Twofish this doesn’t change my prescription. If contracts are as transparent as you say it transfers the unintelligibility down to determining an asset’s ownership as it filters down the repackaging chain, and its risks/beta/leverage.
It just means instead of hiring accountants to make the contracts transparent, as I though they weren’t, you just hire more expensive “financial Private Eyes” to determine who owns what, and some “Portfolio actuaries” to determine true risk levels caused by leverage that appears to be hidden. If this info were transparently available to investors that didn’t have the time/skill to do it themselves; if a bond issue is backed by overpriced Tulips and these regulators warn that might be a bubble, maybe no one buys them.

@Brad – As usual, an excellent post. I depend on this blog as much as I depend upon Bloomberg. Any word yet if you’ll be headed to DC?

It’s possible to find out easily and quickly what mortgages are held in a standard pass through mortgage-backed security. The trouble is that when that that MBS is packaged and repacked, you end up with layers and layers of indirection, at which point it’s hard to find out who owes what to whom.

Also you run into a problem that typically, A owes B, B owes C, C owes D. B might want to renegotiate with B, but if things get written down, B will owes C full value.

Charles: Similarly, finding the owners isn’t difficult, since if the mortgages did pay off, the owners left a forwarding address for where to send the cash.

No. When you send cash to pay a mortgage, that goes to a mortgage servicer who takes a fraction of the money, but really doesn’t own the mortgage at all. The servicer then sends off the money to some people that send it off to other people that send it off to other people.

Charles: I don’t think it would be difficult to persuade someone whose investment is frozen to accept a slight haircut.

That’s not the problem. The trouble is that you have 100 people. If you persuade 99 of those people to take a haircut, all the money goes to the 100th person that didn’t.

The way that the bankruptcy process deals with this is that you have a judge that issues an order that anyone that cares about getting paid needs to send a lawyer to this time and this place, and if you don’t send anyone you get whatever everyone else agreed to. But there is no bankruptcy here.

Also what happens in a lot of situations, is that the mortgage holder just stops paying, and in a lot of cases that’s actually the most logical and financially sane thing for the holder to do. There are lots of laws on the books that limit what a person can do to collect a bill.

Charles: As for re-default, that is a serious issue. However, the problem is mostly because the terms negotiated have been too severe.

It’s a deeper problem. If someone loses their job, then they aren’t going to be able to pay their mortgage no matter what the terms are.

Charles: Most bankruptcies are caused by illness or job loss. If we keep the economy from tanking and keep people healthy, it will prevent most bankruptcies.

The trouble is that the economy *will* tank from time to time and people do get sick.

People mistake the process of dying and the process of burying a body. Bankruptcy is the process of burying a body. It’s unpleasant, but you do don’t go through with it, then what happens is that you end up with a lot of corpses and zombies floating around, and that does no one any good.

For example if the debt was acquired to finance the acquisition of a (1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an (2) (existing-security) to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

The former types of investment are designated as “real” as contrasted to the latter, which constitute “financial” investment (existing homes).

Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy.

Compared to real investment,it is rather inconsequential as a contributor to employment and production.

Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.

And certainly they have no trouble dealing with defaults below a certain level. It’s only when defaults exceed a certain point that there’s a problem.

As for re-default, that is a serious issue. However, the problem is mostly because the terms negotiated have been too severe. I think the terms I have suggested are painful for all, but feasible. As a longer-term issue, if we could get health care reform, it would help a lot. Most bankruptcies are caused by illness or job loss. If we keep the economy from tanking and keep people healthy, it will prevent most bankruptcies.

The contracts that are used in these sorts of transactions tend to be very standard. You can contact the ISDA for the terms of the contracts used. Also lending aggregate numbers such as how many contracts are of what type also tend to be rather transparent.

I really don’t think that transparency is the problem, since it wasn’t as if someone woke up one morning and said “oh my God, banks have been making massive subprime mortgage loans!!!!” The problem is suppose you have this information. What do you do with it?

Huggan: I also think both Republican and Democrats, and maybe even Greens and Libertopians should be given a sliver of public dollars to each establish credit rating agencies to compete with Moody’s. A mosiac of conflict-of-interests if you will.

Stepping back, I’m not exactly what a credit agency is for anyway. Presumably if you are lending money, you should be doing your own research.

I also think both Republican and Democrats, and maybe even Greens and Libertopians should be given a sliver of public dollars to each establish credit rating agencies to compete with Moody’s. A mosiac of conflict-of-interests if you will.

Firstly i have to agree to disagree. Trends take a while to change, however when it changes it turns abruptly. We went from boom to bust, the peak in DOw was in Nov 07. I believe most on this forum are macro guys, our timeframe isnt a day or a month, we are looking at quarters or years. Trends do not change overnite.

Secondly, its not as simple as you chose to believe. Monetary effects are not that easy to reverse. Its not a simple case of buy or sell. Its a multivariate equation. You cannot just hike rates once you see price levels going higher. it doesnt work that way.

“You shouldn’t say hyperinflation. The US has never seen hyperinflation, not even in the 70s.”
one of the most expensive 4 words ever. “it will not happen” a lot of the mess that we are currently in was thought to be minutely probable. inflation figures could be much higher. it really depends on your parameters. i believe there are a lot of researchers who can give you different figures from the official ones.