[pedalling_faster]

this was as close as i got. it's not comprehensive and thorough.

[hr]

I think one of the things to understand about the credit crisis/ unwinding of the mortgage-backed security scam/whatever you want to call it is that - it is very difficult to understand.

I have asked a few "financial professionals" (a stockbroker at the gym, a brother with an MBA and 20 years in commercial real estate) to explain it. The stockbroker said, "I leave it to the experts"; the brother doesn't want to talk about it & tends to be a 'bull' who doesn't like to talk about anything 'bearish'.

one person who does understand it, to the extent that it can be understood (to understand it completely, you need financial transparency, and we don't have that; there's a lot of sleight of hand involved) is Satyajit Das, who has written a few textbooks on credit derivatives.

http://www.amazon.com/Credit-Derivative ... 0470821590

I listened to a video of him talking about it. It elicited the emotional response of "Oh ... My ... God - Scary". I could only partially keep up with him.

It reminds me a little of 2 things -
1/ in college, learning how transistors work. I must have asked one professor 10 times. He was very patient & finally managed to explain it. I later found out that my mother dated him when she was in college.
2/ in yoga, when you can't 'get' a position, you stop fidgeting around and do what you can, and breathe, and relax.*

The credit derivative products that led to the credit crisis that emerged as a 'crisis' starting the summer of 2007, are intentionally complex.

Average salaries of the top 30 hedge fund managers - $500 Million per year (some huge ridiculous number).

So these semi-clever people designed a way to get rich, & sold their financial 'products' (whose worth was based on an ever-rising housing prices) around the world (e.g. town above the Arctic Circle in Norway, an interview with a mayor whose town is coping with the loss of what they thought were sound investments.)

It's a lot like a pyramid scheme, in other words.

If it was just a bunch of wealthy people losing money, it wouldn't bother me. What makes it a crisis is a 'domino effect', for example if Bear Stearns had been allowed to go bankrupt (since they financed a lot of their machinations with debt), their mortgage-backed securities would have been sold on the 'open market' - where there are very few buyers, even for the top-rated of 10 grades (tranches) of mortgage-backed securities.

This is one of the big fears of the Fed - to have those products evaluated by the 'free market' (in the land that supposedly worships free markets). bundles of mortgages that were sold as 'good investments' (as long as real estate prices rise) ... the top rated grades would be selling for approx. 50 cents on the dollar, the lowest rated grades would be selling for approx. zero (this is related to the mortgage foreclosures we're reading more about). And every financial institution holding those 'financial products' would then have to 'mark-to-market' (they've been estimating the value of their credit-backed securities).

Regarding the numbers of outstanding credit derivatives, I see numbers in the range of $50 to $150 Trillion.

Part of the situation is that a lot of US dollars were created. And their value is falling, has been falling since about 2002.

Now the US government is buying the mortgage-backed securities.

I've asked a number of bank managers about their bank's exposure to losses from mortgage-backed securities. Boy do they squirm. They don't like talking about it - and they don't seem to understand it.

Colloquial English will suffice - it's a real f*cked up situation.

[hr]

* i went off on a tangent using the comparison of engineering training & yoga.

i still can't figure out what learning about transistors has to do with mortgage backed securities. but they're both interesting.

i think the yoga does have offer a metaphor. if you've ever taken a yoga class, you might know what i mean by accepting your level of stretchiness & stopping fidgeting around.

i think it's similar with people trying to understand the 'credit crisis'. mortgage backed securities, credit derivatives, all complex stuff. having trouble understanding it ? - that's a sign that you understand it.

[gampy]

What people have failed to say about the sub-prime thing, is how eerily reminiscent it is of credit card company behavior.

The low teaser rates, and then the high rates if you miss your first payment. And the late fees, gouging, RICO score etc.

It's a similar model that was dreamed up in the sub-prime market.

Here is how it was supposed to work:

Higher interest is supposed to cover the defaults. That is the jist of the idea. The higher risk is "hedged" by a higher interest rate. I am not sure of the formluae they dreamed up, but that is how I understand the idea behind lending to riskier people. I think they didn't see, or wish to see, the collapse in the housing market. I guess they assumed that enough people would be able to make their new higher payments to offset the defaults. Unfortunately, it looks like more people are defaulting, than making payments. Hence the problem.

I could have all this wrong, but that is how I understand it.

[Kingcoal]

Sooner or later, these depreciated assets are going to have to become visible. The free market can be brutal, but it always wins in the end. You can't keep going quarter after quarter telling people that they are too simpleminded to understand what's going on. Face it, economics can get complicated, but it is based on some very simple principles. Probably the most fundamental principle is that an asset is worth exactly how much someone at an open auction is willing to pay; no more, no less.

The problem with this crisis is that just about everything is in play; assets and currency. Gold and oil are the enemies of the Fed. In their view, both of those "commodities" should be very cheap and if they were, this would all be just a big paper tiger. In fact, if oil and gold were cheap, times like these would be just another opportunity for growth.

The free market has always existed and always will, so long as there are people around to trade. What the Fed and the other big players fear is panic. They want to avoid the inevitable undershoot, where people board themselves up inside and quit trading with each other. The other, less noble thing they fear is redistribution of wealth, which naturally occurs in situations like this. People in powerful positions want to retain those positions; often at all costs.

[drayor]

They are just shysters with empty promises, and they have the govment backed into a corner not to expose them
Greensin allowed it.
Now, show me the reptile picture again?

[Novus]

$this->bbcode_second_pass_quote('Kingcoal', ' ')Gold and oil are the enemies of the Fed. In their view, both of those "commodities" should be very cheap and if they were, this would all be just a big paper tiger. In fact, if oil and gold were cheap, times like these would be just another opportunity for growth.

[heroineworshipper]

It's been going on for 30 years and will keep going until all workers die of starvation & corporate executives get their own space stations.

[pedalling_faster]

http://www.valueinvestingcongress.com/t ... tation.php

this is a hard-to-understand-but-maybe-as-simple-as-possible summary of the situation. it's a 70 page Powerpoint presentation rendered as a *.pdf (you have to give an email address to sign up. they don't use email verification so you could use an alternate address, such as president@whitehouse.gov)

it gets interesting where they look at a particular product named the "Longshore CDO" (credit derivative something ?)

basically, they do the calculations and, i THINK, conclude that the top tranche of the mortgage-backed security is worth 6-9 cents on the dollar.

the other conclusion from looking at charts of loan re-sets etc. - Baby, this 'credit crisis' is, well, a baby - an infant - we are in the early stages (related to impending mortgage re-sets.)

i'm a little concerned about the stability of one bank where i have some savings. in shopping around for an alternative, i feel a need to ask questions, like "what happens if the economy goes into a deep recession and 40% of your loans default ?" bank managers don't like that question.

although i did finally learn how a transistor works, i don't understand credit derivatives well enough to make an accurate metaphor, using electrical circuits.

but, i'll have a go at it anyway.

i think it's a little like connecting "power" and "ground" (a short circuit).

i did this once on a BMW 2002 and it was totally cool. i was swapping the transmission in a friend's warehouse, and made the mistake of not un-plugging the battery. a 12 Volt wire got sandwiched between the transmission casing and the engine block. i kept tightening the bolt, because i didn't know i had f*cked up. when i tightened it so much the insulation failed, the entire wiring harness fried. in the still air of the warehouse, a construction of smoke with the exact shape of the wiring harness rose slowly into the air, and then slowly dispersed. it was quite beautiful, in a technical sort of way.

we drove the car with a fried wiring harness (charcoal instead of plastic) for another 100 miles. my friend felt sorry for me, i had bought the car from him and was his wrench-monkey in the shop. he bought it back, thereby bailing me out.