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Tag Archive: Subprime lending


The Big Short

The book is a fabulous read because of its simplicity. It’s not just for finance geeks; rather the stuff narrated

by Michael lewis is easy to digest. Although I still believe Liar’s Poker was one of the best work by Michael, but the Big- short seems to me is one of the best journalism written on the subprime crisis.

The reason I recommend to read the book because the movie is out on December 23rd and I still doubt people will follow. It has more characters and the derivatives, CDS market is not easy to understand .

The book is more focused on the vulnerability of the subprime crisis,how the big guns shorted the subprime market making it worse as they  provided the fuel which kept the subprime mortgage furnace burning even when the US was running out of new junk mortgages to write. The book quotes an example of a Deutsche bank trader Greg Lippmann ended up making billions of dollars for his employer — not to mention a $50 million bonus for himself — by aggressively going out and finding fund managers to put on the short bets needed to keep the market ticking.

How the Govt agencies Fannie and Freddie started accepting increasing amounts of subprime paper. Then banks started selling private-label subprime CDOs directly to investors, bypassing the GSEs; a lot of the profits in that activity came from taking the unattractive lowest-yielding tranches and insuring them with AIG.

In the process AIG was over leveraged it was not selling Credit default swaps any more. But then it gave rise to the synthetic subprime CDOs which were bought by Greg Lippmann sold by the banks.

This was the market with almost no pricing transparency in the secondary market: because all securitization deals are unique, the only way to get a feel for the health of the market is by looking at where primary deals are pricing. Whenever anybody said that the marks being put on subprime assets by banks and hedge funds were delusional, it was easy to point to the booming market in synthetic subprime CDOs to prove them wrong. No one, of course, remarked on the irony that the synthetic subprime CDO market was only booming because John Paulson and others were providing a huge amount of demand for bearish bets.

 

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Recently Michael Lewis was in news as he wrote a compelling piece on Serge Aleynikov, the former Goldman Sachs computer programmer imagesconvicted of stealing the bank’s secret algorithms, in the Vanity fair. Where he shared one of the famous line from his book Big short There’s a line in The Big Short; one of the characters, who was cynical about the subprime-mortgage market, says,

“When I hear Chinese Wall, I think you’re a f—ing liar.” I feel that way about liquidity. When I hear the word liquidity, I think you’re a f—ing liar. If this is liquidity, we don’t need it.

The book is a fabulous read because of its simplicity. It’s not just for finance geeks, rather the stuff narrated by Michael lewis is easy to digest. Although I still believe Liar’s Poker was one of the best work by Michael, but the Big- short seems to me is one of the best journalism written on the sub prime crisis.

Continue reading

All this talk about the crisis and predictions got me thinking….We all know how difficult it is to forecast the future.  But

united states currency eye- IMG_7364_web

every once in a while we see predictions that are so far off the mark that you have to wonder if the forecaster is working with a full deck.  Which is actually a great thing because it’s beneficial for the rest of us since we can study these kinds of predictions and understand why they were wrong and what can be learned from them.  I often say “it’s only in being wrong that we can learn to be right”.

That said, what were the very worst predictions of the last 5 years and what can be learned from these bad calls?  I provide my views below: Continue reading

In simple terms a CDO is the debt issued by a specially incorporated entity (SPV) to finance the purchase of assets.( CDOdownload also refers to the SPV ). Typically the assets are bonds, loans, mortgages and receivables. Entity holds the assets as collateral and sells packages of cash flows to investors.

CDO has 4 aspects:-

The global economy gloom is still not over but 2012 was more promising that the last couple of years after the major Subprime Crisis and the ongoing Euro Debt crisis. Here are some of the trades winning bets to be made on Wall Street in 2012. And finding some of them was relatively simple: Just buy the thing that caused—or nearly caused—a major financial meltdown a couple of years back.

1. Subprime mortgage bonds : May sound awkward Continue reading

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