Kevin's Watch

Oscar nominated (best picture category) and critically acclaimed, I was less than sure about seeing yet another film about 'the crash', but this quirky take from the other side (about the people who made shit-loads of cash out of it; well they're always there aren't they) actually hit the spot. The head-liners did their jobs as can be expected, and the lesser known actors also stepped up to the plate and delivered a tension building drama that left a pretty sour taste in ones mouth in respect of the reprehensible cupidity of a profession that still operates unchanged to this day.
Unflinching in its preparedness to accuse the government of colluding with the banking system in perpetrating the greatest ever act of criminal fraud in the history of the world, the film does not shy away from naming the guilty parties (Greenspan et al), nor from the moral dilemmas faced by those who knew that their profit would only come at the expense of the suffering of millions of ordinary folk the world over. That even after the world economy was brought to the brink of ruin, the guilty parties walked free - and rich - off into the sunset is made clear along with the fact that a few short years later the lessons have still not been learned and in that game it's 'business as usual!'

The book was better... Even so, given how challenging the story is to form into a movie, I'm pleased with how they did.

peter wrote: Unflinching in its preparedness to accuse the government of colluding with the banking system in perpetrating the greatest ever act of criminal fraud

Sigh... That's not what happened at all. In fact, with the exception of predatory lenders (whose business plan in fact requires the borrower to default so their assets may be seized), noone actually committed fraud.

I thought the movie did well enough explaining this, but if your impression is that fraud occurred then I suppose it wasn't clear enough. I recommend you read the book if you really want the nitty-gritty about what happened.

Anyway, the big problem with the crash wasn't outright fraud, but rather a systemic problem that came from everyone looking at their tiny part of the economy. Every single individual made decisions that were perfectly logical (and legal) given their situation; it's only when you put everything together that you see the problems that can result. That's why their called 'systemic,' because the problems arise from the system as a whole.

But half the film was going on about how the refusal to downgrade the AAA rating of the CDO's (or one of the other 'bundles' of shit filled mortgage stock) when it was crasing in value and the default level was going through the roof as either complete incompetence on a metioric scale - of fraud. The film never explicitly accused the government of fraud (so yes, I conceded my account was over zealous in this) - but I think it's intent was clear in that the degree of bone-headed stupidity required for the first option to be the case is stretching credulity to the nth degree. The film concludes with a few lines on governments refusal to meet with Burry to this day to discuss his method of spotting the approaching cataclysm and Baum spends the entire film screaming at bankers about the duplicitous nature of what they were doing. No fraud? Rigel - we clearly didn't see the same film.

(Wouldn't be the first time I've constructed a complete structure of misunderstanding built entirely on sand though )

To be fair, it's not like these were the only guys who saw what was happening. Here's Warren Buffet, famously calling these financial derivatives "weapons of mass destruction," in 2003:

news.bbc.co.uk/2/hi/2817995.stm

As for the risk ratings, mathematically the model is sound... IF the underlying investments are not correlated.

Logically, there is little historical reason to think that the mortgages of a dentist in Chicago and a plumber in Miami would be linked in any way... Until, of course, we faced a national, rather than regional, housing bubble.

Additionally, the fallout from the housing bubble wouldn't have been nearly as bad if it weren't for the derivatives market. To give you some idea of the magnitude, in 2007 there were approximately 60 million mortgages in the US. Assuming an average value of $100,000, that gives us a total mortgage market of US $6T.

At the same time, the value of the derivatives market was estimated at around $500T.

(For reference, the value of all the money (cash) in the world was estimated at $30T, and the value of all US stocks at $75T at that time).

As I said above, it was a case of people looking at individual pieces, rather than the system as a whole. The kids who developed the model behind the risk-rating did sound math. The executives who identify risk had never seen any record of a housing bubble so geographically dispersed. The people selling credit default swaps didn't know anything about the underlying investments, only the credit ratings of those investments.

One thing the movie misportrayed was Michael Burry (Christian Bale) studying the underlying mortgages. The book certainly gave the impression that they were layered so many times over that it was impossible to discover which mortgages were part of each investment.

The only thing close to fraud that you could accuse anyone of would be selling CDSs without the cash to pay them... The equivalent of selling insurance without being able to pay claims. As CDSs are routinely used as a form of hedge or insurance on investments, I would agree that putting capital requirements in place for issues of swaps would be an appropriate move.

Is the book written as straight documentary (my preference) or docu-drama (ala the film) Rigel. Clearly I do need some more exposure to get my head around this (I've even forgotten what derivatives are - is that the 'side-betting' that goes on) and the book does sound a good option. But the big question for me has to be..........is it going to happen again anytime soon?

That's a good explanation of terms that I have a very hazy notion of Hashi: much appreciated. Think I'll leave my money in my piggy-bank for the moment, or under my mattress - it seems safer.