Thursday, January 24, 2008

The Ingenuity of the Market: A Primer on the Subprime Crisis

If the current financial turmoil leads to a full blown crisis, future historians will likely include last year's Subprime Mortgage Financial Crisis as one of its main precursors. The above video provides a clear and concise explanation of that key episode. Watch to get an insight on what the U.K.'s former Chancellor of the Exchequer and current Prime Minister Gordon Brown calls "the ingenuity of the market".

Update Jan-25-2008 4:09AM: To reinforce the above, via the comments section of CrookedTimber, a pointer to David Einhorn's remarks a few months ago on the credit market crisis:
"What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas. Securitization is a mediocre idea. Re-securitization of securitized assets into a CDO [Collateralized Debt Obligations] is a bad idea. Re-securitization of CDOs into CDO-squared is really a bad idea...And as I will get to in a moment, it is a horrendous idea to delegate most of the responsibility for assessing credit risk to a group of credit rating agencies, paid for by the issuers rather than the buyers of bonds."
On Securitization
"Avocates of securitization say it disperses risk. However, it does so by separating the loan originator from the eventual outcome of the loan. The originator gets a fee up front. The risk is held somewhere down the line in an alphabet soup of structured vehicles called CDOs, CMBs or CLO..."
On Credit Rating Agencies
"Why would anyone blindly lend to an opaque structure full of loans or pieces of pools of loans that they didn't underwrite or even evaluate? Because the structures come with credit ratings from Standard & Poor's, Moody's and Fitch."
Read the whole thing here (PDF file).


Cocoy said...

so funny! =))

Cocoy said...

the joke, funny as it is, does have some truth in it. it *is* rewarding greed and stupidity.

cvj said...

Hi Cocoy, i agree. I'm amazed at how the two are able to deliver the truth in such an entertaining manner.