The Subprime Primer [Archive]

Francesca R

21st February 2008, 06:12 AM

The Subprime Primer
(source unknown so I can't credit it)

Scene I: At the Mortgage Broker's

ACE MORTGAGE BROKERS
"We Make Your Dreams Come True"

Customer: Gee, I'd like to buy a house but I haven't saved any money for a downpayment and I don't think I can afford the monthly payments. Can you help me?

Broker: Sure! Since the value of your house will always go up, we don't need downpayments any more! And as for being able to afford the payments, that doesn't matter either—we can give you a really low interest rate for a few years. We'll just raise it later on, okay?

Customer: Sure, no problem. Umm, there's one other thing . . . my employer is a real prick and might not verify my employment. Would that be a problem?

Broker: Nope. We can get you a special "Liar's Loan" and you can verify your own employment and income!

Customer: You guys are awesome! You are really willing to work with guys like me.

Broker: Well, we don't actually lend you the money—a bank will do that—so we don't really care if you replay the loan. We still get out commission.

Customer: Wow! Let's get started!

Scene II: A few weeks later, at the Bank . . .

FIRST BANK OF BANKLAND, Inc
"Open Your Christmas Club Account Today"

Loan officer: I'd better get rid of these crappy mortgage loans. They are starting to stink up my office. Thankfully the really smart guys in New York will buy them and perform their financial magic. I'll call them right away!

Scene III: Down Wall St

RSG INVESTMENT BANK OF WALL STREET
"Trust the Really Smart Guys for All Your investment Needs"

Investment Banker Boss Guy: Phew! We'd better get rid of these crappy mortgages before they start attracting flies.

Securitised Loan Analyst: But who would buy this crap, Boss?

Investment Banker Boss Guy: I've got it! First, we'll create a new security and use these crappy mortgages as collateral. We’ll call it a CDO (or maybe CMO). We can sell that CDO to investors and promise to pay them back as the mortgages are paid off.

Securitised Loan Analyst: But crap is crap isn't it? I don’t get it

Investment Banker Boss Guy: Sure, individually these are crappy loans, but if we pool them together only some of them will go bad—certainly not all of them. And since housing prices always go up we really have very little to worry about.

Securitised Loan Analyst: I still don't get it

Investment Banker Boss Guy: The new CDO will work like this: it will be made up of three pieces (or “tranches”) and we’ll call them "The Good", "The Not-So-Good" and "The Ugly". If some of the mortgages fail, as surely some might, we will promise to pay investors holding the "Good" tranche first. We’ll pay the "Not-So-Good" investors second, and the "Ugly" investors last.

Securitised Loan Analyst: I'm starting to get it. And because the "good" investors have the least risk, we’ll pay them a lower interest rate than the other guys, right? The "No-So-Goods" will get a better interest rate and the "Ugly" guys will get a nice fat interest rate.

Investment Banker Boss Guy: Exactly. But wait—it gets better. We will buy bond insurance for the "Good" piece. If we do that, the rating agencies will give it a really good credit rating, in the AAA to A range. They will likely give the "Not-So-Good" piece a BBB to B rating, still pretty good. We won’t even bother asking them to rate the "Ugly" piece.

Securitised Loan Analyst: So you have managed to create AAA and BBB securities out of a pile of stinky, risky mortgage loans. Boss, you are a genius!

Investment Banker Boss Guy: Yes I know.

Securitised Loan Analyst: Okay, who are we going to sell the three pieces to?

Investment Banker Boss Guy: The ********* at the SEC won't let us sell this stuff to widows and orphans, so we'll sell it to our sophisticated institutional clients.

Securitised Loan Analyst: Like who?

Investment Banker Boss Guy: Like insurance companies, banks, small towns in Norway, school boards in Kansas—to anyone who is looking for a high-quality safe investment.

Securitised Loan Analyst: But surely no-one would buy the "Ugly" piece, would they?

Investment Banker Boss Guy: Of course not—nobody is that stupid. We will keep that piece and pay ourselves a handsome interest rate.

Securitised Loan Analyst: This is all great, but since we are only using the smelly mortgages as collateral on an entirely new security, we haven't really gotten rid of them. Don't we have to show them on our balance sheet?

Investment Banker Boss Guy: No, of course not. The guys who write the accounting rules allow us to set up a shell company in the Cayman Islands to take ownership of the mortgages. The crap goes on their balance sheet, not ours. The fancy name for it is "Special purpose Vehicle" or SPV.

Securitised Loan Analyst: That's great, but why would they let us do that. Aren’t we just moving the crap around?

Investment Banker Boss Guy: Sure, but we have convinced them that it is vitally important to the health of the US financial system that investors not know about these complex transactions and what is behind them.

Scene IV: Let’s drop in to see the accountants . . .

OFFICE OF THE CZAR OF ACCOUNTING
"No nit Too Small To Pick"

Concerned investor and citizen: Sir, as an investor and a concerned citizen, I demand that you force our financial institutions to show greater transparency and openness in their financial reporting!

Accountant: Blow me.

Scene V: Telephone call: Gee, we never saw it coming . . .

Norwegian Village Pension Fund Plan Trustee: Hey man, what the hell is up? We’re not receiving our monthly payments!

RSG Investment Banker: Yeah, I meant to call you but it's been really crazy around here. It seems that the ********* who took out the mortgages backing your CDO aren't able to pay them off.

Trustee: Wait a minute! We bought the Triple-A rated "Good" piece of the CDO. You know, the safe one. We're supposed to be getting paid first.

RSG Investment Banker: Well, unfortunately the loans were quite a bit crappier than we originally thought and there is very little cash coming in. Frankly, I assure you that we are as disappointed as you are.

Trustee: But you told me that housing prices would always go up and that your borrowers could always refinance their mortgages!

RSG Investment Banker: Yeah that was a bad assumption. We ********** up, sorry.

Trustee: Bad assumption my ass! What about the AAA rating from the agencies?

RSG Investment Banker: They ********** up too.

Trustee: But this security was insured! What about the insurers?

RSG Investment Banker: Are you kidding? There's no way they have enough money set aside to cover this mess. They ********** up.

Trustee: Well that’s just great, arsehat! What am I supposed to tell my villagers?

RSG Investment Banker: Tell them you ********** up.

Trustee: **** you.

RSG Investment Banker: **** you.

THE END

Flo

21st February 2008, 07:53 AM

Beautiful !

Gord_in_Toronto

21st February 2008, 08:19 AM

You forgot: Scene VI. The Sky is falling!

"Hey. This doesn't look so good. We could lose everything. Let's tell the government that the World economy could collapse unless they bail us out."

Francesca R

21st February 2008, 08:28 AM

Scene VII: The Sky Daddy Is Profit Motivated Too.

Warren Buffet: Hey guys, I'll take that toxic waste off your hands

AMBAC: Oh thank BRK for that! Thank you thank you! I'll just go fish it out of the compost.

Warren Buffet: No, no. Not that bin. The stuff on the table there.

AMBAC: But those are municipal bonds. There's nothing wrong with them. That's the perfectly respectable business we were in for years that has been steadily lining our pockets until we got into insuring CDO collateral. We don't want to unload those insurance contracts

Warren Buffet: Well your share price is suffering and Elliot Spitzer is a mate of mine.

AMBAC: It's this lethal stuff that is dragging us down. I thought you were offering us a lifeline

Warren Buffet: You kidding? I didn't dream this up in one of my pro-bono moments y'know. I'll insure the munis for you as long as you pay me 50% more than you got paid to do it. Let's face it, you're over a barrel. These are the kind of odds we like

AMBAC: Everyone's a bastard! WAAAAAHHH!!

IXP

21st February 2008, 11:31 AM

Now I know why I own that share of Berkshire Hathaway.

IXP

Kestrel

23rd February 2008, 05:03 PM

Two British comedians explain the subprime crisis: :D

http://www.youtube.com/watch?v=SJ_qK4g6ntM

The Central Scrutinizer

24th February 2008, 07:33 AM

Now I know why I own that share of Berkshire Hathaway.

IXP

Me too. :D

Almo

26th February 2008, 02:42 PM

BRK's one of those monstrous 10-ton blue chip ones, right?

Francesca R

27th February 2008, 04:23 AM

BRK's one of those monstrous 10-ton blue chip ones, right?

http://www.berkshirehathaway.com/

The Central Scrutinizer

27th February 2008, 11:53 AM

BRK's one of those monstrous 10-ton blue chip ones, right?

There are two Berkshire shares, A and B.

BRK.A = $140000.11

BRK.B = $4666.00

negativ

21st September 2008, 02:10 PM

Two British comedians explain the subprime crisis: :D

SJ_qK4g6ntM

(fixed)

the {yt} tag is surprisingly non-intuitive.

hodgy

21st September 2008, 03:10 PM

[B][COLOR=black]The Subprime Primer...
THE END

That was very good indeed, you should sell articles to Private Eye :)

Blackadder

21st September 2008, 03:35 PM

video link doesn't work. but just Google "Bird and Fortune - Subprime Crisis"

The scary bit is they made this 13 months ago, and are spot on

ZenFountain

21st September 2008, 04:12 PM

In regardless to the imminent bailout of these institutions: As I understand it, the government will be forcing disclosure, possibly even forcing finacial institutions to sell these dodgy securities to the government at bargain prices so they are off the books and the institutions can theoretically remain solvent. The federal government will then be tasked with unwinding these securities to find out what can be salvaged, all on the taxpayers nickel mind you.

Is this correct? If so, what does the federal government then do with potentially $700 billion of mortgages?

shuize

22nd September 2008, 02:52 AM

The Subprime Primer

(source unknown so I can't credit it)

Here:

http://bigpicture.typepad.com/comments/2008/02/how-subprime-re.html

Francesca R

22nd September 2008, 03:41 AM

Excellent! Thanks for that. :).

ETA: Apparently the owner of that site is not the author either. A friend of mine forwarded the powerpoint to me in February, the originator seems to have deliberately kept a low profile.

JonnyFive

22nd September 2008, 09:12 AM

Scene VII: The Sky Daddy Is Profit Motivated Too.

Warren Buffet: Hey guys, I'll take that toxic waste off your hands

AMBAC: Oh thank BRK for that! Thank you thank you! I'll just go fish it out of the compost.

Warren Buffet: No, no. Not that bin. The stuff on the table there.

AMBAC: But those are municipal bonds. There's nothing wrong with them. That's the perfectly respectable business we were in for years that has been steadily lining our pockets until we got into insuring CDO collateral. We don't want to unload those insurance contracts

Warren Buffet: Well your share price is suffering and Elliot Spitzer is a mate of mine.

Scene IX: Wherein an Important Truth is Learned.

Elliot Spitzer: I had sex with a prostitute a whole lot. Sorry, guys.

NY State Residents: Bye, jackass.

David Paterson: Hey guys! We're screwed! Let's bail AIG out now!

NY State Residents: :bwall

balrog666

22nd September 2008, 09:29 AM

The Credit Crunch of 2007-2008:
A Discussion of the Background,
Market Reactions, and Policy Responses (http://research.stlouisfed.org/publications/review/08/09/Mizen.pdf)

ServiceSoon

22nd September 2008, 09:35 AM

Are we sure the Community Reinvestment Act had nothing to do with this?

balrog666

22nd September 2008, 11:14 AM

Are we sure the Community Reinvestment Act had nothing to do with this?

We are sure the Community Reinvestment Act had something to do with this!

Don At Work

22nd September 2008, 11:24 AM

The Subprime Primer

Concerned investor and citizen: Sir, as an investor and a concerned citizen, I demand that you force our financial institutions to show greater transparency and openness in their financial reporting!

Accountant: Blow me.

SO deserves a nomination...

ZirconBlue

22nd September 2008, 11:34 AM

Scene IX: Wherein an Important Truth is Learned.

Elliot Spitzer: I had sex with a prostitute a whole lot. Sorry, guys.

NY State Residents: Bye, jackass.

David Paterson: Hey guys! We're screwed! Let's bail AIG out now!

NY State Residents: :bwall

Will Scene VIII only be available on the DVD version?

dahduh

22nd September 2008, 01:30 PM

YoPopa

22nd September 2008, 06:30 PM

We are sure the Community Reinvestment Act had something to do with this!

No doubt.

From today's WSJ (http://online.wsj.com/article/SB122204078161261183.html)

The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.This is not to lay all the blame on politicians and community organizers but they have their fare share in the debacle just as much as much as greedy brokers and lying borrowers.

jimbob

23rd September 2008, 11:27 AM

I'm not sure about the " poor borrowers who often cannot repay them [loans]".

After all, microcredit (http://www.washingtonpost.com/wp-dyn/content/article/2006/10/13/AR2006101300211.html) seems to have a higher repayment rate than normal loans.

The bank they created -- Grameen means "village" in the Bengali language -- not only defied conventional lending rules by making loans to the poorest of the poor, but challenged cultural taboos by giving most of the loans to women in a Muslim-dominated society where rural women at the time were seldom allowed to touch money or work outside of their homes. The bank issues most of its loans to women because Yunus discovered that they spent their money more carefully and paid back the loans in far high percentages than did men.

Today, the bank has 6.61 million borrowers and 2,226 branches. The bank reports that it has lent $5.72 billion over the past 30 years and claims a 98 percent repayment rate.

YoPopa

23rd September 2008, 11:42 AM

balrog666

23rd September 2008, 04:01 PM

I'm not sure about the " poor borrowers who often cannot repay them [loans]".

After all, microcredit (http://www.washingtonpost.com/wp-dyn/content/article/2006/10/13/AR2006101300211.html) seems to have a higher repayment rate than normal loans.

That's because they bundle the microcredit loans in groups and no member of a group can get a further individual loan until all of the group's loans are repaid, so the successful ones bail out the failures (with respect to the bank [or other lending authority]) and the unsuccessful ones are essentially eliminated from commerce until they pay back their losses to the group.

The concept is also used in the USA among many tight-knit ethnic groups.

JonnyFive

25th September 2008, 10:45 AM

Will Scene VIII only be available on the DVD version?

Fine, you want it, you got it:

Scene VIII: Happy Times.

Elliot Spitzer: Hey, you, **** *** ***** ***** *********** pigs ****** whipped cream and your ***** **** **********.

Some hooker: Oh, ***** ***** the **** for the love of ***** ***** ***** pigs *****.

Elliot Spitzer: ************************.

Some hooker: ************ and ************* your ************************************.

Elliot Spitzer: Pigs.

drkitten

25th September 2008, 11:31 AM

That's because they bundle the microcredit loans in groups and no member of a group can get a further individual loan until all of the group's loans are repaid,

Really? I hadn't know nthat. Do you have any further information on this aspect you could point me to?

Puppycow

25th September 2008, 07:31 PM

Coming soon to an e-mail inbox near you (http://www.usnews.com/blogs/robert-schlesinger/2008/9/24/i-am-ministry-of-the-treasury-of-the-republic-of-america.html?s_cid=rss:robert-schlesinger:i-am-ministry-of-the-treasury-of-the-republic-of-america):

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN: I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAMM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

JonnyFive

29th September 2008, 12:51 PM