"The Big Short" - Official Thread - Spoilers Inside (1 Viewer)

[dparker713]

If we want to make the rating agencies fiduciaries or give them full legal ownership of their ratings in terms of liability to investors, we'd have to accept that their fees would double or triple, at least. They're not auditors. For the most part, they assume the company's financial statements are accurate and complete, taking them at face value without any independent investigation or verification. This is all clearly stated in their ratings. It seems foolish to me to add another fiduciary on top of the duties already owed by the corporate Ds&Os and the auditors. To me, that's the key part of Lewis' book - that investors can and should take a look at these companies and decide for themselves what's what (I've not seen the movie, which I understand is only "loosely based" on the book.) Of course the agencies have huge inherent conflicts which most everyone is aware of and accepts - their fees are paid by the very companies they are grading! I'm not going to absolve the ratings agencies or even defend them, but just note my opinion that it is somewhat ignorant to put the majority of the blame on them, given their role. Did everyone forget that Enron was investment grade until literally a few days before it filed bankruptcy? If a company is going to produce fraudulent financials, its up to the auditors, the SEC and the investing public to discover that. Ratings agencies compile data and report on it - most of the data they use is public information anyone can pull. They are not some sort of gatekeeper of integrity, they won't discover fraud or even aggressive projections and the the like, and its ignorant to expect that of them.

I agree with all of this generically about rating agencies, but in the case of securitizations I think it's more nuanced in that the pools themselves were created to meet rating agency guidelines for tranche sizing based on underlying risk factors including borrower credit risk (with FICO scores being the typical indicator).

There's a huge difference in my opinion between a ratings agencies rating companies that have been audited by accountants and rating manufactured securities which no one has checked their underlying value. Rating companies isn't all that difficult (any individual investor should have a general idea what to look for) but ratings agencies have no business rating things like MBS which they do not understand and have not been verified.

So the rating agencies people didn't understand the product which means they were hired by managers who didn't do due diligence on these people and didn't double check their work(doubtful) or reported that the ratings were bad and that was ignored by higher ups(which I think happened).You, as the investor could have looked into the details in these CDO's or MBS's or your bean counter could have and realized they are crap. The guys that put those CDO's together knew they were crap, watched them get rated AA or AAA and kept doing it with no one punishing them.

Have you ever read a CDO prospectus? Hell, most of the people working on those deals had no idea how they worked.

 

[Binky The Doormat]

For those that find this subject interesting and enjoy reading about it. Here are 15 articles written by Matt Tabbi about the subject. Similar to the book, he does a great job of breaking down a lot of the complex subjects/situations in an understandable fashion.

This guy is good.

 

[nightmare]

Deleting a long requote.

Have you ever read a CDO prospectus?

Hell, most of the people working on those deals had no idea how they worked.

My response-

No, During the movie it was mentioned that only the lawyers that put the CDO's

or MBS's together read all the documents.

Which lead to that which lead to investment firms repackaging all that stuff and

watching it be graded as good.

 

[Binky The Doormat]

book has one of my favorite quotes:

"There were more morons than crooks, but the crooks were higher up."

and speaking of Goldman Sachs, now 4 of the 12 Federal Reserve regional presidents are former execs of GS.

The part about GS is totally ####ed up.

GS continues to invest their own money differently than their recommendations to clients.

I try not to fall into the "those guys are all crooks and scumbag who would do pretty much anything to take all the money" camp but, man they make it hard.

GS is a legalized mob organization.

An error occurredYou have reached your quota of positive votes for the day

 

[Quez]

Deleting a long requote

The mobile users appreciate this.

 

[elbowrm]

I would assume that most people here are pretty knowledgeable about sports. If so, and you read The Blind Side or Moneyball, I would like you to consider the possibility that his treatment of the financial crisis is similarly narrowly-focused and over dramatized in order to make a good story.

 

[elbowrm]

For a better book about the roots of the crisis, start with Fools Gold by Gillian Tett.

 

[RUSF18]

I would assume that most people here are pretty knowledgeable about sports. If so, and you read The Blind Side or Moneyball, I would like you to consider the possibility that his treatment of the financial crisis is similarly narrowly-focused and over dramatized in order to make a good story.

Care to share, or should we just call you KingPrawn?

 

[elbowrm]

Just that Lewis uses a similar outline in the big short - which is an entertaining and informative book (and I presume movie, which I have not yet seen) well-researched, good story, but the real world events and causes of the crisis were not as simple or straightforward. People want heads on pikes, and you often hear cries about nobody going to jail, and that makes for good books and movies.

 

[CletiusMaximus]

I would assume that most people here are pretty knowledgeable about sports. If so, and you read The Blind Side or Moneyball, I would like you to consider the possibility that his treatment of the financial crisis is similarly narrowly-focused and over dramatized in order to make a good story.

No doubt this is true, and there's an additional layer of dramatization going from the book to a movie script. I've not seen the movie but have read more than one review that indicates the movie is only loosely based on the book. I enjoy Lewis' writing, but he makes no pretensions of even-handedness. His most recent book (Flash Boys) is very compelling, but also rather misleading.

 

[oso diablo]

I would assume that most people here are pretty knowledgeable about sports. If so, and you read The Blind Side or Moneyball, I would like you to consider the possibility that his treatment of the financial crisis is similarly narrowly-focused and over dramatized in order to make a good story.

No doubt this is true, and there's an additional layer of dramatization going from the book to a movie script. I've not seen the movie but have read more than one review that indicates the movie is only loosely based on the book. I enjoy Lewis' writing, but he makes no pretensions of even-handedness. His most recent book (Flash Boys) is very compelling, but also rather misleading.

yeah, i thought Flash Boys (while worth a read) was the only one of these works that pushed the edge of factual-ness too far.

 

[bagger]

If we want to make the rating agencies fiduciaries or give them full legal ownership of their ratings in terms of liability to investors, we'd have to accept that their fees would double or triple, at least. They're not auditors. For the most part, they assume the company's financial statements are accurate and complete, taking them at face value without any independent investigation or verification. This is all clearly stated in their ratings. It seems foolish to me to add another fiduciary on top of the duties already owed by the corporate Ds&Os and the auditors. To me, that's the key part of Lewis' book - that investors can and should take a look at these companies and decide for themselves what's what (I've not seen the movie, which I understand is only "loosely based" on the book.) Of course the agencies have huge inherent conflicts which most everyone is aware of and accepts - their fees are paid by the very companies they are grading! I'm not going to absolve the ratings agencies or even defend them, but just note my opinion that it is somewhat ignorant to put the majority of the blame on them, given their role. Did everyone forget that Enron was investment grade until literally a few days before it filed bankruptcy? If a company is going to produce fraudulent financials, its up to the auditors, the SEC and the investing public to discover that. Ratings agencies compile data and report on it - most of the data they use is public information anyone can pull. They are not some sort of gatekeeper of integrity, they won't discover fraud or even aggressive projections and the the like, and its ignorant to expect that of them.

I agree with all of this generically about rating agencies, but in the case of securitizations I think it's more nuanced in that the pools themselves were created to meet rating agency guidelines for tranche sizing based on underlying risk factors including borrower credit risk (with FICO scores being the typical indicator).

well that was gamed too using weighted average ficos to qualify. A pool of 5 ficos of 800 and 5 ficos of 500 is way riskier than 10 ficos of 650.Even worse there might be 1 larger loan at 800 and 5 smaller loans at 500 to get to the same weighted average.

 

[bagger]

I would assume that most people here are pretty knowledgeable about sports. If so, and you read The Blind Side or Moneyball, I would like you to consider the possibility that his treatment of the financial crisis is similarly narrowly-focused and over dramatized in order to make a good story.

No doubt this is true, and there's an additional layer of dramatization going from the book to a movie script. I've not seen the movie but have read more than one review that indicates the movie is only loosely based on the book. I enjoy Lewis' writing, but he makes no pretensions of even-handedness. His most recent book (Flash Boys) is very compelling, but also rather misleading.

lol

 

[elbowrm]

Just saw the movie and it's awesome. Really entertaining, and was far more evenhanded than I assumed based upon people's comments. I loved it.

 

[Daywalker]

Didn't everyone know someone making a ton of dough circa 2006 getting everyone they knew into a house? Those two dopes they met in Florida?

Those types were a joke here in SoCal at the time. To be fair they made a killing for a few years with no repercussions.

 

[bigbottom]

Okay, I realize this is a really stupid question, but I didn't understand the role of Ryan Gosling's character. He worked for Deutschbank, right? If so, how was he making his money on the short? Was he independently getting a cut of Front Point's deal?

 

[elbowrm]

It's been a long time since I read the book, but as I understood it he was a salesperson, whose bonus would be some function of revenue to the firm from sales he executed. Since the big shorters put their positions on a couple of years before things blew up, they were responsible for premium payments every quarter (this created liquidity challenges for Bale's fund, and led to several quarters of poor performance). Although the movie made it seem like Gosling's character cashed one big check at the end, post - blow up, what would have been far more likely would have been that he was receiving the bulk of that money before it was evident that the Big Shorters were right, as it would have been a highly revenue positive trade for DB in the short term.

Which again serves to highlight the main underlying issue - short term incentives without long term accountability at every step.

I can spend some time walking through in a bit more detail the nature of CDS, CDO, and synthetic CDOs, as someone with a working knowledge of those products but who hasn't been directly professionally involved in them, if people would like. It will be time consuming though, so if it's not useful I won't bother. It will help explain why their short positions were not in the money until the very end - and I would refute the movie's assertion that this was due solely to "fraud" by the investment banks.

 

[Statorama]

It's been a long time since I read the book, but as I understood it he was a salesperson, whose bonus would be some function of revenue to the firm from sales he executed. Since the big shorters put their positions on a couple of years before things blew up, they were responsible for premium payments every quarter (this created liquidity challenges for Bale's fund, and led to several quarters of poor performance). Although the movie made it seem like Gosling's character cashed one big check at the end, post - blow up, what would have been far more likely would have been that he was receiving the bulk of that money before it was evident that the Big Shorters were right, as it would have been a highly revenue positive trade for DB in the short term.

Which again serves to highlight the main underlying issue - short term incentives without long term accountability at every step.

I can spend some time walking through in a bit more detail the nature of CDS, CDO, and synthetic CDOs, as someone with a working knowledge of those products but who hasn't been directly professionally involved in them, if people would like. It will boe time consuming though, so if it's not useful I won't bother. It will help explain why their short positions were not in the money until the very end - and I would refute the movie's assertion that this was due solely to "fraud" by the investment banks.

I find this stuff fascinating, so if you print it, I'll read it

 

[cstu]

Okay, I realize this is a really stupid question, but I didn't understand the role of Ryan Gosling's character. He worked for Deutschbank, right? If so, how was he making his money on the short? Was he independently getting a cut of Front Point's deal?

He was actually Greg Lippman:

Eventually, the committee's report says, Deutsche Bank built a $5 billion short against the subprime market (Lippmann says he had to fight to get them to do it). A trader who worked for Deutsche Bank even wrote a song about it. It's called "CDO Oh Baby," and it's set to the Vanilla Ice song.

Lippmanns defense for "duping" and writing the above is this: He was "grasping at things" to prove he was right in his short position.

What I think he was doing was making money for DB while also making money on commissions getting more people to short the housing market.

And he knew that DB themselves were selling investors garbage products:

"You can certainly build a portfolio by picking only bad names and you have largely done that as Rascahl is considered bad as is Fremont (bsabs fr, fhlt, jpmac fre, sabr fr, nheli fm deals) ace, arsi and lbmlt." (The acronyms refer to the names of lenders. Lippmann called "ACE," "bad" even though it was a Deutsche Bank-created asset.) - 8/4/2006

 

[Rohn Jambo]

Okay, I realize this is a really stupid question, but I didn't understand the role of Ryan Gosling's character. He worked for Deutschbank, right? If so, how was he making his money on the short? Was he independently getting a cut of Front Point's deal?

Ryan's character, Greg "I'm short your house" Lippmann, made $2 billion for Deutscher and got a $50 million bonus. Both Deutscher and Lippmann offloaded CDO and CDO2 to clients while they shorted them.

 

[elbowrm]

I found a halfway decent summary of MBS, CDO, CDS -

https://medium.com/@danwwang/the-cdo-the-cds-and-the-subprime-mortgage-crisis-c1aa28c01116#.qlex0dbdx

A key point that is not really discussed is the fact that the CDS contracts were bilateral contracts between, say, Scion Capital (burry, portrayed by Christian Bale) and Goldman Sachs.

Scion, as the buyer of the contract, is paying on an insurance policy with Goldman, where he would receive a payment to make him whole on any losses taken following a specified set of circumstances (outlined in the CDS contract) in the underlying security on which the policy was sold. Typically, on a classic corporate bond CDS contract the insurance payout would only be triggered by a default of the underlying corporate bond, and the insurance payout would be determined by the fate / market pricing of the underlying corporate bond following the default. Default is a specific legal condition that would have been spelled out in the indenture of the underlying security - most obviously a missed interest ir principal payment or bankruptcy of the underlying borrower.

We can assume that it is the same here, where Scion would onlg get paid off on the long CDS position (short mortgages) following the default of the underlying security. If the underlying security was the BB or BBB tranche of a mortgage backed security that contained a significant concentration of subprime mortgages, it would not have taken a lot of people to stop paying their mortgages to massively increase the likelihood of default of the junior tranches (i.e. Not AAA, AA, or A) of that securitization, but even the BBBs and BBs would have been reviving enough income to make interest payments (maybe 6-7%) as they came do, based upon the relative sizing of those pools.

So, even though Scion was absolutely correct, and the defaults began building in the securitization tranches that they had insured in their CDS contracts with Goldman, in the absence of actual default of the pool tranche itself the specific pricing ("mark") of their insurance contract was whatever Goldman said it was. There was no exchange that they could look up MBS CDO CDS spreads. They just had an insurance contract with a party whose interests were not aligned.

The notion of their pricing being "fraudulent" is debatable - if there were willing sellers of the CDS at prices sustainable by their marks, despite the pricing and performance of the underlying securities, they would have had a lot of latitude in this area. When the 2 internal bear stearns hedge funds were blowing up in early 2007, there was an article in the Wsj that outlined a potential plan of theirs to actually begin buying some of the houses in the underlying pools in order to prop up the marks. Obviously it didn't work.

Early on, it is almost assured that the counterparties on the other side of the scion CDS contracts were the banks themselves. It was free money to them until the very end, when actual pools would,have defaulted. Then the banks began offloading this risk to other institutions - with AIG being the most prominent. As the default probabilities increased and the mark to market values began moving in the favor of the Scions (and the banks were now on the same side of the trade - the bale phone call with Goldman before it moved in his,direction), all of the sudden the cash had to move in the other direction on the contracts, creating massive liquidity needs. AIG getting downgraded itself was a major precipitating factor. So instead of actually collecting on the insurance policies, most of the shorts would have sold their positions and cashed out.

 

[elbowrm]

My last paragraph was poorly written, sorry.

 

[dparker713]

I found a halfway decent summary of MBS, CDO, CDS -

https://medium.com/@danwwang/the-cdo-the-cds-and-the-subprime-mortgage-crisis-c1aa28c01116#.qlex0dbdx

A key point that is not really discussed is the fact that the CDS contracts were bilateral contracts between, say, Scion Capital (burry, portrayed by Christian Bale) and Goldman Sachs.

Scion, as the buyer of the contract, is paying on an insurance policy with Goldman, where he would receive a payment to make him whole on any losses taken following a specified set of circumstances (outlined in the CDS contract) in the underlying security on which the policy was sold. Typically, on a classic corporate bond CDS contract the insurance payout would only be triggered by a default of the underlying corporate bond, and the insurance payout would be determined by the fate / market pricing of the underlying corporate bond following the default. Default is a specific legal condition that would have been spelled out in the indenture of the underlying security - most obviously a missed interest ir principal payment or bankruptcy of the underlying borrower.

We can assume that it is the same here, where Scion would onlg get paid off on the long CDS position (short mortgages) following the default of the underlying security. If the underlying security was the BB or BBB tranche of a mortgage backed security that contained a significant concentration of subprime mortgages, it would not have taken a lot of people to stop paying their mortgages to massively increase the likelihood of default of the junior tranches (i.e. Not AAA, AA, or A) of that securitization, but even the BBBs and BBs would have been reviving enough income to make interest payments (maybe 6-7%) as they came do, based upon the relative sizing of those pools.

So, even though Scion was absolutely correct, and the defaults began building in the securitization tranches that they had insured in their CDS contracts with Goldman, in the absence of actual default of the pool tranche itself the specific pricing ("mark") of their insurance contract was whatever Goldman said it was. There was no exchange that they could look up MBS CDO CDS spreads. They just had an insurance contract with a party whose interests were not aligned.

The notion of their pricing being "fraudulent" is debatable - if there were willing sellers of the CDS at prices sustainable by their marks, despite the pricing and performance of the underlying securities, they would have had a lot of latitude in this area. When the 2 internal bear stearns hedge funds were blowing up in early 2007, there was an article in the Wsj that outlined a potential plan of theirs to actually begin buying some of the houses in the underlying pools in order to prop up the marks. Obviously it didn't work.

Early on, it is almost assured that the counterparties on the other side of the scion CDS contracts were the banks themselves. It was free money to them until the very end, when actual pools would,have defaulted. Then the banks began offloading this risk to other institutions - with AIG being the most prominent. As the default probabilities increased and the mark to market values began moving in the favor of the Scions (and the banks were now on the same side of the trade - the bale phone call with Goldman before it moved in his,direction), all of the sudden the cash had to move in the other direction on the contracts, creating massive liquidity needs. AIG getting downgraded itself was a major precipitating factor. So instead of actually collecting on the insurance policies, most of the shorts would have sold their positions and cashed out.

Calling them insurance policies is rather generous. There was no obligation for the "insurees" to have any relationship to the underlying security. These were bets.

 

[elbowrm]

That was the way they were used by these particular traders, but it doesn't change the fact that credit default swaps are nothing but insurance policies against default of the underlying instrument.

 

[dparker713]

That was the way they were used by these particular traders, but it doesn't change the fact that credit default swaps are nothing but insurance policies against default of the underlying instrument.

You can't take out home owners/fire/earthquake/etc on someone else's house. Nor can you take out life or medical insurance on some random person. They were bets, pure and simple.

 

[elbowrm]

Not disagreeing with you in this case. We're arguing over semantics. I believe that limiting the purchase of default protection to owners of the underlying securities would have been a useful reform post-crisis, as would have moving the trading of all derivatives above a certain size threshold to exchanges.

Instead we got the Volcker rule, which was well-intentioned but may wind up causing the next crisis. The rules against banks trading for their own account have dramatically lessened liquidity in markets across the board, leading to far greater volatility.

 

[elbowrm]

I will note there is a lot of debate about the volcker rule and liquidity:

http://www.marketwatch.com/story/does-the-bond-market-really-have-a-liquidity-problem-2015-08-18

 

[sporthenry]

I will note there is a lot of debate about the volcker rule and liquidity:

http://www.marketwatch.com/story/does-the-bond-market-really-have-a-liquidity-problem-2015-08-18

I can tell you that liquidity has disappeared in the bond market. I'm not really sure I buy Volcker saying there was too much liquidity. And the one article mentions nonbank participants stepping in. You have already started to see that in the bond market w/ some money managers and insurance companies starting to make markets. But you are essentially taking the risk off bank's balance sheets and moving it to insurance companies or money managers. Not really sure that solves the problem.

 

[sporthenry]

Not disagreeing with you in this case. We're arguing over semantics. I believe that limiting the purchase of default protection to owners of the underlying securities would have been a useful reform post-crisis, as would have moving the trading of all derivatives above a certain size threshold to exchanges.

Instead we got the Volcker rule, which was well-intentioned but may wind up causing the next crisis. The rules against banks trading for their own account have dramatically lessened liquidity in markets across the board, leading to far greater volatility.

Can't you use the same arguments that exist for being able to short a stock as being able to buy CDS without actually owning the underlying? Not to mention, investors will just find a way around the restriction and create synthetic products that mimic CDS.

 

[zamboni]

Finally saw this over the weekend. Never read the book because it hit to close to home (pun unintended), but it's time.

I worked for one of the rating agencies back in the mid to late '90s and also for a few of the big banks that were prominent in the film - not in the mortgage/CDO side of the business though. Unfortunately, I eventually (twice) became like that guy who walked out of the building with only a boxful of belongings after years of service - even though totally removed from the disaster around him.

Really good movie - very entertaining. Of course, much of the characters were exaggerated (e.g., the woman at S&P), but I thought they did a good job of breaking down the complexities in everyday terms.

Not to get into the political stuff, but I agree with most that while the banks and rating agencies deserve a fair share of the blame, there is enough to go around for everyone. Walking out of the movie, I felt a pronounced sadness that I, even as a fairly astute financial professional, got caught up a bit and wound up taking on more of a mortgage in the late 2000s that I should have. That's where prices were at the time, but it is something that is going to impact my retirement and probably my kids' financial situation.

 

[zamboni]

Rating agencies don't have a fiduciary duty to anyone.

Actually, in one of the lesser discussed aspects of the crisis, rating agencies had a fiduciary duty to their own shareholders as public companies. Moody's stand alone (went public in 2000), and S&P as part of McGraw-Hill.

This was a side comment made by Carrell during the movie, and is a critical component of the entire crisis. As public companies, the rating agencies had clear conflicts of interest generating earnings for shareholders and providing information to investors. Pretty big divergence of interests there.

The fact that rating agencies are public companies is one of the more egregious aspects of the crisis IMO.

 

[elbowrm]

Good point - I was thinking of the investors in the rated deals.

 

[Short Corner]

I found a halfway decent summary of MBS, CDO, CDS -

https://medium.com/@danwwang/the-cdo-the-cds-and-the-subprime-mortgage-crisis-c1aa28c01116#.qlex0dbdx

A key point that is not really discussed is the fact that the CDS contracts were bilateral contracts between, say, Scion Capital (burry, portrayed by Christian Bale) and Goldman Sachs.

Scion, as the buyer of the contract, is paying on an insurance policy with Goldman, where he would receive a payment to make him whole on any losses taken following a specified set of circumstances (outlined in the CDS contract) in the underlying security on which the policy was sold. Typically, on a classic corporate bond CDS contract the insurance payout would only be triggered by a default of the underlying corporate bond, and the insurance payout would be determined by the fate / market pricing of the underlying corporate bond following the default. Default is a specific legal condition that would have been spelled out in the indenture of the underlying security - most obviously a missed interest ir principal payment or bankruptcy of the underlying borrower.

We can assume that it is the same here, where Scion would onlg get paid off on the long CDS position (short mortgages) following the default of the underlying security. If the underlying security was the BB or BBB tranche of a mortgage backed security that contained a significant concentration of subprime mortgages, it would not have taken a lot of people to stop paying their mortgages to massively increase the likelihood of default of the junior tranches (i.e. Not AAA, AA, or A) of that securitization, but even the BBBs and BBs would have been reviving enough income to make interest payments (maybe 6-7%) as they came do, based upon the relative sizing of those pools.

So, even though Scion was absolutely correct, and the defaults began building in the securitization tranches that they had insured in their CDS contracts with Goldman, in the absence of actual default of the pool tranche itself the specific pricing ("mark") of their insurance contract was whatever Goldman said it was. There was no exchange that they could look up MBS CDO CDS spreads. They just had an insurance contract with a party whose interests were not aligned.

The notion of their pricing being "fraudulent" is debatable - if there were willing sellers of the CDS at prices sustainable by their marks, despite the pricing and performance of the underlying securities, they would have had a lot of latitude in this area. When the 2 internal bear stearns hedge funds were blowing up in early 2007, there was an article in the Wsj that outlined a potential plan of theirs to actually begin buying some of the houses in the underlying pools in order to prop up the marks. Obviously it didn't work.

Early on, it is almost assured that the counterparties on the other side of the scion CDS contracts were the banks themselves. It was free money to them until the very end, when actual pools would,have defaulted. Then the banks began offloading this risk to other institutions - with AIG being the most prominent. As the default probabilities increased and the mark to market values began moving in the favor of the Scions (and the banks were now on the same side of the trade - the bale phone call with Goldman before it moved in his,direction), all of the sudden the cash had to move in the other direction on the contracts, creating massive liquidity needs. AIG getting downgraded itself was a major precipitating factor. So instead of actually collecting on the insurance policies, most of the shorts would have sold their positions and cashed out.

Calling them insurance policies is rather generous. There was no obligation for the "insurees" to have any relationship to the underlying security. These were bets.

That's what an insurance policy is.

 

[Short Corner]

Not disagreeing with you in this case. We're arguing over semantics. I believe that limiting the purchase of default protection to owners of the underlying securities would have been a useful reform post-crisis, as would have moving the trading of all derivatives above a certain size threshold to exchanges.

Instead we got the Volcker rule, which was well-intentioned but may wind up causing the next crisis. The rules against banks trading for their own account have dramatically lessened liquidity in markets across the board, leading to far greater volatility.

Can't you use the same arguments that exist for being able to short a stock as being able to buy CDS without actually owning the underlying? Not to mention, investors will just find a way around the restriction and create synthetic products that mimic CDS.

Insurance is literally a put on the underlying asset, ie your health, your home, etc.

 

[dparker713]

Not disagreeing with you in this case. We're arguing over semantics. I believe that limiting the purchase of default protection to owners of the underlying securities would have been a useful reform post-crisis, as would have moving the trading of all derivatives above a certain size threshold to exchanges.

Instead we got the Volcker rule, which was well-intentioned but may wind up causing the next crisis. The rules against banks trading for their own account have dramatically lessened liquidity in markets across the board, leading to far greater volatility.

Can't you use the same arguments that exist for being able to short a stock as being able to buy CDS without actually owning the underlying? Not to mention, investors will just find a way around the restriction and create synthetic products that mimic CDS.

Insurance is literally a put on the underlying asset, ie your health, your home, etc.

Insurance is a hedge against the loss of value for an ownership stake in the underlying asset. You can't insure your Tercel for a billion in theft

 

[Short Corner]

Not disagreeing with you in this case. We're arguing over semantics. I believe that limiting the purchase of default protection to owners of the underlying securities would have been a useful reform post-crisis, as would have moving the trading of all derivatives above a certain size threshold to exchanges.

Instead we got the Volcker rule, which was well-intentioned but may wind up causing the next crisis. The rules against banks trading for their own account have dramatically lessened liquidity in markets across the board, leading to far greater volatility.

Can't you use the same arguments that exist for being able to short a stock as being able to buy CDS without actually owning the underlying? Not to mention, investors will just find a way around the restriction and create synthetic products that mimic CDS.

Insurance is literally a put on the underlying asset, ie your health, your home, etc.

Insurance is a hedge against the loss of value for an ownership stake in the underlying asset. You can't insure your Tercel for a billion in theft

Technically you could, you just probably wouldn't be able to afford the premiums.