a loan started defaulting, and the whole house of cards collapsed.
I June, 2013, I bought some New York Mortgage Trust, mostly because it paid a huge dividend (about 16%), for $6.54. It's paid the dividend every quarter, and is now trading at $7.93. I tried to understand exactly how they work and make money, and I found out it's so complicated I doubt if anyone understands what they do. I just figured the real estate crash already happened and it's not going to happen again until it gets inflated again.
I had already started writing this post before vanman's post was up. (I take awhile for me to write a post), sorry for the repetition.
I June, 2013, I bought some New York Mortgage Trust, mostly because it paid a huge dividend (about 16%), for $6.54. It's paid the dividend every quarter, and is now trading at $7.93. I tried to understand exactly how they work and make money, and I found out it's so complicated I doubt if anyone understands what they do. I just figured the real estate crash already happened and it's not going to happen again until it gets inflated again.
I had already started writing this post before vanman's post was up. (I take awhile for me to write a post), sorry for the repetition.
vanman2300
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The government had a big part in the trouble because the banking lobby had them kill the Glass Steagall Act that controlled what the banks could do in terms of trading. Bank executives had a much greater role in it and the main driving force behind it all. These execs were paid huge bonuses for giving out as many loans as possible and that's why anyone with a pulse could get a loan. Execs really didn't care what they were doing to their own bank since they would already have their money well before everything collapsed. In effect they put their interest above that of their employer and not caring what it would do to innocent individuals or this country.
Seraphim
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vanman2300 said:
That's my basic understanding as well. I think there was also speculation about how some of the packages were graded. Nothing came of it, as far as I know.
Derivatives, as you put it, are ethereal because they are nothing more than a contract based on performance. I read somewhere there was even a derivative based on the weather. That's why I refered to it as an upside down pyramid. At the bottom were the plain vanilla mortgages, next the packages with the good and bad mortgages, on top of that derivative's based on the performance of the packages - and derivative's can be based on good or poor performance. When so many plain vanilla mortgages went sour because of the drop in the housing market, everything above toppled as well, damaging even the packages containing solid mortgages, as well. Used properly as hedges, I've read, the derivative's COULD have offset much of the damage from the housing crisis. - such as JPMorgan did. Lehman had borrowed so much money - using leverage - that they had no hope of normal recovery.
But I don't mess with derivatives any more than I do junk bonds. I try to keep risk to a minimum. And cost.
HarmonicaBruce said:
Th banks extend credit, not the government. Plus, there were a great many other factors in the recession. The recession was global - not just in the US. Monetary problems in Europe and Asia affected us as well. One has to be careful quoting Wikipedia, but this entry seems fairly comprehensive, if not in-depth:
"Many factors directly and indirectly caused the Great Recession (which started in 2007 with the US subprime mortgage crisis), with experts placing different weights upon particular causes. Major causes of the initial subprime mortgage crisis and following recession include: International trade imbalances and lax lending standards contributing to high levels of developed country household debt and real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.
One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000–2007 period when the global pool of fixed-income securities increased from approximately $36 trillion in 2000 to $80 trillion by 2007. This "Giant Pool of Money" increased as savings from high-growth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally.[1]
The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country, as lenders and borrowers put these savings to use, generating bubble after bubble across the globe.
While these bubbles have burst, causing asset prices (e.g., housing and commercial property) to decline, the liabilities owed to global investors remain at full price, generating questions regarding the solvency of consumers, governments and banking systems.[2] The effect of this debt overhang is to slow consumption and therefore economic growth and is referred to as a "balance sheet recession" or debt-deflation.[3]
The fall in asset prices (such as subprime mortgage backed securities) during 2007 and 2008 caused the equivalent of a bank run on the U.S. shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards.[3] Struggling banks in the U.S. and Europe cut back lending causing a credit crunch. Consumers and some governments were no longer able to borrow and spend at pre-crisis levels. Businesses also cut back their investments as demand faltered and reduced their workforces. Higher unemployment due to the recession made it more difficult for consumers and countries to honor their obligations. This caused financial institution losses to surge, deepening the credit crunch, thereby creating an adverse feedback loop.[4]
The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in ethics and accountability at all levels."
