The weren’t.

Guest: Why are lenders who lent money to people without asking for income statements…without asking for net worth statements…without asking for anything…bailed out?

Also no bailout. Now FHA is extending some credit to the borrowers who are on the edge of losing their homes, and that can be justified since there was a lot of selling of mortgages that were clearly unsuited for the customer.

Guest: Why are private equity idiots who are sitting with over $300 billion in unfunded buyouts?

Because they had nothing to do with investing in subprimes.

“…the focus on ownership has seen the dual objectives blur, and the emphasis move from rehabilitation and construction of public housing towards moving more Americans onto the home-loan ladder. “One administration after another - particularly during the Clinton years - has pointed to the increase in ownership. It seems we overdid it.”…” http://www.ft.com/cms/s/0/aa9ea90a-57dc-11dc-8c65-0000779fd2ac.html

” One of the things that amazes me is that a process originally intended (in part) to create “liquidity” in the mortgage market (i.e. securitization) managed to create a set of complicated “correlation” products that now seem almost as illiquid as mortgages were in the pre-securitization days.”

I think there’s a distinction to be made between the idea of funding liquidity capacity of the originating institutions and the market liquidity of mortgages as instruments. The original motivation for securitization was to expand the outlet for mortgages beyond bank portfolios. Banks viewed securitization as an alternative funding source. Moving mortgages off balance sheet liberated bank-funding capacity for other purposes. Beyond liquidity, the broader risk purpose was freeing up bank capital. Banks could improve ROE by moving mortgages off balance sheet while retaining origination and/or servicing fees. Other balance sheet benefits such as a reduction in asset concentration and interest rate risk fell under the broad umbrella of more efficient capital utilization.

This worked fairly well for the commercial banks. But the risk motivation of bank CFOs is not the same as the risk motivation of investment bankers and traders. The machine for securitization went to overdrive on aggressive risk sourcing and overly complex risk transformation. Increasing complexity in non-bank portfolios resulted in deteriorating non-bank credit and liquidity risk, until we are where we are today.

The secular improvement in bank liquidity has actually been a success - notwithstanding the recent larger-scale discount window borrowing (largely staged and symbolic), in an environment of broad credit and liquidity turmoil. Much commercial bank risk has been transferred to others. The money center banks with broadly diversified risk profiles should weather the storm relatively well in comparison to stand-alone investment banks (e.g. Bear, Lehman) and non-banks.

The buildup of risk in the latter is the center of the systemic failure this time around. This was aided and abetted by risk analysis that promoted backward looking correlation as a (risk) free lunch. Unfortunately, the risk management industry has supported risk taking with great quantitative sophistication, but absent a counterbalance of good judgment.

if i follow this man’s manoeuvres correctly, he made a lot of money entirely out of people like himself. in the market menagerie he counts as a cannibal trout.
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bear: “…One of the most successful investors to bet on a credit crunch was Jim Melcher, who has run Balestra Capital, a small New York hedge fund… It has doubled so far this year. He did this by exploiting the complex new debt instruments that are now exploding in the faces of their inventors. For example, he bought… (CDSs) against a range of 30… (CDOs) that were rated AA. Translated into English, he bought insurance against default by packages of loans that were not the highest quality, but were not junk either… He sold short the ABX index of subprime mortgage bonds, a manoeuvre that made money when the price of these bonds shot down. He also sold short high-yield, or “junk” bonds while buying Treasury bonds. That paid off when there was a sharp increase in the extra yield that junk companies had to pay. And he bought the Japanese yen, which has risen during the market mayhem. The risk was that someone on the other side of the transactions had to pay up. These counterparties are usually investment banks and Mr Melcher thought some might go under. As insurance he bought “put” options - giving the right to sell stock for a given price - in investment banks. These were cheap because they were “out of the money” - meaning that they conferred the right to sell for a price far below the price at which the companies were trading. That trade also proved lucrative, as the fall in investment banks’ share prices has pushed up the price of the options. Even his insurance policy is making money. The true bargains, then, were when the credit market was at its peak. There will be chances to pick up undervalued securities when this crisis has played itself out. But for now, the discouraging news is that value investors remain on the sidelines - while Mr Melcher is still betting on things to get worse.” http://www.ft.com/cms/s/0/c8ceb270-5823-11dc-8c65-0000779fd2ac.html

assume the chicken littles work for the insurance industry, are serial short sellers - or government economists hoping that market failures may create opportunities to build a powerbase and their own income potential as administers of social assistance to those affected.

really effective shortsellers may be deserving of bloomberg’s ‘hitmen’ metaphor - not sure how that translates in the animal world - perhaps attack trained dobermans and pitbulls.

the dinosaurs must work for the dredges of dying industries or may have obligations to protect various outdated academic theories and territories - or laziness at the prospect of having to endure the hard work and competition involved producing something better which actually captures change - better to fear and slander anything new, keep dwelling in the past and hope all change is temporary phenomena that will implode leaving one’s own prehistoric pet theories to prevail.

endangered species representing sectors, regions and ideas worth saving, like the environment and proven approaches to its management.

ostriches perhaps belonging to the family of political animals that selectively isolate and spin facts for the sole purpose of slandering the opposition, and regain or hold their own powerbase while attempting to suppress and distract from unpleasant truths about their own party’s failings.

i’m sure the farm is much bigger then that - whether haphazard cross-breeding and genetic engineering is generating replacements for possible losses in dinosaur and endangered species categories - and without getting into the mapping of more favourable habitats for each. just a start