The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. . . . The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too. What are the odds that people will make smart decisions about money if they don’t need to make smart decisions — if they can get… Read more →
EppsNet Archive: Finance
EppsNet Book Reviews: The Big Short by Michael Lewis
I worked in the information technology department of a mortgage bank in the run-up to the 2007 implosion of the subprime mortgage market . . . Given that it was fairly evident at the time that complicated financial instruments were being dreamed up for the sole purpose of lending money to people who could never repay it, it’s remarkable that very few people foresaw the catastrophe and that even fewer actually had the nerve to bet on it to happen. Long story short, the major rating agencies — Standard and Poor’s and Moody’s — were incompetent in their rating of subprime mortgage bonds, giving investment-grade and, in some cases, triple-A ratings to high-risk instruments. A lot of people took the ratings — which implied that subprime mortgage derivatives were no riskier than U.S. Treasury bonds — at face value and acted accordingly. But there were also some interesting psychological factors in play, not… Read more →
Academically Speaking, I’ve Still Got the Geedus
I took a Computational Finance midterm over the weekend on Coursera. I’ve taken a few Coursera classes before — they had quizzes, problem sets, programming assignments, essays — but none of them had a midterm or final exam. It’s the first academic exam I’ve taken in at least a couple of decades, and the first exam ever in which — because it was online — I was able to participate in the company of my life partner, Wild Turkey. Here’s my result: I lost the one point on this question right here: If you understand the question, it’s obvious which one of the four I missed, but it may not be obvious what the right answer is. It wasn’t to me, anyway. My wife asks, “Did you see the grading curve?” “No, but when you score 149 out of 150, you leave it to others to worry about the curve.” Read more →
Will Financial Regulation Make a Difference?
Banks are expected to find ways to offset the impact of the new financial regulations on their earnings, though they face a potentially complex process of adapting to the new requirements, analysts said on Friday. The share prices of some of the biggest United States banks, including Citigroup, JPMorgan Chase and Bank of America, were higher in afternoon trading, hours after a House-Senate conference committee completed work on a bill that would toughen financial regulations. Analysts pored over the specifics of the deal as they emerged on Friday and expressed a wide array of views about the impact it would have. Some saw the bill as more of a political statement than a practical measure that could prevent another financial meltdown. Others said banks’ costs would increase, but banks would pass the increased costs along to consumers. — NYTimes.com Read more →
Goldman Sachs
I was shocked and dismayed –I think we all were- to learn that Goldman Sachs had been involved in whatever it was they did. I had always ranked them with unlicensed boxing promoters and taxi drivers in Cairo, as people who inspire one with absolute confidence. — Chase me ladies, I’m in the cavalry Read more →