Too Technical, Too much and Too little??

Several readers complained, commented and whined about the level of technical jargon in my previous post.  "What is a subprime mortgage? How do they get  securitized?" they asked me. Well I could write a 500 page manifesto on this topic but there is an almost 9 minute video (staring the brilliant comics John Bird and John Fortune) which explains everything beautifully. Subprime Crisis

President Obama laid out his frame work for a more centralized more efficient financial regulation by adding two agencies and getting rid of one.  Reminds me of the Tom Lehrer's song New Math. 

I'm confused.  

I don't understand how we can achieve more government efficiency by adding another government agency to effectively regulate highly paid, highly educated, highly motivated financial wizards.  Only the supreme brain power of the University of Chicago, Harvard, Wharton, Kellogg, Stanford, Columbia, and NYU business schools could have produced this colossal systematic meltdown. The poorly paid government worker never had a chance. 

[Hint: Better pay induces wall street types to leave the sin of their profession and go to the holiness that is public service. The GS scale doesn't cut it.  You can't buy Armani on a government salary and send you kids the finest private schools.]

(And why oh why didn't they merge the SEC and the CFTC? Were they afraid of cooties?)

Well I'm reading the 85 page financial regulation manifesto and it's putting me to sleep.  

Till next time.

Welcome to the world of Financial Improv

In July 2007, Bear Stearns announced their two highly leveraged CDO funds were worthless and investors woke up to the idea that structured investments may actually take losses. Investors panicked and withdrew money from hedge funds. Hedge funds panicked and stopped buying any assets. Wall street firms and CDO managers panicked because their money making machine seized. Private label residential mortgage backed securities issuers panicked because no one would buy their subordinate bonds. Non-agency mortgage originators panicked because no one would buy their crappy loans. And so on, and so on.....

The mortgage market, that had developed in the early 2000s and reached its nadir in late 2006, died. As the unfolding crisis continued, financial market participants scrambled to stave off liquidations, forestall bankruptcy, create solutions, protect balance sheets, and blame everyone else under the sun.


While watching this unfolding crisis from my unique position, I realized financial market participants used many of the strategies employed in Improvisational Theater (think Whose Line Is It Anyway and Second City). For instance, Rating Agencies (sometimes called Nationally Recognized Statistical Rating Organizations or certain choice expletives) used to use the well known Yes And! technique for rating CDOs. I remember those conversations well...


[Fictionalized Flashback to 2006]


CDO Manager: This CDO is the best ever!
Rating Agency Senior Analyst: Yes and using Credit Default Swaps (CDS) as 70% of the underlying collateral is brilliant!

CDO Manager: Yes and it's heavily weighted towards subprime and Alt-A mortgages. US mortgages NEVER EVER go bad.

Rating Agency Senior Analyst: Excellent! Yes and your back of the envelope credit models give us great confidence that the collateral you choose is only the best quality!

CDO Manager: Yes and our fees will be at the top of the received waterfall and we can trade up to 25% of the assets per year.

Rating Agency Senior Analyst: Fantastic! Yes and we know that this bond will always pay, we'll make a fat fee, and deserves a AAA rating!

[End Flashback]


This blog is dedicated to those talented individuals within improvisational theater and the financial which have taught us so much and caused to laugh, cry, and hurl obscenities.


Send me a word and I'll improvise a post.