Date: Mon, 13 Aug 2007 16:25:17 -0500
From: "Elle" 
Newsgroups: misc.invest.financial-plan
Subject: Re: what's the fuss about subprime crisis?
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"Douglas Johnson"  wrote
 > At least one more is that between fancy computer modeling 
and ratings agencies
> that did not do their job, much of the paper got rated AAA 
> when it should be C
> or less.
>
> The computer modeling said something to the effect of 
> "based on history, these
> mortgages will default at such-and-such a rate and will 
> recover such-and-such a
> percent of the value in foreclosure."  The ratings 
> agencies said something to
> the effect of "the model means that the paper has 
> such-and-such chance of loss,
> so the paper is AAA rated".
>
> Bah.  Elle could have told them that past performance does 
> not guarantee future
> performance.

No, I don't think this is the sort of sound bite that 
captures what was behind this correction/panic. Computer 
modelling evidently was different, but I do not exactly 
fault it.

The following seems a good explanation of some of this:
http://www.nytimes.com/imagepages/2007/08/05/weekinreview/20070805_LOAN_GRAPHIC.html

See the other link I posted here for the whole kitten 
kaboodle. I buy it. In short, too much credit to the 
unqualified masses and we get a panic. I do not think the 
panic is exactly justified. I do, however, welcome the 
correction.

> Especially when the loans underlying the paper were far 
> shakier
> than the loans made in the past.

I think it was a faction of the financial sector (investment 
banks, broker etc.) that knew they  could offer loans to 
poorly qualified folks/businesses and either (1) make out 
like bandits for the long run, based on fairly rational 
expected rates of default (many industries use past behavior 
of consumers to justify expectations; I don't at all 
entirely fault the use of history when running a business); 
and or (2) make out like bandits for the short run, even if 
they destroyed the U.S. and world economies for a while.

See the S&L crisis of the 1980s.

I find it rather profound that a mass of such "little 
people" (with individual mortgages) defaulting on their 
ill-gained (for whatever reason) interest only, adjustable 
rate, blah blah, "ooh, we can have a house just like the 
Joneses, even it it's way cheaper to rent!" mortgages 
affected major hedge funds and so much more wealthy folks. 
Remember the mortgage debts, through some serious ;-) 
leger-de-main, eventually landed in such funds, luring 
investors with the promise of great income, for one. Said 
investors being as uh, ill-informed, as the "little people," 
but having way more money to throw away in one fell swoop.

It has become way too fashionable to trust what the masses 
in the U.S. do. Everyone seemed to be getting an ARM 
starting a few years ago, so it must be all right. How many 
times have I heard that idiot cliché about, "We only plan to 
be in this house a few years, so an ARM or interest only 
mortgage makes sense." No, given the few year timeframe, 
renting is far lower risk and made far more sense.

It's this misplaced trust that interest only and ARMs were 
"okay," rippling through the markets as described in the AP 
article I linked in this thread, that led to this 
correction.

And yet, it is a needed correction. It will tend to plant 
people's feet back on the ground. Well, the smart ones who 
learn and read more. Or it will throw out stock carcasses 
for vultures like me to hover over, then swoop down and pick 
on and so allow me to make a bit more profit than expected 
in the coming years.