"Toxie," NPR's adopted 'toxic asset,' is dead

They explain some fairly complicated financial stuff in an easy to understand way, without dumbing it down. They have lots of good, heavy-hitting guests on.

Go subscribe to the podcast. It's free:

http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...

But you will argue with me, even though you haven't studied finance or economics because you are yet another ignorant american leftist who listened to npr and now you think your educated. Indoctrinates is more like it.

And while none of you can present counter arguments to my claims, which are factual and thus not disputable, I'm sure you will attack me personally and mod this post down, like you do every post of mine that doesn't agree with the herd mentality ....and go to sleep thinking you exercised your critical thinking skills.

Here's a clue you will certainly ignore: if you engage in critical thinking, you can't stand to listen to NPR because it is such blatant and obvious political propaganda that doesn't stand up to scrutiny on the face of it.

Of course you think that is an absurd thing to say, because the Matrix has you. You can't imagine a free life.

Of course, not the guy I'm directly responding to, who mows,maybe his mind is not far gone.... But in general, this is the situation we fing ourselves in.

And being totally mislead about the 2008crisis, you're ready to be fucked by the 2012 crisis.... Just like you knew nothing out enron but were certain there was no housing bubble in 2005.... Because you believed the lies NPR, et. Al. Told you about enron and your friends got rich flipping houses.

Remember that the toxic asset is not a collection of salami slices from different mortgages - there are laws against dividing up a mortgage or loan interest that way, I believe. The slices were claims on the profit - the sum of mortgage payments minus cost of capital, and were paid out in exchange for cash up front.

Holding these assets seemed like a good idea at the time they were issued, because even if Joe Blow lost his job or whatever, the rising property market meant that he or the loan service company just had to be patient for a few months - then the house could be sold for more than the value of the debt, the unsecured creditors would be OK. Joe Blow himself would have a clean slate unless he was truly incompetent, because before the bubble burst it was fairly easy to offload the property and look like a responsible individual who serviced debt promptly. I heard of people doing that and ending up with a better credit rating as a result, because on paper they were now the sort of person that does profitable 6-figure real estate transactions. The smart ones gave classes, the stupid ones believed their credit reports and started thinking they were financial wizards.

On the issue side, it worked like so: I give Joe Blow a $500k mortgage, he is supposed to give me back $1m over 20 years or whatever the compound interest + principal amounts to. Well great, but now I have to wait a decade before I start actually making money on the deal. Traditionally, banks' business model is to control enough capital and manage risk well enough to play that long game, in fact to play a longer game than anybody else on the market. But in recent decades, so much money had gone into the stock market via retirement funds etc. that bringing in your profit over a 10-30 year period looked rather tame. Sure, there were big profit multiples in the credit card business, but it takes time for most people to run up substantial credit card debt, and the kind of people who rack up house-size debts quickly are unfortunately the sort of people who tend to pay them off too because they understand how to use credit effectively, so they are not generating any profit. And in a rising market, those long-term profits seem to have a very high opportunity cost, because although they are secured by property, I could probably double my money faster by investing it in some dot com thing, whatever that means...

Meanwhile, I'm out the $500k I just gave to Joe Blow, and my competition across the street is just celebrating an IPO of clueless,com that paid off at 32:1. Damn! But wait - YOU look like a smart guy. Look, I have this mortgage on Joe Blow's house, and 99 others just like it. Houses - lovely solid assets, not like those inflationary stocks. They're even better than gold, because you can't live in a goldbrick, amirite? And who invests in gold, that's no way to make money any more, the 70s were a long time ago.

I'm gonna collect $500k from Joe over the next 20 years! He'll pay because it's his house, duh. My cost of capital from the federal reserve? Cheap, they only want $100k in interest, God bless Alan Greenspan. No, you can't raise capital there, you need a banking license like I have but they're like taxi medallions, you gotta wait years to get one. But look, about this $400k profit I make after I pay the Fed off. Times 100 mortgages that I've issued, that's $40 million dollars of pure profit - and this profit is on debt secured with $50 million worth of houses...at today's prices. And they're not making any new land, heh heh!

Oh, you wish you could get in on this? Yeah, too bad you don't have a banking license like me...but come to think of it, don't a lot of taxi guys rent out their cab, and everybody wins? Yeah! How about this: you give me $50 million, and I'll split the $40m profit with you, even Stevens, $20 mil each and I'll do all the hard work of collecting the payments each month and I'll hold all the risk. What's in it for me? Well, I'll issue some more mortgages, I got people trying to buy property faster than the hired help can build it. What's in it for you? $20 million my friend, and peace of mind. How long do you think this bank has been here?

OK, it was more complicated than that - there was an investment bank in the middle giving the sales pitch and gift-wrapping the item, and they were getting paid a commission up front. But this was the basic transaction that both sides suckered themselves into, and on which both sides lost money while the investment bank kept its cash commission.

http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe...

There are different classes of bond holders within their bond fund. Toxie was a lower ranked class that was assuming more risk, and we've now reached a point where a sufficient number of mortgage holders within the bond fund have defaulted, that there will never be enough mortgage payments coming in to pay the holders of Toxie-class bonds within this fund. Other people within the fund are still getting paid.

If I recall correctly from earlier Planet Money podcasts, this was part of the problem. The overall fund would receive a low-risk rating, and those parts would be bought up by the really big institutional investors. The crappier bits of the same funds would then be sold to your local teachers retirement fund or similar, bought by investors who were savvy enough to realise they were assuming more risk.

(I've almost certainly got some of that wrong - someone correct me!)

Regardless: listen to Planet Money - it's 12-20 minutes 3 times a week, and they make a lot of complicated stuff relatively easy to understand and accessible.

http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...

Also banks got bailouts which cushion them against losses but do not prevent losses. A loss on an asset is a loss on an asset. The federal reserve buying mortgage bonds was not considered a bailout per say but are helping to prop up prices which indirectly help the banks.

They have very negative effects for lower tranches of mortgage backed securities.

These sorts securities were structured in such a way that some people get a lower ROI, but better risk profile. The way that works is that whoever accepts the lowest rate of return gets their portion first. When the money runs out, the assets that would have the highest rate of return miss out entirely.

There are two major ways that a loan can change: default (where the debtor simply does not pay; this typically leads to foreclosure and the bank often takes a loss) and renegotiation (where the debtor negotiates a reduction in how much the debtor will eventually need to pay on the theory that the lower amount will make default less likely). Both of these reduce the amount of money coming in (and, indeed, the amount that is ever going to come in).

What happened is that the amount of money coming in (and expected to come in) dropped to the point where, after paying every asset promising a lower rate than Toxie, there was no money left to pay Toxie. As there is no means by which this situation can change, Toxie no longer has value.

When you have a loan modification, the principal owed drops. That means that the total amount of money coming into the deal goes down. Those losses hit the bottom bonds first. As you reduce principal, you reduce interest. Once enough money has gone out of the deal, those bonds won't pay anything more, and the bond is dead.

(I haven't been in finance for several years, but I used to be in the CMBS world.)

Well, you get that when they buy the security. "By signing, you agree to accept..."

Except unlike for DVDs, this sort of thing is actually legally binding. Part of the whole subprime crisis was that nobody actually read these things, and they were caught by surprise when conditions changed. ("If 3 people default on their loans, your 50 billion investment is worthless." That's kind of bad when it's your own money, but really bad when you borrowed those 50 billion from someone else. Hence, a recession.)

Why? There were lots of people on the other side of the transaction, too. The money paid to the collectors of the CDSes did not come out of thin air, after all.