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Friday, March 6, 2009

A major factor in how we got here.

*these three articles epitomize the financial crisis. The article from Conde Nast on the Gaussian copula formula that helped to not have to value CDS (credit default swaps) is a must read. Its all about the risk and the go to any lengths mentality to avert it. The other two are about how good, solid, conservative institutions got in over their head thinking they could catch the gravy train without ever really having to say their sorry, for giving mortgages and loans to anyone who came in through the door, real or imagined. I decided that this was enough to read for one morning while awaiting the jobs numbers.

*please note..I happen to believe after all I have learned these past two years, that subprime has lots of definitions, i.e., prime borrowers, who are defaulting at a much faster rate due to housings severe drop in prices, are now subprime; liar loans, having nothing to do with "subprime" but rather, "speculation;" Alt-A's and ARM's were sold primarily to "prime borrowers." So blaming Carter's and Clinton's and even Bush's ownership society mantras has become disingenuous, at the very least!

HSBC-Household Finance merger legitimized subprime loans
Until 2002, when HSBC bought U.S. finance company Household Finance, lending money to homeowners who could not get credit from retail banks was seen as somewhat disreputable. HSBC provided the subprime business a measure of respectability and, as one hedge fund manager said, gave capital markets the "assurance that got this subprime-mortgage thing really rocking." International Herald Tribune (05 Mar.)

The Formula That Killed Wall Street
by Felix Salmon
Mathematician David Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

Crisis spurs scrutiny of theory of efficient markets
The efficient-market theory, the concept that markets will price all available data into assets, has sustained a number of blows in the past decade. Dot-com companies in the late 1990s earned little and yet were valued in the billions of dollars. More recently, investors underestimated the risks associated with bundling subprime mortgages. The developments raise fundamental questions about why regulators allowed an unsustainable bonus culture to persist. The Economist (05 Mar.)

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