Toxic Assets, Toxic After All

That's according to a new study from Joshua D. Coval, a professor of Business Administration at Harvard, and Princeton economist Jakub W. Jurek.

Coval and Jurek write that the prices of toxic assets reflect fundamentals and that the low prices are not--as Geithner and Treasury argue--the result of "fire sales."

"Policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets," Coval and Jurek write, "are likely to only delay – and perhaps even worsen – the day of reckoning."


Krugman and others have been arguing for a while that the mess the banks finds themselves in does not stem from a liquidity problem; as John Carney writes at Clusterstock, summarizing the Coval and Jurek paper,

"The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result."

That's right and Geithner and Treasury's misdiagnosis of the financial crisis will, as Coval and Jurek argue, only delay the day of reckoning.

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    I have a hard time calling.... (5.00 / 1) (#3)
    by kdog on Mon Apr 06, 2009 at 02:05:40 PM EST
    bundles of bad debts that will never be repaid an "asset" at all...I'm no economist, but aren't these instruments better described as toxic liabilities?  

    Somewhat double negatives (5.00 / 1) (#16)
    by pluege on Mon Apr 06, 2009 at 02:49:51 PM EST
    toxic asset = liability

    toxic liability = asset.

    call a spade a spade: they're liabilities and the people trying to fool us into seeing lipstick on that pig are cretins, they're unpatriotic plutocrats ripping us all off.


    You're absolutely right... (none / 0) (#23)
    by kdog on Mon Apr 06, 2009 at 03:10:03 PM EST
    they are plain old liabilities...well said.

    Why Citibank's liabilities are our problem I have no idea...I remember when Paulson rolled out the first TARP, everybody and their mother said without Citibank and the like we starve, but I didn't buy it then and I don't buy it now...it was a bluff we should have called.


    They will be repaid kdog (2.00 / 1) (#8)
    by ChiTownMike on Mon Apr 06, 2009 at 02:35:28 PM EST
    Like another poster pointed out today these assets are made up of many different mortgages. Not all of them are going to go into foreclosure. A majority of them won't. So the assets holding good mortgages which most of them are will always be worth something. The only legitimate place they lose value is in foreclosures.

    We're talking about CDS's right? (5.00 / 1) (#10)
    by kdog on Mon Apr 06, 2009 at 02:42:58 PM EST
    A lot of this stuff goes right over my head...and by design:)

    If we're talking about CDS's, as far as I understand those are made up of all kinds of debts...mortgages, credit cards, corporate loans, etc.  The reason they are bundled together, imo, is to make a big pile of worthless paper appear to have value.

    Nah...these debts are never being repaid, if there was a chance they'd be repaid the original holders of the debt never would have bundled and sold it off.  Right?


    No, These are called CDO's... (5.00 / 1) (#27)
    by gtesta on Mon Apr 06, 2009 at 03:21:51 PM EST
    collaterized debt obligations.  which is securitization of debt....making new things to trade that are based on other things.
    Mortgage backed securities (MBS) are one kind of CDO's.  They are basically bonds that have a value (par) and a yield.  They are backed by lots of slivers of other similiar mortgages.
    Anyway, I argued in an earlier thread that I don't know how you value a MBS where some of the mortgages go into default, and where some of the mortgages are no longer an accurate reflection of a homes value.  It really is a mess and not at all accurate to argue that these "assets" will gain value in the long run.  These are derivatives after all, not the actual mortgage notes.
    BTW, CDS's (credit default swaps) are the worthless insurance that AIG sold and that we (taxpayers) now own.

    CDO.... (none / 0) (#35)
    by kdog on Mon Apr 06, 2009 at 03:52:55 PM EST
    thank you, that is the investment vehicle I read about that boggles the mind.  CDS is the insurance that boggles the mind....sorry, I'm uber-boggled over here...I don't even have a checking account!

    Coval and Jurek (none / 0) (#14)
    by ChiTownMike on Mon Apr 06, 2009 at 02:47:35 PM EST
    are not talking about CDS. CDS is insurance against the assets going bad. What Coval and Jurek are talking about is the assets themselves. But I agree with you this is all very complicated and it is easy to get confused and almost impossible to understand every little nuance.

    Thanks for clarifying... (none / 0) (#19)
    by kdog on Mon Apr 06, 2009 at 02:56:40 PM EST
    or trying to clarify the unclarifiable:)

    I'm sorry, there is no reason for the business of the world to be this complicated, unless of course the architechts are up to no good.  

    Architechts like that sc*mbag Cassano.


    You make a bigger point (none / 0) (#22)
    by Slado on Mon Apr 06, 2009 at 03:07:56 PM EST
    without trying kdog.  Truly a talent.

    The economy is only complicated when you don't play by the rules of capitalism.

    There's a reason all Econ classes start with and end with the discussion definiition of the Suplly/Demand Cuve.

    Because it is that simple.

    It only gets complicated when you deviate from the basics.


    Deviate from the basics... (none / 0) (#25)
    by kdog on Mon Apr 06, 2009 at 03:18:00 PM EST
    That's putting it kindly Slado....I'd call it market rigging, loophole exploitation, or gaming the system.

    Yes but it (none / 0) (#17)
    by Slado on Mon Apr 06, 2009 at 02:51:44 PM EST
    didn't matter when the "Ponzi Scheme" called our debt bubble was rising.

    As long as you could keep bundling and sell to the next sucker on the belief that it would gain relitive value compared to another bundle of debt you could keep this ball rolling.

    Once we produced to many houses, too much product etc... for even this debt to consume the bubble burst and here we are.

    Anyone who thinks houses are goign up is kidding themselves.   Houses will either stay flat or continue to drop for the next few years so much of this debt that isn't bad yet will become bad meaning anyone stupid enough to purchase it at these "bargain" prices will loose their shirt and then we'll be right back where we started.

    All of this is built on the outdated assumption that eventually we'll recover in a way that wealth creation through the manufacturing of debt versus product will work again.  The ugly truth is we've pushed that formula to the limit and not enough suckers are going to buy in this go around for it to work again.


    I've got a word (none / 0) (#7)
    by Slado on Mon Apr 06, 2009 at 02:33:12 PM EST

    Much of this debt will never be paid back and it shouldn't be.   It was loaned to people that could never pay it back so the people that did the loaning should pay the price.

    Capitalism is not pretty but it works.  Time for Obama to start letting it happen.


    Another word (5.00 / 1) (#26)
    by eric on Mon Apr 06, 2009 at 03:21:17 PM EST
    Loss.  These investments are losses.  They paid money for them, hoping to gain but didn't.  That is a loss if I have ever heard of one.  Now, because the loss is packaged up and has a name doesn't change its character.

    I put some money into my NCAA pool, and it looks like I am not going to win.  I lose.  Now, I suppose I could characterize the chance to win that I bought as something - lets say a Basketball Investment Derivative (BID) but that Bid became worthless when Wake Forest tanked.  Wake Forest didn't make it to the Final Four and nothing is going to change that.  Want to buy by BID?  It is a little toxic right now, but it might come back, right?


    I'll Trade you 2 Pitt BID's for (none / 0) (#28)
    by gtesta on Mon Apr 06, 2009 at 03:24:18 PM EST
    your Wake Forrest BID.
    Well Said.

    Spoken in a language I can understand... (none / 0) (#37)
    by kdog on Mon Apr 06, 2009 at 03:56:32 PM EST
    Thanks Eric...now if anyone knows anyone who wants to buy some LSKBERAID'S send 'em my way will ya:)

    (LSKBERAID= Long Shot Kick the Bucket in the Eight Race at Aqueduct Investment Derivative)


    heh (none / 0) (#39)
    by eric on Mon Apr 06, 2009 at 04:05:49 PM EST
    I'll take OTB over WS :) (none / 0) (#40)
    by nycstray on Mon Apr 06, 2009 at 04:11:23 PM EST
    at least I'll get to enjoy all those purdy horsies  :)

    They are beautiful.... (none / 0) (#43)
    by kdog on Mon Apr 06, 2009 at 04:55:12 PM EST
    and real, which is more than I can say for the widgets these crooked cats gamble on.

    Amen brother... (none / 0) (#12)
    by kdog on Mon Apr 06, 2009 at 02:44:12 PM EST
    Just say no socialized losses and privatized gains...thats fuedal system sh*t.  It doesn't even resemble capitalism or a free market...not even close.

    FDIC Auctions Are Not Encouraging (5.00 / 1) (#6)
    by BDB on Mon Apr 06, 2009 at 02:31:26 PM EST
    Zero Hedge looked at what FDIC auctions were bringing in in Jan. and Feb. (emphasis omitted):

    The results: 43 commercial loan auctions, of which 39 were for exclusively performing (so not non-performing, or lower quality auctions, and by implication free cash generating), consisting of 331 total loans, representing $206 million in face value, ended up clearing for a $103 million price, a 49.3% discount, or a 50.7% clearing price! That's right, the FDIC itself clears performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions. One would assume the chairman of the very agency that conducts these loan auctions would be aware of them and would at least reference or mention these results in her numerous public appearances.

    But, hey, I'm sure the assets at Citi are worth 90 cents on the dollar.  Why else would the FDIC agree to guarantee loans to buy them?

    This actually proves that they are not toxic. (3.50 / 2) (#13)
    by steviez314 on Mon Apr 06, 2009 at 02:45:14 PM EST
    You said those commercial loans were performing and cash flow generating.  Therefore the ONLY reason they traded at 50 cents was that there was a forced seller--the FDIC, which has no interest in holding onto loans.

    If a bank can meet its current liabilities, why force it to sell performing assets at 50 cents on the dollar? Why create forced selling when it is not necessary?  Why mark these assets to market if they are performing and are not needed fo sale to meet any obligations?


    The problem is clearly the non-performing (none / 0) (#15)
    by andgarden on Mon Apr 06, 2009 at 02:49:33 PM EST
    assets. Those constitute the $h*tpile.

    Non-performers are already marked down and those (5.00 / 1) (#18)
    by steviez314 on Mon Apr 06, 2009 at 02:53:27 PM EST
    losses have been taken.

    The question is what percentage of performers become non-performers over the next year.

    And also, if a bank has to sell good loans to raise cash what price would they get.


    The market clearly doesn't think (5.00 / 2) (#20)
    by andgarden on Mon Apr 06, 2009 at 03:02:42 PM EST
    that the assets they're still holding are worth enough. You and the treasury apparently think otherwise.

    Or the market (2.00 / 1) (#36)
    by ChiTownMike on Mon Apr 06, 2009 at 03:53:21 PM EST
    recognizes good deals from a motivated seller which I agree is the case here. As the market and the emerging secondary market on these assets unfolds the truth will be told. In the beginning as with almost all equities they will sell for less than where they eventually end up - as long as RE prices do not tumble further. And recent data shows that RE prices will probably slowly trend upward from here on out.

    They are worth more (2.00 / 1) (#11)
    by ChiTownMike on Mon Apr 06, 2009 at 02:43:00 PM EST
    than $50%$ unless 50% of the mortgages they hold have foreclosed and that is not likely. We have to remember these are mortgages. Mortgages are simple in terms of money: they pay interest and they eventually get paid in full. Most of the mortgages in these securities fit that model. Foreclosure rates are not at 50%.

    Unfortunately, it's not that simple. (5.00 / 1) (#29)
    by gtesta on Mon Apr 06, 2009 at 03:28:58 PM EST
    the mbs's are not a collection of mortgage notes, only "slivers of mortgage notes" that all have similiar characteristics.  Welcome to securitization.  Anyway, no one knows how to value these things, I wish we did.

    I believe (none / 0) (#34)
    by ChiTownMike on Mon Apr 06, 2009 at 03:46:31 PM EST
    the mbs's are structured in two ways. As you describe and as bundled whole mortgages. In your example nothing changes from what I posted other than the mortgages are split among several mbs's. So if you have a foreclosure it is spread out among several mbs's. Which was the upside of the equities. If a mortgage went bad no one person took the complete loss and the risk was spread out. In theory that sound wonderful. Had the RE bubble not burst combined with the subprimes everything would be fine. So the primary problem as I see it is the RE bubble and the subprimes which brought th entire system crashing down.

    Please notice I said Primary problem. Yes there are others which make this all so complicated. There is no easy solution.


    True but the real problem (none / 0) (#21)
    by Slado on Mon Apr 06, 2009 at 03:04:21 PM EST
    was the prices and "value" of these homes was falsley elevated by the rapant production of welath through debt creation that went on it key sectors of our country like FL, CA etc...   This debt is good per se as long as the value of the home rises or satys within reach of the loan value.  

    Problem is we/banks bought and sold lons at levels that we may not see again in our lifetime.  As this becomes more and more clear loans that are paying today will either fail tomorrow or while they don't become insolvent they will actually remove money from the economy because money that is being used to pay an inflated mortgage could have been used to buy tangible goods.

    Nothing is going to fix the fact that millions of homes are now worth less then the inflated price paid for them.

    Unlike the 90's bubbles these are houses not internet companies.  They can't just go away.  We are stuck with them and they will drag down the value of the rest of our homes with them.


    Thank you for acknowledging (2.00 / 1) (#30)
    by ChiTownMike on Mon Apr 06, 2009 at 03:33:29 PM EST
    the point I made. You mention home values. Let's remember that there is a lot of revaluing going of home mortgages by banks to reflect the current realities. So those loan values you mention are at least to some degree are being brought back to market prices. That allows home values to match the mortgage, and in some cases will allow the home owner to hold some equity or at least not be upside down. If they are even then they will gain because home prices will rise as soon as economic confidence is restored and people have jobs again.

    When all that happens most of the bank assets will rise in value also. That is the core belief of the governments plan and it makes perfect sense from the context that I am speaking from.


    True except everyone assumes (5.00 / 2) (#41)
    by Slado on Mon Apr 06, 2009 at 04:25:01 PM EST
    home prices will rise.

    Rise compared to what?

    There is massive inventory in the system right now.

    Simply put at the peak of the bubble close to 70% of the country was living in a home they purchased or took out a mortgage for.

    That's too high.  The mean over the last 50 years was close to 60%.    

    The homes went up in value because of the easy access to mortgages and people where able to buy homes they would never have been able to afford otherwise.  

    There is massive inventory in the system and the belief that home vavlues are simply going to rise because they always have is exactly the mentality that created this mess.   Since when did real estate become the ever increasing commodity.   Who changed the rules of commodoties so that homes automatically increased in value?  

    The rise everyone is counting on only existed in the first place because it was fueled by debt creation and that horse has left the barn.

    Home values will rise for any other reason except inflation until all this inventory is eaten up.  How is this plan going to work if I'm right?


    those who claim that (4.00 / 1) (#33)
    by cpinva on Mon Apr 06, 2009 at 03:39:41 PM EST
    "all mortgages eventually get paid" haven't been paying attention. they don't, and in this particular case, won't.

    simply put, it's primarily the "teaser rate" ARM's that have (and will continue to) caused the bulk of the problems. and we've really only been through the first round. rounds 2, 3 and 4 have yet to play out.

    "ARM's gone wild" are what enabled people of modest means to qualify for loans that they never would have under conventional terms. they started out at "interest only", or a nominal rate (say, 2 or 3%), with a balloon payment due in 2, 3, 4 or 5 years (2 seems to have been the most popular term). either the debtor re-financed (presumably to a conventional, 30 year note), or the interest rate on the ARM skyrocketed.

    these ARM's were then bundled, along with other types of debt, and sold at a discount, and re-sold, re-bundled and re-sold again, etc.

    everyone assumed that housing values would continue to rise, and securing that low-interest, conventional note would be a piece of cake. unfortunately, that turns out to not be the case.

    those ARM's started coming due, housing values dropped, and re-financing was impossible. the higher rates kicked in, borrowers (high risk to begin with) couldn't pay, and the foreclosures started.

    add to that the rising unemployment, and even people smart enough to get a conventional note to begin with started to default.

    however, there is a whole other bunch of ARM's that have yet to kick in. that will start this year, leading to even more defaults, leading to even more worthless paper.

    so you see boys and girls, we've only just seen the beginning of this crash. anyone who thinks the economy is going to turn around by the end of 2009 or 2010 is either lying, or delusional.

    Bravo (5.00 / 1) (#42)
    by Slado on Mon Apr 06, 2009 at 04:30:14 PM EST
    The worst is yet to come and our government is simply making the cliff we will all jump off of higher.

    As I said above these plans like all plans don't deal with the heart of the matter.

    We've created more debt then we have wealth to pay for.  

    The economy needs to retract until the amount of wealth we create throgh production is on par with the amount of debt we create.   The pretend wealth we created through debt production and laxed monetary policies has run it's course.   The run on the bank has begun and the George Bailey policies of president Obama aren't going to cut it.  


    Good to see you (none / 0) (#1)
    by Big Tent Democrat on Mon Apr 06, 2009 at 01:55:56 PM EST
    on this beat Ethan.

    Nice find.

    This report is interesting. (5.00 / 1) (#24)
    by inclusiveheart on Mon Apr 06, 2009 at 03:14:36 PM EST
    It caused a sell off of bank stocks today:


    New York Times

    Wall Street Journal

    Mayo said loan losses for U.S. banks will likely increase to 3.5% from 2% by the end of 2010, due to ongoing problems in mortgage loans and increasing deterioration in credit cards and consumer, construction, commercial real estate and industrial loans. Under a stress scenario, loan losses could reach as high as 5.5%, Mayo said, compared with the 3.4% loss rate reached in 1934.

    Loans Not Marked Down Enough
    Mayo titled his report "Seven Deadly Sins of Banking," and listed them as "greedy loan growth, a gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators."

    He said that the government won't be able to quickly resolve problem loans, which he said had only been marked by the banks that hold them to 98 cents on the dollar.

    What will the Banks rebrand themselves as? (none / 0) (#2)
    by Salo on Mon Apr 06, 2009 at 02:02:58 PM EST
    1. City Gentlemen.  

    2. Toxic Waste Managers.

    3. Fluffy Bunnies.

    4. Money Hugs.

    5. Xe

    6. iMoney

    7. LIquid Soap

    8. I Can't Believe it's Not Money!

    9. Sliced Bread

    They've completely misdiagnosed the trouble, i'll agree with BTD here.  They are insolvent because they require a huge cash infusion from the state.  The Geithners of the world reckon they can kick-start the economy again by obfuscation and the rebranding of old concepts and practices and corporations.  It's a complete disaster, because they really had a chance to change the way the market worked--from trade to healthcare it's all starting to go horribly wrong.

    But, but, but (none / 0) (#9)
    by NYShooter on Mon Apr 06, 2009 at 02:42:05 PM EST
    They made a profit last month.

    And, as a poster here demanded, because you can't point to a document expressly proving that the taxpayer > AIG > Citi money wasn't purely coincidence, we have to assume the crisis is over, and it's clear sailing from here on out.

    Move over, Jesus, John, and Paul; Come'on in, Obama, Tim, and Larry.


    But (none / 0) (#4)
    by jbindc on Mon Apr 06, 2009 at 02:25:47 PM EST
    Coval and Jurek have always hated Obama, so they must be wrong. <snark>

    If you're not willing to (none / 0) (#5)
    by Slado on Mon Apr 06, 2009 at 02:27:23 PM EST
    admit you've lost the current battle how can you get ready for the next one?

    Obama, Bush, Pualson, Geitner are not willing to admit the obvious.  We've lost.  We've piled up too much debt and the losers must lose so we can all get back to building wealth again instead of winnings created by a debt balloon.

    Some will win because they where smart/lucky enough to get out before the margin call but trying to pump air back into a baloon that's already burst is fruitless.

    As I've said at nauseum we ran up a total debt (personal, buinsness and gov't) that was 370% of GDP.   Our governemnt doesn't want the party to end so they're trying to use the same tricks that created this bubble to get it blown up again and the system of capitalism won't let them.   Too much debt is bad, known and nobody wants it.  YOu can call them toxic assests, zombie banks whatever you want but no government plan is going to convince a smart investor that bad debt is anything but bad debt.   They'll be some investors with nothing to loose or just plain stupid but on the whole dressing up debt as anything other then what it is won't work.

    Enough already.  And for those who think Obama was wrong in plan only I've got news for you.   There's not enough debt creation capability to overcome the hole we all dug for ourselves the last 30 years.  Krugman is right for the wrong reasonss.   Obama's plans sucks and so does his.  

    Nothing will work.  We are headed for the downturn and government's true goal should have been all along to make the slide easier on everyone and getting the economy ready to come back.  Not keeping the inevitable from happening which is a massive deleveraging of all this DEBT.

    Don't trust the banksters (none / 0) (#31)
    by MyLeftMind on Mon Apr 06, 2009 at 03:36:43 PM EST
    I know of at least two mortgages that are not in foreclosure even though no payments have been made in months (12 months on one house, 7 months on the other).  Foreclosure proceedings can start as early as one week into delinquency, but more commonly start after 90 days of non-payment.  

    Why are the banks not foreclosing on some properties?  Does delaying foreclosure allow some mortgage holders present healthier balance sheets to the public and Congress so the bailouts will keep coming?  (Look, it's working, give us more money!)  Will mortgages deemed late, but not in foreclosure not be counted against a bank's financial outlook?  Did CitiBank really have earnings this year, or are they finagling the figures?  (One of the mortgages above is a CitiBank loan.)  

    The public is likely to accept a lot more bailout throw-aways of our money before we revolt if it seems like the previous bailouts are working.

    And, I've met one person who was (none / 0) (#38)
    by Inspector Gadget on Mon Apr 06, 2009 at 04:00:09 PM EST
    foreclosed on without having missed a payment. Seems, though, their mortgage paper was sold in bundle to another bank and no one told them. They continued making their monthly payments to the company they believed was their lender until the holder of the paper came after them.

    I've read that many mortgages have been bundled and sold so many times that who has what is still being untangled.


    This will be the age of law (none / 0) (#32)
    by joze46 on Mon Apr 06, 2009 at 03:38:33 PM EST
    With a giggle and a laugh while reading some of the comments one wonders about the term toxic assets.  I still don't know what the heck they are. Sheesh even Junk Bonds, is that like Junk Food? Or record keeping is like book keeping, the books hidden in the oven for a good meltdown, or thrown into the boiling caldron like in cooked books? Let's lawyer it up at some basics.

    For me it looks like the recipe for the recovery plan is actually ingenious. It is something that is unbelievable compelling for any crook to get fished in. That's why it will likely be changed. The plan is too good to be true. But that's the plan to get all these Bush bott's that are sitting on trillions of pirated tax dollars to invest and start a paper trail is the real motive. You better believe the Bush Ambassadors and their connection world wide are sitting on economic handcuffs.  

    It should be said, lets face it this inconsequential melt down was and is Bush's  total chuck wagon roast well done from the get go. According to book written by Charles Lewis " The buying of a President" the Bush era Government Accounting Office study was issuing warnings totally oppressed by the mainstream media that American Companies were in a stampede to Bermuda, Cayman Islands, and other tax heavens during 2001. For tax advantage and other secret stuff even Cheney made off with money too.  

    Halliburton Cheney Inc. claimed some where around twenty subsidiaries in the Cayman Island alone. Even private banking divisions of Citibank, Merrill Lynch and other financial titans benefit handsomely. The tax advantage is one thing but the off shore asset shelters are the real stuff to avoid lawsuit judgments. This was known in Bush's first term and George Bush Inc. with his dad paved the way to deals beyond description with the advice and direction in the Carlyle Group where the principle business office located in Washington D.C. about six blocks from the Whitehouse, but all of their business partnerships were listed in the Cayman Islands. That is a hoot.

    To quote Charles Lewis page 210 State Secrets

    "If history is any guide, George W. Bush will not seek to undo the regulations that help hide so many financial transactions from view. After all, his presidency has been characterized by a zeal for secrecy, an unrelenting push to stem the free flow of information."

    Isn't that funny Republicans talk about no regulations at the same time building them to hide fraud? It is an out rage. The only person who could possibly be center stage to all this mess during that time is Allen Greenspan former chairman of the Federal Reserve. His wife who is likely privy to these trillion dollar deals is anchor to MSNBC which for me is out and out complicity with this news network.        

    So what will replace (none / 0) (#44)
    by NYShooter on Mon Apr 06, 2009 at 06:20:03 PM EST
    the current system?

    Our country, and our economy, was built by businesses providing things that people needed. They competed among themselves for dominance by being cheaper, friendlier, more efficient, more innovative, and so on. Banks lent, at reasonable rates, to both producers and consumers to fuel this growth. Things were as they should be, and everything was swell.

    So what happened? Houdini stepped in and took over our economy and our country.

    Eventually the people had just about everything they needed. So Houdini, aka producers & banksters, who had gotten used to ever growing demand, hokus/pokus, changed "need" into "want." Once we needed two or three varieties of deodorant; now we need 200. But the producers, in cahoots with the banks, needed one more ingredient to guarantee that the "wants" will never be satiated, and that ever increasing growth and profits go on forever. So they bought a government.

    Their government soon became addicted to private hair salons and dining rooms, and so they told their slave masters, "go...do more; do anything you want. Don't settle at being millionaires, become billionaires, and then, trillionaires! Don't worry, we'll cover for you; there's no act of self-degradation we're not gleefully willing to perform for you......as long as, you know; those little white envelopes keep coming.

    Competition? Why? Merge! Squeeze those little bast*rds till they bleed. You don't even have to be nice to them; once you've bought all the competition, where are the rodents gonna go?

    Schools? Are you kidding me? Now why would we want to produce future little purchasers who can think, or God forbid, even read? We got'm now where they can't even talk intelligibly, so give'm pictures they can point to.........LOL


    Welcome to the future;
    "Change"...."Just words"

    Obama-R- Us.

    The paper deals with (none / 0) (#45)
    by Green26 on Mon Apr 06, 2009 at 06:25:42 PM EST
    "the pricing of investment grade credit risk during the financial crisis", according to its title and first sentence. Note the "investment grade" part.

    The empirical analysis is based on a "structural risk model".

    The paper deals with credit securities and markets, not loans (which are part of the toxic assets).

    While I have read only the first half of the paper, I don't understand the leap from this type of risk model to the actual toxic securities--much of which is not investment grade.

    In the comments below the linked article on the paper, there is some criticism of the methodology.

    I read every comment (5.00 / 1) (#50)
    by Militarytracy on Mon Apr 06, 2009 at 07:45:55 PM EST
    What comment questions the methodology? There is one commenter who can't seem to grasp that the most stable investments when "studied" are losing value due to a market correction and it has nothing to do with liquidity problems bringing on fire sale prices also known as the crap is undervalued. The commenter seems stuck on mortgages mortgages and mortgages and still wants to talk about mortgages as if this is a mortgage problem?   What this paper says is that our Investment Grade Corporate Credit which IS one of the soundest and least volatile investment risks at this time is indicating that the prices of all of our assets are not falling due to a lack of liquidity.....they are falling due to an actual market correction.  Investors have finally come to appreciate that risk does exist......AGAIN....in fact it never left the building but the financial industry did their level best to pretend that it had just up and disappeared. They had some brand new equations to use that made risk evaporate everywhere you used it and they used it almost everywhere.

    Here are posts questioning methodology: (none / 0) (#52)
    by Green26 on Mon Apr 06, 2009 at 09:49:40 PM EST
    1. "It is probably more reasonable to think they continue to be incorrectly priced than to believe a study which is valuing cash flows based on their risk due to equity values being reduced and volatile because other cash flows previous to that were incorrectly overpriced."

    2. "The paper is about investment grade corporate credit risk, not mortgages. They even say in there that their methodology wouldn't work on mortgage-backed securities because (1) in MBS there is so much noise from bad ratings and (2) they get to use corporate equities prices to inform their methodology."

    That's all I saw in that thread. In what must have been another site, I saw criticism of using the tranches in the evaluation.

    Not responsive to your question, but Pozen of MFS Investment Management said the following in early February:

    "However, the purchase of these securities faces a major challenge -- no one really knows how they should be priced since most have not traded for six months, a long time." http://online.wsj.com/article/SB123362351978641849.html

    How can anyone know the value of the assets if they haven't traded for six months? How can anyone say there's a "market" for these assets?

    By the way, virtually every credible source I've read has said the assets are undervalued by the bid prices, however sparse, for the assets. This is also the general view of investment bankers and bankers with whom I have contact every day.


    I wonder if Pozen still wants to focus on trying (5.00 / 1) (#53)
    by Militarytracy on Mon Apr 06, 2009 at 10:26:24 PM EST
    to figure out how much you can get suckers to pay for this crap now that he is probably beginning to understand that at some point pitchforks could become involved.

    Oh yeah, and I'm on my third margarita (5.00 / 1) (#54)
    by Militarytracy on Mon Apr 06, 2009 at 10:35:01 PM EST
    but the first commenter can only talk about cash flows....they like talking cash flows as much as the other commenter likes to talk mortgages. And they can't seem to grasp what this paper exposed, that investors were not charging for risk because they were told there wasn't any and THAT WAS A LIE all over Wall Street that became leveraged 16 to 1.

    What is your definition of an (none / 0) (#47)
    by Militarytracy on Mon Apr 06, 2009 at 06:48:13 PM EST
    investment grade credit risk?

    Here's one definition: (none / 0) (#48)
    by Green26 on Mon Apr 06, 2009 at 07:08:26 PM EST
    "What Does Investment Grade Mean?
    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds"." http://www.investopedia.com/terms/i/investmentgrade.asp

    I assume this is generally what the authors of the paper were using.


    You do realize that much of what was (5.00 / 2) (#51)
    by Militarytracy on Mon Apr 06, 2009 at 08:43:16 PM EST
    graded AAA has now been found to have not met the criteria required for the rating but the raters never even checked.

    "The Reckoning" (none / 0) (#46)
    by Militarytracy on Mon Apr 06, 2009 at 06:42:59 PM EST
    It's so catchy.  I love it....but alas the New York Times ran a tip of the iceberg series of articles about the financial crisis already named that.  I suppose I could name a show dog "Reckoning Squared"....what would his call name be though....you know....his around the house name?  

    "Wreck" as he'll surely wreck havoc (5.00 / 1) (#49)
    by nycstray on Mon Apr 06, 2009 at 07:18:35 PM EST
    at some point in his life  ;)

    I want to get a female and male so I can name them Wham Bam and Thank You Ma'am (Thyme for short). I have a feeling two Dals would have me sayin' that often, lol!~