- Mar 25, 2007
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dacjohns, IIRC you have a tech background?
The banks bundled whole bunches of mortgages together, rated the bundles and sold them to each other as investments. They insured these investments with each other to amounts of money that exceeded the entire value of the company assets, such that in the event they should ever have to pay out on one of the insurance policies, the company would be bankrupt. They believed the mortgages were safe bets because of a mathematical error in how they valued the mortgage bundles: In a decent economy, any individual mortgage that defaults can be assumed to be the result of random chance. Illness, job loss, etc. are fairly random events in a good/mediocre economy with a normal, homoscedastic population of workers. However, we do not have a good/mediocre economy, nor do we have normal and homoscedastic populations of workers. When you have an aging worker population (with higher illness rates accordingly) and a lousy economy (where many people are unemployed or underemployed as a function of the Dow Jones fluctuation du jour), you end up with lots of people defaulting on mortgages, making them no longer a safe bet. So in order to value these things accurately, they needed to do a Bayesian analysis to account for these effects. They didn't.
Worse than that, they did not attach audit tracebacks to any of the bundled mortgages, so figuring out which mortgages in any given bundle are garbage is very very very difficult. Not impossible, just difficult and time-consuming. So if my mortgage, which is paid every month on time like clockwork, is in a bundle with Joe Schmo The Slumlord's mortgage, and Joe Schmo defaults and skips town, the valuation of my mortgage as an asset to MegaBank, Inc. also goes down, just because the financial people cannot be bothered to do the actual work of sorting out the bundle. It's easier on their brains to assume the whole bundle is junk, and ask Congress to give them money to make up the difference, else they will hold our whole economy hostage.
Yeah, I have a dim view of the bailout.
Anyway, I am helping the local economy by having some renovations done on the house before the winter weather sets in. And I am being extra-helpful by hiring the contractor who promised to use all American workers: I'm paying him $3000 more than the guy who gave me a lowball estimate but admitted he was going to use illegal immigrants. Also, we are using locally harvested wood sawn by a local sawmill that specializes in hardwood reproductions and harvested off state forestry land that is used as wildlife habitat.
The banks bundled whole bunches of mortgages together, rated the bundles and sold them to each other as investments. They insured these investments with each other to amounts of money that exceeded the entire value of the company assets, such that in the event they should ever have to pay out on one of the insurance policies, the company would be bankrupt. They believed the mortgages were safe bets because of a mathematical error in how they valued the mortgage bundles: In a decent economy, any individual mortgage that defaults can be assumed to be the result of random chance. Illness, job loss, etc. are fairly random events in a good/mediocre economy with a normal, homoscedastic population of workers. However, we do not have a good/mediocre economy, nor do we have normal and homoscedastic populations of workers. When you have an aging worker population (with higher illness rates accordingly) and a lousy economy (where many people are unemployed or underemployed as a function of the Dow Jones fluctuation du jour), you end up with lots of people defaulting on mortgages, making them no longer a safe bet. So in order to value these things accurately, they needed to do a Bayesian analysis to account for these effects. They didn't.
Worse than that, they did not attach audit tracebacks to any of the bundled mortgages, so figuring out which mortgages in any given bundle are garbage is very very very difficult. Not impossible, just difficult and time-consuming. So if my mortgage, which is paid every month on time like clockwork, is in a bundle with Joe Schmo The Slumlord's mortgage, and Joe Schmo defaults and skips town, the valuation of my mortgage as an asset to MegaBank, Inc. also goes down, just because the financial people cannot be bothered to do the actual work of sorting out the bundle. It's easier on their brains to assume the whole bundle is junk, and ask Congress to give them money to make up the difference, else they will hold our whole economy hostage.
Yeah, I have a dim view of the bailout.
Anyway, I am helping the local economy by having some renovations done on the house before the winter weather sets in. And I am being extra-helpful by hiring the contractor who promised to use all American workers: I'm paying him $3000 more than the guy who gave me a lowball estimate but admitted he was going to use illegal immigrants. Also, we are using locally harvested wood sawn by a local sawmill that specializes in hardwood reproductions and harvested off state forestry land that is used as wildlife habitat.
