Ben Stein pointed the other day to the fact that Goldman had been shorting mortgage securities at the same time that it was underwriting them (and selling them to institutional investors). I pointed out that there is a clear conflict of interest in this and that it would create waves.
The NYT came out today with an article on how bad the situation for the securitizations from the street in 2006 are currently and points to the fact that many of them were actually hedging agaist a downfall (or being short) at the same time that they were underwriting them.
One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year.
Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent.
In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks.
Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly.
Goldman Sachs also moved early to insulate itself from potential losses. Almost a year ago, on Dec. 14, 2006, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting. The investment bank’s mortgage desk was losing money, and Mr. Viniar, with various officials, reviewed every position in the bank’s portfolio.
The bank decided to reduce its stockpile of mortgages and mortgage-related securities and to buy expensive insurance as protection against further losses, said a person briefed on the meeting who was not authorized to speak about the situation publicly.
Goldman, however, did not stop selling subprime mortgage securities. The bank, like other firms, retains a piece of the securities it sells. A Goldman spokesman said the firm was not betting against the mortgage securities it underwrote in 2007.
Like Goldman, Lehman Brothers also started to hedge its huge inventory of home loans in the second quarter of this year, concerned about poor underwriting standards. But Lehman also continued to sell mortgage securities packed with shaky loans, underwriting $16.5 billion of new securities in the first nine months of 2007. About 15 percent of the loans backing these securities have defaulted.
As has been pointed out in the past - there was a clear link between Wall Street and sub-prime originators. Wall Street found (smart and/or dumb) liquidity for exotic instruments that were backed by mortgages and the originators had no problems finding ever higher yielding mortgages.
I am guessing this will have interesting tails...
Thursday, December 6, 2007
Monday, December 3, 2007
The Government hand in "helping borrowers": what will the result be?
So the Government is laying out a plan to help the mortgage industry: they will coordinate with lenders and servicers to allow for more loan modifications to happen.
Here is Secretary Paulson:
Paulson has said rate freezes would not be offered to people who can afford the adjusted payment or those who, despite having made mortgage payments so far, have too little income and assets to do so in the future. Another issue was whether to exclude heavy borrowers who owe more than their homes are now worth.
Hope Now alliance members are close to agreeing on a systematic approach for dealing with resets on adjustable-rate mortgages, but they are still developing criteria for determining which borrowers will be eligible for streamlined refinancings and loan modifications
This reminds me of the kinds of market trampling that for which Emerging Markets get penalized every 10 years. Whenever the Government tries to have a direct effect on the market, fuel is added to the fire and ends up being counterproductive. The Government needs to make rules through which the economy plays; if rules are made and then changed, players don't play and the economy doesn't work.
Let's see what they are after here: They want to decide what kinds of loans should be modified in the market, because the market has only been able to modify 1%. Let's see, rational investors and borrowers (knowing that there is a 40% loss event if things go into foreclosure), have only been able to modify 1% of the loans. Is it because they are not cooperating and they need an intermediary or is it that there is simply no opportunity to rationally modify these loans?
I have no idea how they will be able to decide which borrowers are eligible to remain at their current rates and which ones not (without offering the option to everyone), not to say the drastic problems they would create to future incentives. Let's see, the responsible borrower that took out a fixed rate loan, or took out an ARM but has been making significant sacrifices to consumption patterns to afford the future payment, or somebody who refinanced just recently into a fixed rate loan, or somebody who took out the risky loan, but, simply can afford it... those don't get help. But, an irresponsible (or the victim of an irresponsible broker) borrower who took out an adjusting loan that upfront couldn't be repaid at the higher rate or those in the camp above but that are able to that fool the system into believing they can't pay, AND (to do justice to what they are trying to do) can pay at the unadjusted current rate, then, those are getting relief (or in market terms - significant returns on their (conscious or unconscious) gambles).
Market distortion: the government will always be there to the rescue...or investors beware if you are making very risky investments - it could be the case that the government will step in and decide exactly how many cents on the dollar you are getting back.
here is a frustrated borrower:
I’m no doubt opening myself up to charges of heartlessness. I don’t have a an ultralow teaser-rate ARM. My loan isn’t subprime. In fact, I knew exactly what I was doing when I bought an adjustable-rate product. I understood the risks and benefits. I’ll be able to afford the consequences of a rate increase.
Still, why should I be the sap who pays just because the above is true? The Journal’s primer suggests that only borrowers for whom a freeze would make the difference between staying in their home and defaulting would be eligible for a freeze. Those who either can afford their mortgages without a freeze or can’t afford their mortgage under any circumstances wouldn’t qualify. Good luck deciding who doesn’t need the help. I’ve just told you I don’t need it because I’m being honest and I’m not sharing any numbers. Would I like to continue paying the same interest rate for the next five years? Hell yes.
The decision to freeze an interest rate or otherwise modify a mortgage is appropriately handled by the borrowers and the lenders, and, in our current reality, the investors who bought the loans from the lenders. They’re the lenders now. They’ll act in their economic interests, whether that be freezing a rate or forcing a default. Anything else makes a total sham of the system of lending money so a borrower can purchase an asset which, in turn, is pledged as collateral against the loan.
I am simply very skeptical that this effort will succeed without creating huge distorsions in the credit incentives that will simply end up making matters worse.
Here is Secretary Paulson:
Paulson has said rate freezes would not be offered to people who can afford the adjusted payment or those who, despite having made mortgage payments so far, have too little income and assets to do so in the future. Another issue was whether to exclude heavy borrowers who owe more than their homes are now worth.
Hope Now alliance members are close to agreeing on a systematic approach for dealing with resets on adjustable-rate mortgages, but they are still developing criteria for determining which borrowers will be eligible for streamlined refinancings and loan modifications
This reminds me of the kinds of market trampling that for which Emerging Markets get penalized every 10 years. Whenever the Government tries to have a direct effect on the market, fuel is added to the fire and ends up being counterproductive. The Government needs to make rules through which the economy plays; if rules are made and then changed, players don't play and the economy doesn't work.
Let's see what they are after here: They want to decide what kinds of loans should be modified in the market, because the market has only been able to modify 1%. Let's see, rational investors and borrowers (knowing that there is a 40% loss event if things go into foreclosure), have only been able to modify 1% of the loans. Is it because they are not cooperating and they need an intermediary or is it that there is simply no opportunity to rationally modify these loans?
I have no idea how they will be able to decide which borrowers are eligible to remain at their current rates and which ones not (without offering the option to everyone), not to say the drastic problems they would create to future incentives. Let's see, the responsible borrower that took out a fixed rate loan, or took out an ARM but has been making significant sacrifices to consumption patterns to afford the future payment, or somebody who refinanced just recently into a fixed rate loan, or somebody who took out the risky loan, but, simply can afford it... those don't get help. But, an irresponsible (or the victim of an irresponsible broker) borrower who took out an adjusting loan that upfront couldn't be repaid at the higher rate or those in the camp above but that are able to that fool the system into believing they can't pay, AND (to do justice to what they are trying to do) can pay at the unadjusted current rate, then, those are getting relief (or in market terms - significant returns on their (conscious or unconscious) gambles).
Market distortion: the government will always be there to the rescue...or investors beware if you are making very risky investments - it could be the case that the government will step in and decide exactly how many cents on the dollar you are getting back.
here is a frustrated borrower:
I’m no doubt opening myself up to charges of heartlessness. I don’t have a an ultralow teaser-rate ARM. My loan isn’t subprime. In fact, I knew exactly what I was doing when I bought an adjustable-rate product. I understood the risks and benefits. I’ll be able to afford the consequences of a rate increase.
Still, why should I be the sap who pays just because the above is true? The Journal’s primer suggests that only borrowers for whom a freeze would make the difference between staying in their home and defaulting would be eligible for a freeze. Those who either can afford their mortgages without a freeze or can’t afford their mortgage under any circumstances wouldn’t qualify. Good luck deciding who doesn’t need the help. I’ve just told you I don’t need it because I’m being honest and I’m not sharing any numbers. Would I like to continue paying the same interest rate for the next five years? Hell yes.
The decision to freeze an interest rate or otherwise modify a mortgage is appropriately handled by the borrowers and the lenders, and, in our current reality, the investors who bought the loans from the lenders. They’re the lenders now. They’ll act in their economic interests, whether that be freezing a rate or forcing a default. Anything else makes a total sham of the system of lending money so a borrower can purchase an asset which, in turn, is pledged as collateral against the loan.
I am simply very skeptical that this effort will succeed without creating huge distorsions in the credit incentives that will simply end up making matters worse.
Sunday, December 2, 2007
NYT: The answer to the mortgage mess: North of the Arctic Circle...
It is usually heard that brokers at origination point that misled borrowers into very risky loans, or that lenders funded these loans (knowing that they weren't putting the capital)... and we've heard about realtors, and rating agencies, and investment banks...and in summary, there was such a complex system to originate and sell mortgages that the simple eye would simply recognize early on that this would not have a happy ending...
but, as I have established in the past - the golden rule regulates markets and if there had been no "takers" for these loans, there would have been no borrowers either. For example, volume in these loans dried up significantly this year and it is not because borrowers suddently decided they had enough of brokers or unscrupulous lenders, it is simply because there weren't any more buyers for this paper. The market signals I get point lead me to believe that if there were liquidity for these loans right now, there would still be borrowers.
Because of this, we need to ask ourselves how that liquidity entered the system and if there were schemes that were created to amplify the liquidity.
Here is one example from Narvik, Norway (city of 18,000 people north of the Arctic Circle):
"Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters." "Above all, the residents want to know how their close-knit community of 18,000 could have mortgaged its future — built on the revenue from a hydroelectric plant on a nearby fjord — by dabbling in what many view as the black arts of investment bankers in distant places." "They allege that they were duped by Terra’s brokers, who did not warn them that these types of securities were risky and subject to being cashed out, at a loss, if their market price fell below a certain level." "The chief investigator of Norway’s financial regulator, Eystein Kleven, said Terra Securities’ Norwegian-language prospectus did not mention such payments, or other risk factors. Citigroup’s term sheet did provide information on risks, but Narvik got a copy only after it had signed the agreement."
The financial alchemy that started it all - the concept that risky collateral could be transformed into safe investments by packaging it creatively - went around the world looking for every single pocket of liquidity that existed - first it was smart liquidity (that probably pretty quickly figured the game) and then it used intermediaries to sell on dumb liquidity. Of course, the more complex the structuring got, and the more parties that were involved in a security (security enhancements, et al), the easier it was to sell (even to smart liquidity) - who could've know what was going on in the first place? it was almost impossible.
I come back over and over to the same point - market intermediares (smart), paid on a commission basis (no skin in the game), line up the necessary elements to connect the dots to generate those commissions... and there are usually (not so smart) dots in the map (although not necessarily in direct contact with those intermediaries).
but, as I have established in the past - the golden rule regulates markets and if there had been no "takers" for these loans, there would have been no borrowers either. For example, volume in these loans dried up significantly this year and it is not because borrowers suddently decided they had enough of brokers or unscrupulous lenders, it is simply because there weren't any more buyers for this paper. The market signals I get point lead me to believe that if there were liquidity for these loans right now, there would still be borrowers.
Because of this, we need to ask ourselves how that liquidity entered the system and if there were schemes that were created to amplify the liquidity.
Here is one example from Narvik, Norway (city of 18,000 people north of the Arctic Circle):
"Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters." "Above all, the residents want to know how their close-knit community of 18,000 could have mortgaged its future — built on the revenue from a hydroelectric plant on a nearby fjord — by dabbling in what many view as the black arts of investment bankers in distant places." "They allege that they were duped by Terra’s brokers, who did not warn them that these types of securities were risky and subject to being cashed out, at a loss, if their market price fell below a certain level." "The chief investigator of Norway’s financial regulator, Eystein Kleven, said Terra Securities’ Norwegian-language prospectus did not mention such payments, or other risk factors. Citigroup’s term sheet did provide information on risks, but Narvik got a copy only after it had signed the agreement."
The financial alchemy that started it all - the concept that risky collateral could be transformed into safe investments by packaging it creatively - went around the world looking for every single pocket of liquidity that existed - first it was smart liquidity (that probably pretty quickly figured the game) and then it used intermediaries to sell on dumb liquidity. Of course, the more complex the structuring got, and the more parties that were involved in a security (security enhancements, et al), the easier it was to sell (even to smart liquidity) - who could've know what was going on in the first place? it was almost impossible.
I come back over and over to the same point - market intermediares (smart), paid on a commission basis (no skin in the game), line up the necessary elements to connect the dots to generate those commissions... and there are usually (not so smart) dots in the map (although not necessarily in direct contact with those intermediaries).
Sunday, November 25, 2007
Optimizing Leisure Preferences - a Business Idea
I've always thought that there are significant inefficiencies around our leisure activities - be it plane flights, hotel nights, restaurante outings, etc... Seats, rooms, tables are given out to parties without necessarily there being optimal transactions between willing parties.
An example is somebody given a middle seat on a plane espite the fact that he/she would have been willing to pay an amount of money that somebody at an aisle or window seat would have been willing to receive in exchange for their seat, or significantly more price differences in a hotel due to the differing characteristics of each room, or in restaurant tables - why can't table X with a slightly better view of the sea at restaurant y be worth more than the other table? or theater seats, or sport seats (it is already widely practiced in sports stadiums - significant number of price levels according to quality).
There would be business models to solve this inefficiency albeit complex: 1) an online exchange to buy-up the better seats, rooms, tables, 2) service provided to corporations to map out their various levels of product (best to worst rooms), best to worst seats and to differentially price according to it...
Of course, there might not be enough incentives for business owners to achieve this since ultimately it could end up being the case that less money is collected by price discriminating among customers.
An example is somebody given a middle seat on a plane espite the fact that he/she would have been willing to pay an amount of money that somebody at an aisle or window seat would have been willing to receive in exchange for their seat, or significantly more price differences in a hotel due to the differing characteristics of each room, or in restaurant tables - why can't table X with a slightly better view of the sea at restaurant y be worth more than the other table? or theater seats, or sport seats (it is already widely practiced in sports stadiums - significant number of price levels according to quality).
There would be business models to solve this inefficiency albeit complex: 1) an online exchange to buy-up the better seats, rooms, tables, 2) service provided to corporations to map out their various levels of product (best to worst rooms), best to worst seats and to differentially price according to it...
Of course, there might not be enough incentives for business owners to achieve this since ultimately it could end up being the case that less money is collected by price discriminating among customers.
Mortgage Mess: Who's to blame?
Buyer beware? Lender responsibility? Investor responsibility?
Income is tightly correlated with the sophistication to understand what it being sold to somebody. Does the government have a responsibility to protect those that are less "able" to make the correct decisions, and if the government protects these people, where is the line drawn? (to not intrude into the decisions of those that are able to take their own decisions given full information and which make economies grow and markets move?) Perhaps the old liberal vs. conservative argument - should the government help some people and by establishing policies to help such people, do you then perhaps create an environment that is less conducive to growth (and thus end up with a smaller pie, and helping them less to start with).
Back to the mortgage market - I personally find it hard to believe that given the extent of the paperwork, and the size of the economic transaction, that these people were actually taken for a ride. I think it was wishful thinking (to buy a home knowing very well the risks inherent in the mortgage), the same wishful thinking that the experienced people went through - that home values would never decline, that refinancing is always an option (that led these people to take out these loans).
Why were minorities overrepresented in sub-prime pools - partly because of lack of education (taken for a ride) and partly because they are poorer and have worse credit on average (than non-minorities). Having said that (even if they were taken for a ride), it doesn't mean that they didn't make the decision (to buy a home or refinance) knowing that there wasn't a risk...
Income is tightly correlated with the sophistication to understand what it being sold to somebody. Does the government have a responsibility to protect those that are less "able" to make the correct decisions, and if the government protects these people, where is the line drawn? (to not intrude into the decisions of those that are able to take their own decisions given full information and which make economies grow and markets move?) Perhaps the old liberal vs. conservative argument - should the government help some people and by establishing policies to help such people, do you then perhaps create an environment that is less conducive to growth (and thus end up with a smaller pie, and helping them less to start with).
Back to the mortgage market - I personally find it hard to believe that given the extent of the paperwork, and the size of the economic transaction, that these people were actually taken for a ride. I think it was wishful thinking (to buy a home knowing very well the risks inherent in the mortgage), the same wishful thinking that the experienced people went through - that home values would never decline, that refinancing is always an option (that led these people to take out these loans).
Why were minorities overrepresented in sub-prime pools - partly because of lack of education (taken for a ride) and partly because they are poorer and have worse credit on average (than non-minorities). Having said that (even if they were taken for a ride), it doesn't mean that they didn't make the decision (to buy a home or refinance) knowing that there wasn't a risk...
In general, I don't support the supposition that on average, the customer was taken for a ride - its too much of an important transaction for anybody, no matter their financial circumstances to claim that it wasn't their fault. Make buyers very responsible for the decision and potentially we would not have had this extent of a mess.
Sunday, November 18, 2007
Mortgage Market: The actors in the crisis and their role
There were a confluence of factors and no shortage of actors, each with their own incentives, but, I will focus on a couple here as possible spark plugs for what we just saw happened.
Number 1
A belief by all actors in the system that home prices simply went up (and thus, that there would always be alternatives to a foreclosure - selling the home or refinancing).
This led to the creation of products that expanded the buck and focused on simply the initial payments to qualify a borrower. "Tomorrow is always better than today" - and the adjustment periods became shorter.
Also, additional risk layers (that permitted the borrower to take more risk- not necessarily tied to an adjusting payment- but to borrow more relative to the value of the home or borrow more from their own income to pay for the mortgage) were permitted for a low price (again, the belief that the risk of default was very low).
Investment Banks (nothing new)
The investment banks saw an opportunity to deliver paper to hungry investors (for yield) and simply looked for ways to deliver that yield - ever more risky assets ended up in paper that was sold to the market. It was then not the assets themselves but their structuring that let to the higher yield. Perhaps investors were not willing to take on higher yield in a risky asset by itself, but, if it was packaged in a particular way, then they were able to take it.
These two were not only spark plugs, but, they were necessary conditions for the feeding frenzy to continue (with one additional item - the appreciation of homes - for the party to continue homes actually had to appreciate in value).
While there were spark plugs and necessary conditions. There were other things that permitted to fire to expand so fast. Like the wind is to a fire, there was the channel itself - Wall Street needed paper with a higher yield to put into securities (because they were able to convince investors, for whatever reason, that it was good), well, "we know how to find mortgages" and by the way if you didn't like the yield I found you the last time (high LTV, high DTI), here is how we can find more yield (stated income, lower FICO)... So, what is the channel? it is composed of mortgage bankers, mortgage brokers, realtors (who were able to sell more homes), appraisers (who were able to make more appraisers), and others...
So, it was a great, great world - borrowers were able to get better and bigger homes, brokers and mortgage bankers made fortures, realtors sold homes like never before, appraisers had more business than ever (and btw, to remain competitive they needed to become more lax in their stds, because otherwise, the bank - who pays them would simply go next door - this is a different topic, how do you uphold your stds in feeding frenzies and still manage to do business, it is almost like losing in every direction, but, this point applies to everybody - brokers, bankers, appraisers, wall street and even investors), wall street was getting some fat fees, and investors were getting great yield.
Which gets me to the following point (which is already implied up there)... whenever
(1) a deep belief (that is contingent on certain (up to that point) illogical elements happening) is ingrained in a market (can be led by some of the players),
(2) that is linked to a (significant) profit opportunity among many dispersed players, and
(3) not everybody has the same information, and
(4) those with the most information are compensated based on commissions (not taking any risk or if they can control the risk - for example, mtg bankers taking equity out of their companies every year)
other necessary elements:
- hot potato based on risk - people believe that if you ever run into trouble, you can simply unload by selling
- belief that the private markets always come up with the optimal outcome and that they regulate themselves (i.e. excessive risk taking would come by the way of losses)...
- transaction based income for main players - no skin in the creation of the hot potato...
the results?
Investors: made yield for many years, hot potato was dispersed (although some took real risk)
Investment Banks: made money, transactions, profits during those years? hot potato write-off (the little of what remained)
Brokers: made money, transactions, no skin
Bankers: made money, transactions, pulled a lot of money out
Realtors: made money, transactions, no skin
Appraisers: made money, transaction, could lose their license.
Mortgage holders: they are the ones that are holding the two key assets: the homes (that can drop in value) and the mortgage (that they can potentially not be able to pay) - some however, got a mortgage that they would not have gotten otherwise and will still be ok...
Number 1
A belief by all actors in the system that home prices simply went up (and thus, that there would always be alternatives to a foreclosure - selling the home or refinancing).
This led to the creation of products that expanded the buck and focused on simply the initial payments to qualify a borrower. "Tomorrow is always better than today" - and the adjustment periods became shorter.
Also, additional risk layers (that permitted the borrower to take more risk- not necessarily tied to an adjusting payment- but to borrow more relative to the value of the home or borrow more from their own income to pay for the mortgage) were permitted for a low price (again, the belief that the risk of default was very low).
Investment Banks (nothing new)
The investment banks saw an opportunity to deliver paper to hungry investors (for yield) and simply looked for ways to deliver that yield - ever more risky assets ended up in paper that was sold to the market. It was then not the assets themselves but their structuring that let to the higher yield. Perhaps investors were not willing to take on higher yield in a risky asset by itself, but, if it was packaged in a particular way, then they were able to take it.
These two were not only spark plugs, but, they were necessary conditions for the feeding frenzy to continue (with one additional item - the appreciation of homes - for the party to continue homes actually had to appreciate in value).
While there were spark plugs and necessary conditions. There were other things that permitted to fire to expand so fast. Like the wind is to a fire, there was the channel itself - Wall Street needed paper with a higher yield to put into securities (because they were able to convince investors, for whatever reason, that it was good), well, "we know how to find mortgages" and by the way if you didn't like the yield I found you the last time (high LTV, high DTI), here is how we can find more yield (stated income, lower FICO)... So, what is the channel? it is composed of mortgage bankers, mortgage brokers, realtors (who were able to sell more homes), appraisers (who were able to make more appraisers), and others...
So, it was a great, great world - borrowers were able to get better and bigger homes, brokers and mortgage bankers made fortures, realtors sold homes like never before, appraisers had more business than ever (and btw, to remain competitive they needed to become more lax in their stds, because otherwise, the bank - who pays them would simply go next door - this is a different topic, how do you uphold your stds in feeding frenzies and still manage to do business, it is almost like losing in every direction, but, this point applies to everybody - brokers, bankers, appraisers, wall street and even investors), wall street was getting some fat fees, and investors were getting great yield.
Which gets me to the following point (which is already implied up there)... whenever
(1) a deep belief (that is contingent on certain (up to that point) illogical elements happening) is ingrained in a market (can be led by some of the players),
(2) that is linked to a (significant) profit opportunity among many dispersed players, and
(3) not everybody has the same information, and
(4) those with the most information are compensated based on commissions (not taking any risk or if they can control the risk - for example, mtg bankers taking equity out of their companies every year)
other necessary elements:
- hot potato based on risk - people believe that if you ever run into trouble, you can simply unload by selling
- belief that the private markets always come up with the optimal outcome and that they regulate themselves (i.e. excessive risk taking would come by the way of losses)...
- transaction based income for main players - no skin in the creation of the hot potato...
the results?
Investors: made yield for many years, hot potato was dispersed (although some took real risk)
Investment Banks: made money, transactions, profits during those years? hot potato write-off (the little of what remained)
Brokers: made money, transactions, no skin
Bankers: made money, transactions, pulled a lot of money out
Realtors: made money, transactions, no skin
Appraisers: made money, transaction, could lose their license.
Mortgage holders: they are the ones that are holding the two key assets: the homes (that can drop in value) and the mortgage (that they can potentially not be able to pay) - some however, got a mortgage that they would not have gotten otherwise and will still be ok...
Monday, November 5, 2007
On religions, nationalism
I used to be a very nationalistic person growing up, and my feelings towards that happen to be the same as they are today about religion.
I feel that there are simply two routes to tolerance and peaceful living for human beings:
1) Preferred but impractical (hard to believe everyone can achieve this and even a minority not achieving it can create problems): go beyond our borders to learn about other people's culture and/or religion, and understand them as we do our own. Only doing that will we grow to respect them and enrich our own views.
2) The only practical solution in today's world (because of the inability to do the above): Leave culture and religion in a second degree to a secular/global vision of the world (probably following a liberal mindset) where we put our commonalities ahead of our differences and we see ourselves as citizens of the world (and not of a particular country or members of a particular religion).
I feel that there are simply two routes to tolerance and peaceful living for human beings:
1) Preferred but impractical (hard to believe everyone can achieve this and even a minority not achieving it can create problems): go beyond our borders to learn about other people's culture and/or religion, and understand them as we do our own. Only doing that will we grow to respect them and enrich our own views.
2) The only practical solution in today's world (because of the inability to do the above): Leave culture and religion in a second degree to a secular/global vision of the world (probably following a liberal mindset) where we put our commonalities ahead of our differences and we see ourselves as citizens of the world (and not of a particular country or members of a particular religion).
Right in the middle of another bubble...
I've found myself within two bubbles - Internet 99-00 and the Mortage Industry 05-07.
I ended up fully immersed within the first one, believing (like many people did) that we were experiencing a new paradigm - a new economy, new productivity, therefore new valuations. I ended up believing that the traditional valuation models were not accurately measuring the potential of the new economy - forget Graham, Buffet, or any other traditional financial mind. Buffet himself said he would never invest in MSFT because he didn't understand it. I left the bubble promising myself that I would never committ the same mistake twice - traditional finance will never grow old, stick to traditional fundamentals when evaluating any business.
With that same mindset I arrived in the mortgage industry in late 05. I had been following the "housing bubble" for quite some time (since late 2001), and the fact that it had not burst yet, made me doubt, but, sticking to fundamentals had been deeply ingrained by then. Applying that traditional logic to the mortgage industry didn't lead me to doubt about its sustainability. Mortgages were originated and then sold off into securities (that had many forms - MBS, CDOs, etc), so as long as the market was willing to invest in these securities, mortgage origination equity would never go bad. The housing bubble did burst (as expected), but, it took with it the whole non-agency mortgage origination industry. Where had I been wrong? Was I fooled for a second time? I was inside and I ended up believing in things in the same way I did in 1999?
Yes and no. Yes, I could have seen what happened within before, in fact I did see it, but, I wasn't able to understand the ramifications until they really hit the industry.
Here was some of my faulty logic:
Stated Income loans - I knew it was pretty crazy; I questioned why lenders would ask for the income in the first place (if it was a lie anyway), but, I believed that since the market was pricing that risk, it was already being taken into consideration (by means of a higher yield).
I should have asked myself if the market was actually pricing it correctly and if the market actually knew the fundamentals of this type of lending (no and no)
Negative Amortization loans - I fully understood what they were and understood that you needed high FICO scores to get them... should I have asked myself that in a situation where property prices are depreciating, not even high FICO scores would repay those loans.
Fee structures not being transparent to borrowers - instead of taking it as industry practice, should I have asked myself if that was actually right and if things needed to be that way?
The whole market banking on eternal home price appreciation -> pretty foolish, but, we all got carried away.
In hindsight, everything is easy, the hard part is really learning from every single situation.
I ended up fully immersed within the first one, believing (like many people did) that we were experiencing a new paradigm - a new economy, new productivity, therefore new valuations. I ended up believing that the traditional valuation models were not accurately measuring the potential of the new economy - forget Graham, Buffet, or any other traditional financial mind. Buffet himself said he would never invest in MSFT because he didn't understand it. I left the bubble promising myself that I would never committ the same mistake twice - traditional finance will never grow old, stick to traditional fundamentals when evaluating any business.
With that same mindset I arrived in the mortgage industry in late 05. I had been following the "housing bubble" for quite some time (since late 2001), and the fact that it had not burst yet, made me doubt, but, sticking to fundamentals had been deeply ingrained by then. Applying that traditional logic to the mortgage industry didn't lead me to doubt about its sustainability. Mortgages were originated and then sold off into securities (that had many forms - MBS, CDOs, etc), so as long as the market was willing to invest in these securities, mortgage origination equity would never go bad. The housing bubble did burst (as expected), but, it took with it the whole non-agency mortgage origination industry. Where had I been wrong? Was I fooled for a second time? I was inside and I ended up believing in things in the same way I did in 1999?
Yes and no. Yes, I could have seen what happened within before, in fact I did see it, but, I wasn't able to understand the ramifications until they really hit the industry.
Here was some of my faulty logic:
Stated Income loans - I knew it was pretty crazy; I questioned why lenders would ask for the income in the first place (if it was a lie anyway), but, I believed that since the market was pricing that risk, it was already being taken into consideration (by means of a higher yield).
I should have asked myself if the market was actually pricing it correctly and if the market actually knew the fundamentals of this type of lending (no and no)
Negative Amortization loans - I fully understood what they were and understood that you needed high FICO scores to get them... should I have asked myself that in a situation where property prices are depreciating, not even high FICO scores would repay those loans.
Fee structures not being transparent to borrowers - instead of taking it as industry practice, should I have asked myself if that was actually right and if things needed to be that way?
The whole market banking on eternal home price appreciation -> pretty foolish, but, we all got carried away.
In hindsight, everything is easy, the hard part is really learning from every single situation.
Sunday, September 9, 2007
Second Life: A good introspection into society...
There was an article in NYT on Second Life, the online digital world and I thought it was pretty significant how much (just thinking about it) expands our thinking horizons. It essentially allows for a better understanding of our own world ( in my mind). As people log-in, societies are born. At some point they will also start to look for ways to organize - socially and economically. The exchange of goods and services take root, money is born, markets are born. Perhaps people would like to establish rules that would regulate their lives, and entrust the making (and enforcing) of those rules on some people in particular, and governments are born... and perhaps citizenships are granted... we get the message, I think it is fascinating to think about the possibilities within that digital world - it takes me back to 2000, when while in El Sitio, a 3D world was created (I thought about this endless world of possilbities), but with dial-up internet in LatAm, it was far ahead of its time:
Excerpts from the article:
When people are given the opportunity to create a fantasy world, they can and do defy the laws of gravity (you can fly in Second Life), but not of economics or human nature. Players in this digital, global game don’t have to work, but many do. They don’t need to change clothes, fix
their hair, or buy and furnish a home, but many do. They don’t need to have drinks in their hands at the virtual bar, but they buy cocktails anyway, just to look right, to feel comfortable.
"What does Second Life say about us, that we trade our consumerist-oriented culture for one that’s even worse?"
Second Life, a three-dimensional world built by hundreds of thousands of users over the Internet, is also being used for education, meetings, marketing and more obvious game playing.
Many residents have lived the American dream in Second Life, and built Linden-dollar fortunes through entrepreneurship.
You use a credit card to buy Lindens, and Lindens earned during the game can be converted back into dollars via online currency exchanges
Nobody can go hungry, there is no actual need for warmer clothes or shelter, and there is much to do without buying Lindens.
Big corporations like Toyota have set up islands in Second Life for marketing. Calvin Klein came up with a virtual perfume. Kraft set up a grocery store featuring its new products. But those destinations are not popular.
"These brands that have this real-world cachet are meaningless in Second Life, so most are ignored
But the more mundane items are what really drive the economy: clothes, gadgetry, night life, real estate. "People buy these huge McMansions in Second Life that are just as ugly as any McMansions in real life, because to them that is what’s status-y," Mr. Wallace said. "It’s not as easy as we think to let our imaginations run wild, in Second Life or in real life."
Land is the biggest-ticket item in Second Life, with Linden Lab selling islands for $1,675, plus a $295-a-month maintenance charge.)
"The money is in the real-looking stuff: making skins with red lips and smoky eyes, and stiletto boots," said Ms. Hawkins, the Second Life fashion writer. First comes something popular, then the knockoffs. Soon everyone has one. "People go for similar looks and similar things," she said.
you think in Linden dollars. When something is expensive, even though it comes out to a few dollars, a lot of people don’t want to spend that much money."
Although Linden dollars can be bought with a credit card, there is evidence that the in-world economy is self-sustaining, with many players compelled to earn a living in-world and live on a budget.
Surprisingly, many take on low-paying jobs. They work as nightclub bouncers, hostesses, sales clerks and exotic dancers for typical wages of 50 to 150 Linden dollars an hour, the equivalent of 19 to 56 cents. A recent classified ad stated: "I am looking for a good job in SL. I am sick of working off just tips." This job seeker listed potential occupations as landscaper, personal assistant, actor, waitress and talent scout.
Second Life players are evidently discovering what inheritors have struggled with for generations: It’s not as much fun to spend money you haven’t earned. Apparently, despite the common lottery-winning fantasies, all play and no work is a dull game, after all.
"People don’t take jobs just for the money," said Dan Siciliano, who teaches finance at Stanford Law School and has studied the economies of virtual worlds. "They do it to feel important and be rewarded."
It’s not just vanity that drives people to dress up in Second Life. It’s also seen as good for business. Ms. Fitzpatrick, the landlady, says she doesn’t really care about how her avatar looks. But she cares about what prospective tenants think. "I felt I had to go, finally, and buy the hair and the suit," she said, "or my customers might think I’m too weird."
THE stock exchanges and banks in SL are imposing, but they are unregulated and unmonitored. Investors fed Linden dollars into savings accounts at Ginko Financial bank, hoping to earn the promised double-digit interest. Some did, but in July there was a run on the bank and panic spread as Ginko A.T.M.’s eventually stopped giving depositors their money back. The bank has since vanished. With no official law and order in Second Life, investors have little recourse.
Some Second Life residents are calling for in-world regulatory agencies — the user-run Second Life Exchange Commission has just begun operating — and some expect real-world institutions to become involved as the Second Life population and economy expands. "It’s a horse race as to whether the I.R.S. or S.E.C. will start noticing first," Mr. Duranske said. ■
Excerpts from the article:
When people are given the opportunity to create a fantasy world, they can and do defy the laws of gravity (you can fly in Second Life), but not of economics or human nature. Players in this digital, global game don’t have to work, but many do. They don’t need to change clothes, fix
their hair, or buy and furnish a home, but many do. They don’t need to have drinks in their hands at the virtual bar, but they buy cocktails anyway, just to look right, to feel comfortable.
"What does Second Life say about us, that we trade our consumerist-oriented culture for one that’s even worse?"
Second Life, a three-dimensional world built by hundreds of thousands of users over the Internet, is also being used for education, meetings, marketing and more obvious game playing.
Many residents have lived the American dream in Second Life, and built Linden-dollar fortunes through entrepreneurship.
You use a credit card to buy Lindens, and Lindens earned during the game can be converted back into dollars via online currency exchanges
Nobody can go hungry, there is no actual need for warmer clothes or shelter, and there is much to do without buying Lindens.
Big corporations like Toyota have set up islands in Second Life for marketing. Calvin Klein came up with a virtual perfume. Kraft set up a grocery store featuring its new products. But those destinations are not popular.
"These brands that have this real-world cachet are meaningless in Second Life, so most are ignored
But the more mundane items are what really drive the economy: clothes, gadgetry, night life, real estate. "People buy these huge McMansions in Second Life that are just as ugly as any McMansions in real life, because to them that is what’s status-y," Mr. Wallace said. "It’s not as easy as we think to let our imaginations run wild, in Second Life or in real life."
Land is the biggest-ticket item in Second Life, with Linden Lab selling islands for $1,675, plus a $295-a-month maintenance charge.)
"The money is in the real-looking stuff: making skins with red lips and smoky eyes, and stiletto boots," said Ms. Hawkins, the Second Life fashion writer. First comes something popular, then the knockoffs. Soon everyone has one. "People go for similar looks and similar things," she said.
you think in Linden dollars. When something is expensive, even though it comes out to a few dollars, a lot of people don’t want to spend that much money."
Although Linden dollars can be bought with a credit card, there is evidence that the in-world economy is self-sustaining, with many players compelled to earn a living in-world and live on a budget.
Surprisingly, many take on low-paying jobs. They work as nightclub bouncers, hostesses, sales clerks and exotic dancers for typical wages of 50 to 150 Linden dollars an hour, the equivalent of 19 to 56 cents. A recent classified ad stated: "I am looking for a good job in SL. I am sick of working off just tips." This job seeker listed potential occupations as landscaper, personal assistant, actor, waitress and talent scout.
Second Life players are evidently discovering what inheritors have struggled with for generations: It’s not as much fun to spend money you haven’t earned. Apparently, despite the common lottery-winning fantasies, all play and no work is a dull game, after all.
"People don’t take jobs just for the money," said Dan Siciliano, who teaches finance at Stanford Law School and has studied the economies of virtual worlds. "They do it to feel important and be rewarded."
It’s not just vanity that drives people to dress up in Second Life. It’s also seen as good for business. Ms. Fitzpatrick, the landlady, says she doesn’t really care about how her avatar looks. But she cares about what prospective tenants think. "I felt I had to go, finally, and buy the hair and the suit," she said, "or my customers might think I’m too weird."
THE stock exchanges and banks in SL are imposing, but they are unregulated and unmonitored. Investors fed Linden dollars into savings accounts at Ginko Financial bank, hoping to earn the promised double-digit interest. Some did, but in July there was a run on the bank and panic spread as Ginko A.T.M.’s eventually stopped giving depositors their money back. The bank has since vanished. With no official law and order in Second Life, investors have little recourse.
Some Second Life residents are calling for in-world regulatory agencies — the user-run Second Life Exchange Commission has just begun operating — and some expect real-world institutions to become involved as the Second Life population and economy expands. "It’s a horse race as to whether the I.R.S. or S.E.C. will start noticing first," Mr. Duranske said. ■
PR Status: Don't exercise the option early
There are a number of reasons why PR should (continue to) postpone the status issue further into the future, despite its 50+ years discussion. Being faithful to my training, I will summarize the reason why PR needs to wait in financial terms: PR owns an option with unlimited expiration, and options have time value if unexercised (and no time value if exercised). PR has the option but not the obligation to decide its political destiny at some point into the future.
Before I am crucified because of this simplistic and "colonial" explanation, let me explain what I mean. Nobody knows how the future will look like or what the future will bring to PR or how the world will look. There is an extreme world under which I a majority of Puertorricans would choose to become a state and another extreme under which a majority of Puertorricans would choose to become an independent state. Between those two worlds, we move and try to give shape to our world. On one extreme, a peaceful, capitalist, democracy rich, with free flow of capital and goods (and potentially people) world would reduce the advantages of statehood while granting value to the flexibility of being an independent country. On the other extreme, a polarized world, where democracy and/or capitalism are threatened, or where trade barriers are being imposed, would call f0r potentially aligning ourselves with the "good guys." In all likelihood, the world will navigate between those two extremes.
The option also exhibits additional value for PR: Puertorricans are split in half regarding the two options (although over 95% would like to have some type of monetary union with the US and would like to remain US citizens). Forcing PR's to choose is wasteful spending of money, people's time, national attention and it changes the people's focus on what should matter. What the population should be focused on is on improving the economy, our skills, the standard of living of all PRs and extracting as much of the population as we can from poverty, providing good education for all PRs and creating a peaceful and loving society.
What does the status has to do with any of this!? The status discussion only detracts from those goals. It puts common economic and social views on different camps because of ideological separation. In other words, leaders who share the same thoughts about how to move PR forward, can't agree on anything just because they have different status ideologies.
Luis Munoz Marin used the ELA, the option, as a tool for development - and he indeed showed it, but, the status discussion has been retarding our development now for close to 35 years. There is nothing we gain from statehood or independence that we can' t do with the current status. The additional federal funds (under statehood) or the ability to enter into int'l treaties or cheaper cargo costs (under independence) are just a couple of the hundred examples the two sides could come up with as to why we should become one or the other.
The bottom line is that PRs ability to produce goods and services and to educate itself with tomorrow's technologies has nothing to do with the status, but, with the willingness and the productivity of the residents of PR. In a way, it is the status "issue" is what is really holding back our development. It is this generation's responsibility to go back to the thoughts that Munoz laid out in the 1940s-1950s: setting up a path for a peaceful society that is forward looking, but, that also understands its past; a society that has an international mindset and that is committed of leaving its imprint in the world. Once a higher level of development is reached, once we have an educated society that understands and respects its past and is not afraid of the future, and once PR is confident about its place in the world, a majority of the population will see a very clear choice in front of them: be it statehood, be it independence or any other status that is internationally accepted at the time, it will be very clear. Maintaining the 50/50 fight will simply drive us farther from that goal.
Before I am crucified because of this simplistic and "colonial" explanation, let me explain what I mean. Nobody knows how the future will look like or what the future will bring to PR or how the world will look. There is an extreme world under which I a majority of Puertorricans would choose to become a state and another extreme under which a majority of Puertorricans would choose to become an independent state. Between those two worlds, we move and try to give shape to our world. On one extreme, a peaceful, capitalist, democracy rich, with free flow of capital and goods (and potentially people) world would reduce the advantages of statehood while granting value to the flexibility of being an independent country. On the other extreme, a polarized world, where democracy and/or capitalism are threatened, or where trade barriers are being imposed, would call f0r potentially aligning ourselves with the "good guys." In all likelihood, the world will navigate between those two extremes.
The option also exhibits additional value for PR: Puertorricans are split in half regarding the two options (although over 95% would like to have some type of monetary union with the US and would like to remain US citizens). Forcing PR's to choose is wasteful spending of money, people's time, national attention and it changes the people's focus on what should matter. What the population should be focused on is on improving the economy, our skills, the standard of living of all PRs and extracting as much of the population as we can from poverty, providing good education for all PRs and creating a peaceful and loving society.
What does the status has to do with any of this!? The status discussion only detracts from those goals. It puts common economic and social views on different camps because of ideological separation. In other words, leaders who share the same thoughts about how to move PR forward, can't agree on anything just because they have different status ideologies.
Luis Munoz Marin used the ELA, the option, as a tool for development - and he indeed showed it, but, the status discussion has been retarding our development now for close to 35 years. There is nothing we gain from statehood or independence that we can' t do with the current status. The additional federal funds (under statehood) or the ability to enter into int'l treaties or cheaper cargo costs (under independence) are just a couple of the hundred examples the two sides could come up with as to why we should become one or the other.
The bottom line is that PRs ability to produce goods and services and to educate itself with tomorrow's technologies has nothing to do with the status, but, with the willingness and the productivity of the residents of PR. In a way, it is the status "issue" is what is really holding back our development. It is this generation's responsibility to go back to the thoughts that Munoz laid out in the 1940s-1950s: setting up a path for a peaceful society that is forward looking, but, that also understands its past; a society that has an international mindset and that is committed of leaving its imprint in the world. Once a higher level of development is reached, once we have an educated society that understands and respects its past and is not afraid of the future, and once PR is confident about its place in the world, a majority of the population will see a very clear choice in front of them: be it statehood, be it independence or any other status that is internationally accepted at the time, it will be very clear. Maintaining the 50/50 fight will simply drive us farther from that goal.
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