> tBone wrote: > That being said, and after doing a lot of reading, I think these laws > are applicable under the clause granting the legislature the ability to > write law in regards to interstate and international commerce. >
You'd make a kick-ass lawyer. Especially policy lawyer. > My question is this. I thought that things like risk and actuary tables > were were extremely accurate, why then didn't they foresee the number of > people that would be unable to afford their mortgages? > Because the problem has little to do with mortgages. Now that statement is a little inaccurate, but more or less true if you look at pure numbers. Even if you took every single sub-prime and said it's defaulted it's only about $1T. And we're FAR from having every sub-prime default. The reason mortgages are the focus is because they are the major (but not only!) underlying asset that was used to create a few nasty things: * Collateralized debt obligations * Credit default swaps When you combine tricky interconnected securities with the ability of an entity to borrow extreme amounts of money to trade, it's a recipe for trouble. I'll take a quick shot at this, not that I'm an expert: CDOs allow me to create a hierarchy of rated instruments based on mortgages, let's say 10 mortgages. From that I create, say, 4 levels that you can buy with interest return: AAA-rated, 3% AA-rated, 5% BBB-rated 7% BB-rated 9% In other words, each level has a risk represented by the rating and an interest return. Each month the mortgage borrowers pay their bill and each level gets their return. Now let's say you decide to take the BB rated level and create your own CDO with your own levels. Now let's say on of my 10 borrowers defaults. This means that one of my levels will bear that risk, the BB-rated level. So BB level investors lose their return. That means you. And you now your entire CDO just blew up. Uh oh. But wait! This is why we have insurance for these things. But normal insurance is regulated and a pain in the ass. So let's create a "swap" which is insurance, but we won't call it that so that we don't get regulated. To protect your ass, you buy a credit default swap from AIG which promises to make you whole if any of my borrowers default. Welp, one of my borrowers just defaulted so now you go to AIG to get your cash. Problem is, they sold A LOT OF SWAPS and all those people want their pay out. Ok, no problem, AIG has enough to cover their swaps but it ain't going to be happy about it. The credit rating agency sees this huge burden and downgrades their credit rating. But, uh oh. All the people that own AIG swaps that AREN'T paying out now exercise their contractual right to require AIG to post more collateral against their insurance because they want to know that AIG can pay. AIG now has to come up with $14 billion in cash as collateral and they can't. So they're toast. All of sudden the entire credit market realizes that they have NO IDEA if their bets will pay out or if their risk is covered. Worse they realize that they have no idea if their borrowers have exposure. Thus the freeze in liquidity, i.e., people hold cash because they're terrified they'll go down like AIG. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Adobe® ColdFusion® 8 software 8 is the most important and dramatic release to date Get the Free Trial http://ad.doubleclick.net/clk;207172674;29440083;f Archive: http://www.houseoffusion.com/groups/cf-community/message.cfm/messageid:273652 Subscription: http://www.houseoffusion.com/groups/cf-community/subscribe.cfm Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=89.70.5
