arbitraily in a finance interview, they asked you… so how do you think the US economy got into this mess… be comprehensive as possible… how would you guys answer?
hellomello Wrote: ------------------------------------------------------- > arbitraily in a finance interview, they asked > you… so how do you think the US economy got into > this mess… be comprehensive as possible… > > how would you guys answer? this is for you to decide, but net net, it was 3 things 1) lax oversight from the fed (on thr players who issue loans and those who securitize them.) 2) excess leverage on the banks balance sheets. 30 to 1 is insane, but guesswaht: CEOs got paid derek jeter money so no one raised their hand 3) east money, tons of liquidity, home prices escalated, no one stress tested what would occur if prices dropped. models had some erosion in prices factored in, but no one expected 30% drops in home prices…that killed resi MBS… bonus 4) greed/fear (dont say this, b/c while it is true,it is cliched)
Don’t forget the incentives of the major players - CDS allow banks to move risk off balance sheets, and execs get paid based on writing mortgages. Other execs have short term focuses (focii?) - so they chase short term performance by levering up. In the absence of clawbacks in compensation, they don’t care about what happens down the road.
hellomello - what city are you in??!?!? east coast? you better get this job with all the advice you are sucking out of these boards : ) - meant that in a good way buddy
bubble in home prices, lax regulations and lending standards, high delinquencies in subprime (also, Alt A) market coupled with: increased leverage, over-securitization from new financial engineering products, increased liabilities from CDSs to insure CDOs by financial institutions (commercial banks, investment banks, insurance companies, etc), liquidity meltdown, credit squeeze / deleveraging that’s a general overview, but you can start researching from there…
In my humble opinion, the trigger is the whole securitization “system”. It featured incentives to many parties to do a “bad” job: - mortage joints who granted loans to people with no income (because they knew they could sell the loans) - IBs who knew they could make profit from securitizing these loans and selling them to other IBs and hedge funds - rating agencies who gave good ratings to crap because they made so much money rating them - etc.
trigger was lax congress. nothing wrong with securitzing, it transfers risk and helps in price discovery. congress let it get crazy.
The problem with saying that the crisis was caused by the securitization system is that the system was in place long ago and never used. I heard talks about CDO’s in 1997 (?) but none of these took off until credit spreads were incredibly thin and interest rates were incredibly low in 2003 or so. Then the market exploded exponentially. People had to find ways to take on risk in 2003-2005 simply to justify their salaries.
krishariss Wrote: ------------------------------------------------------- > > 2) So called financial engineering ’ > Securitization’ > > bad answer. how did THAT trigger a blow up. it did not. securitization in and of itself is good.
It’s an excellent thing and it will change the world for the better when we get past this stage.
I really think this event has been a ‘perfect storm’ of events, not just one, two, or three things. Our current position first began with the housing bubble. So many houses, condos, and complexes were being built because prices were rising so fast. Banks and S&Ls got caught up in the market and began finding faster ways to fund the trend - many of which are now obiously not sound lending practices. When the housing bubble ‘popped,’ these risky lending practices began to trigger defaults on the loans in the giant CDO/CLO/MBS/SIV structures and investor and banks began to panic as they couldn’t price the complex structures. This caused a giant, illiquid structured market and loan market that drove these asset prices way down, bringing the investors down with them. Now we are seeing the markets frozen as no one can value these assets or the banks/investors that holds them. Essentialy, there isn’t really any one person to blame. Just markets in motion and the constant business cycle (homebuyers, lenders, investors, dealers, etc.). Its just too bad that this market has been a little more ‘real’ (estate) which directly affects people and their families. CEOs can’t really be blamed for the housing bubble - that’s homebuyers, homebuilders, and their financiers.