http://ampedstatus.com/the-financial-oligarchy-reigns-democracys-death-spiral-from-greece-to-the-united-states

I don't believe that the “Stock Jobbers" will sop their attack on the euro, they'll start again at the next opportunity

money attacks explained to the dummies

Europe's Debt Crisis: Your Questions Answered - New York Times (blog) http://tinyurl.com/2dscn7r

http://www.zerohedge.com/ "Goldman Can Create Shorts Faster Than Europe Can Print Money"

and Moody should be rated BBB- too

"Hey, Moody’s, why didn’t you tell us about the SEC’s Wells Notice until now? "

http://bit.ly/aEXCVy

you are more intelligent than the experts, and we need your science

never said so, but you said that I said it, when I just brought links, must be your desir to prove that I'm wrong, or your love for me ! LMAO

there is no end to this vicious circle, only the abandon of the euro, will make the economical engine of Europe restart ! and just keep the euro as a exchange money only for the banks

Why the Euro Is Doomed http://bit.ly/bPxE5E

comment #59

“All bubbles are also information problems. Values and prices go out of whack. Where do we find the truth about the real value of things to prevent the emergence of a bubble?”

I have been giving this topic a lot of thought recently. I work for a company that provides risk management software for the financial industry, and I have long felt that securitized products such as collateralized debt obligations coupled with credit default swaps were simply too complex for accurately measuring and valuing risk exposure.

While I still hold this opinion, I believe it is only part of the story. The real culprit, I feel, is how management makes decision based upon incomplete information during market bubbles.

At the heart of this recent financial shock was the downturn in the US housing market. While the housing market, like most markets, has historically been subject to periodic downturns, this cycle was different due to the widespread of securities linked to subprime mortgages. The International Monetary Fund estimated that costs associated with subprime write-offs could reach as high as $1 trillion. These securities were linked to subprime mortgages through complex securitized products known as collateralized debt obligations.

The 1968 Charter Act allowed the newly created organization, Fannie Mae, to purchase mortgages from banks and pool them into what is known as mortgage-backed-securities. These new securities were then sold off to investors. As the market for these mortgage-backed securities matured, investment banks found ways for creating new products. One such way was pooling these assets yet again through securitization. This became a method for financing assets that were combined into pools that were then split into shares, or ‘tranches,’ and sold as collateralized debt obligations – ‘CDOs.’ This was a method widely used for packaging and selling subprime mortgages to investors seeking higher yields.

What made these new synthetic instruments difficult to accurately value and model from a risk perspective was their complex structure. A subprime mortgage would be pooled into a mortgage-backed security containing other subprime mortgages and sold as securities. These mortgage-backed securities would then be pooled further into new securitized products, CDOs, that would then be carved into specific tranches and sold. The higher tranches had the best ratings and had the least chance of default. These tranches were rated AAA. The lowest tranches were BBB, and were considered on par with junk bonds, risky, but carried high premiums attractive to investors.

In many cases, insurance products known as credit default swaps would be tied to specific tranches to help increase their credit worthiness. If a tranche were in trouble due to payment default, the issuer of the credit default swap would step in to pay the principal.

Trying to measure a firm’s risk exposure with regards to these instruments is challenging. One of the most widely used risk models is called VaR – Value at Risk. This model measures the boundaries of risk in a portfolio over short durations. In the 1990’s, as the use of derivative securities were exploding, the Securities and Exchange Commission, and later, the Basel Committee on Bank Supervision validated VaR’s calculations by allowing financial institutions to use it for measuring risk exposure and setting their capital requirements to offset that risk.

However, a risk information management system is only as good as the quality of the underlying data used and the ability to accurately model information. Making the risk modeling effort difficult was the complex nature of these securitized of debt instruments. There was insufficient data and the modeling techniques used were poor. The standard risk models used for CDO portfolios failed to take into account the whole risk distribution of the subprime assets within them. It was extremely difficult and time consuming to actually determine the underlying details of a subprime mortgage within a mortgage-backed security, within a CDO, broken out into a specific tranche. Instead, risk managers often analyzed CDO’s by relying on computer simulation techniques such as a Monte Carlo simulation.

The Monte Carlo simulation was the primary risk model used by the rating agency, Moody’s Investor Services, in determining the default risk of specific tranches within a CDO. Despite relying on this sophisticated and highly quantitative model, Moody’s still had problems getting sufficient data and being able to accurately model these complex instruments. During their process for assigning ratings, absent of the necessary data, they had to review each contractual document of the issued CDO and any credit default swap assigned to a specific tranche. This was a highly intensive manual process in a market where over $520 Billion worth of CDO’s were issued in 2006, alone.

Nevertheless, financial institutions were relying on these quantitative models either directly, or through the credit rating agency. This gave a false comfort that their risk models were complete and that everything they needed to measure was within them. These firms tended to focus on risk modeling where there was data, rather than risk modeling where there was risk.

The US Government Accountability Office’s reviewed many of the leading financial institutions and presented their findings in a testimony to the Subcommittee on Securities, Insurance and Investments, Committee on Banking, Housing, and Urban Affairs, in the U.S. Senate. In their ‘Oversight of Risk Management Systems,’ they found weaknesses throughout the risk management systems these firms were using. Even though the weaknesses were known to exist before the crisis occurred, many of the troubled financial institutions still used their results to justify capital reserves. These reserves proved to be grossly inadequate, causing a liquidity crisis where the government was forced to step in.

Despite the faultiness of these quantitative models, there were warning signs that the US housing market was in trouble. Two such signs were the rapid growth of the number of subprime loans that were being packaged into CDOs, and the alarming concentration of these loans in specific areas of the country.

In 2000, there was $130 billion in subprime mortgage lending, with $55 billion of that repackaged as Collateral Debt Obligations. By 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. In 5 years, the total number of subprime mortgages had grown by 400%, while the number of subprime mortgages that were packaged into securitized products had grown over 820%. Equally alarming, was that the historical average home price ratio to income was 3:1. However, it had increased to over 11:1 in Los Angeles, 8.5:1 in Miami, and 8:1 in New York. It was these distortions that caught the attention of the few firms who spotted a problem in the subprime housing market.

As early as 2004, Ivy Zelman, the housing market analyst for Credit Suisse voiced her concern. It wasn’t just the unprecedented distortions in certain areas that alarmed her, but also that many of the buyers in these areas were not real buyers, they were speculators. All that was required for a BBB bond tranche, the lowest tranche in a CDO to go to zero was for the default rate on the underlying loans to reach 14 percent. Areas such as Los Angeles, Miami and New York could easily hit these default rates.

Why weren’t alarm bells going off in the standard risk models that were being used? This goes back to the difficulty in understanding the risk distribution of the subprime assets within them. Due to the numerous layers of securitization that took place, it was a challenge to determine what percentage, if any, of the tranche was concentrated in these high-risk regions and what the default rates were.

Francis Diebold, a professor of economics, finance and statistics at Wharton argues that it is important for users of models to maintain a healthy skepticism about those models. Managers involved in analyzing their firm’s risk exposure must constantly question the models that are being used and assume something can be terribly wrong.

There were a few firms that managed to get out in time. These firms were able to spot early signs indicating that the subprime market was in trouble, and they managed to avoid its collapse. What separated these firms from everyone else was that when the warning signs began to appear, they refused to solely rely on their quantitative models, and instead, verified their skepticism through alternative approaches that the market was in trouble.

This skepticism is what helped Steve Eisman, general partner at the Hedge Fund FrontPoint Partners, a firm that successfully shorted the subprime market. Prior to FrontPoint, Steve was a finance analyst that researched companies tied to the housing market. By the spring of 2005, FrontPoint was convinced that the underpinnings of the US mortgage market was in trouble. Where Steve turned next was not to his risk models, but to examine what was actually happening in the market, particularly to the major players, the mortgage brokers themselves.

Throughout the subprime industry, by 2006, mortgage brokers and firms specializing in subprime mortgages were in trouble. In January 2006, Ameriquest Mortgage Company, one of the largest subprime lenders, was investigated and fined $325 Million for misleading and predatory lending. By Q4 of 2006, New Century, the third largest mortgage broker in the US was in trouble suffering major losses, and in early 2007, two Bear Stearns hedge funds that invested in subprime mortgages were shut down suffering losses of over $4 Billion.

Paulson and Co., a hedge fund that reaped significant profits of almost $15 Billion by shorting the subprime market between 2007 and 2008, became concerned as early as 2005. In his statement before the U.S. House of Representatives Committee on Oversight and Government Reform, Paulson stated that due to weak credit underwriting standards and excessive leverage among the firms investing in these assets, he began tracking published delinquency rates and determined that the subprime mortgage market was in trouble.

If the quantitative risk models were not picking up that something was wrong in the subprime mortgage market, there were still numerous warning signs that were widely available. Why didn’t firms such as Lehman Brothers, who filed for bankruptcy on September 15th, 2008, see them?

Between 2006 and the first two quarters of 2008, Lehman Brothers sought an aggressive 13% annual growth model for revenues. This was reflected in its share price. On January 29, 2008, Lehman reported revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending November 30th, 2007. On September 12th, 2008, Lehman’s stock declined to $4 per share. Three days later, Lehman Brothers filed for Chapter 11 protection.

During this period, as a way to achieve this incredible growth, Lehman increased its use of leverage and its risk appetite with a major concentration in the subprime market. By 2007, the firm had raised its risk limits from $2.3 billion to $3.5 billion, eventually reaching as high as $4 billion in early 2008.

Using this expanded increase in acceptable risk, in early 2007, Lehman was still aggressively expanding its presence in the subprime market through its Aurora subsidiary. This was occurring at a time when Lehman’s own housing analysts were sounding alarms about disturbing trends with regards to Aurora’s mortgage maker program. In the United States Bankruptcy Court Southern District of New York. In Re: Lehman Brothers Holdings Inc. Chapter 11 – Case No. 08-13555, the examiner, Anton Valukas provided internal emails of those sounding alarms:

“Looking at the trends on originations and linking them to first payment defaults, the story is ugly: The last four months of Aurora has originated the riskiest loans ever, with every month being riskier than the one before – the industry meanwhile has pulled back during that time”

By May, 2007, Lehman got further involved in real estate investments through the $22 Billion acquisition of Archstone, a massive real estate investment trust, even though this deal would cause the firm to completely exceed its already increased risk limits and wipe out any liquidity.

Lehman was not alone in their reliance on complex risk models in navigating through the decline in the U.S. housing market. AIG was in a similar situation. The Financial Products unit at AIG had made billions of dollars by underwriting insurance through credit default swaps that were packaged into CDOs. Throughout 2007, AIG was increasingly alarmed at their exposure to this declining market. Internal emails at AIG show their executives laboring to understand the flaws in Financial Product’s once vaunted mathematical models and debated how much to disclose to investors.

By the end of 2007, AIG was in a dispute with their client, Goldman Sachs, regarding the valuation methods that they were using to measure a number of CDOs that they insured. PriceWaterhouseCoopers, AIG’s auditors, demanded that AIG provide greater disclosure on the risks in the credit insurance it had written. By forcing AIG to pay the terms on the insurance products, which totaled $6.6 billion, Goldman pushed AIG into a liquidity crisis

In comparing AIG and Lehman, we see a common pattern of two firms who relied heavily on questionable risk and valuation models in making decisions on their capital reserves. Due to the prior enormous growth and profitability, these firms became overzealous and stopped being careful, despite clear warning signs that the US housing market was in trouble. As a result, these firms took greater risk where they became overly leveraged and ill prepared for when the market deflated.

While I think that there were many dirty players, Franks Schumer & Dodd were among them along with Fannie and Freddie. They were just as bad as the mortgage brokers pushing this junk. However, it takes two to tango and investors were at fault as well.

Risk models such as VaR, were inadequate for capturing the complex information necessary for measuring risk associated with securitized products such as collateralized debt obligations and credit default swaps. Until risk models such as VaR can accurately value and measure risk, financial firms should not be permitted in using them to justify and set their capital reserves.

comment #78

“The first is the phenomenon of outrunning your information headlights.”

I attended a recent lecture with Jonathan Lu, professor of structured finance at MIT where he spoke about the risk of data silos and the difficulty in concentrating on complex data sets, especially with outside noise that could distract us.

In this exercise, he played this video (there was no narration in his), and to make things challenging, he counted out random numbers to distract us:

http://viscog.beckman.illinois.edu/flashmovie/15.php

looks like that those who are supposed to get infos aren't perfect, and can miss important infos, and thus not preventing them to happen, it's so that Moody missed the infos on Greece earlier


http://pajamasmedia.com/richardfernandez/2010/05/08/the-trouble-with-tulips/#comments

"This entire article which you've cut and pasted in is about the US housing bubble, and the way government policy increased the risk, NOT soverign debt or backstoping banks"

If you've read that, I'd rather cared for the description of computer data risks models, and that they aren't adequate for certain products

"Risk models such as VaR, were inadequate for capturing the complex information necessary for measuring risk associated with securitized products such as collateralized debt obligations and credit default swaps. Until risk models such as VaR can accurately value and measure risk, financial firms should not be permitted in using them to justify and set their capital reserves."

STRATFOR's newest Geopolitical Weekly by George Friedman - The Global Crisis of Legitimacy http://bit.ly/cSkqGK

This week's GeoPol examines the concept of European identity and how it contributes to the Greek crisis http://bit.ly/9NT150

just a bit of light onto what is the reality in EU, that you criticised so much before !

now, for the fun, one more:

http://tinyurl.com/284moso Russia Fears Weaker Obama, Rise of ‘Military Establishment’ Germany, France Favored also Italy & Spain becuz we deserve it, we don't attack bears in our countries !

amuse yourself !

http://www.cnbc.com/id/37084075

looks like the US is the missing link

Ihave read worst than the WS journal

Now Lagarde is trying to confort french people, that everything is all right, but the hidden face of the plan, is that the EU banks are all involved in the insane debt bonds, and more than a bail out of Greece, it was a bail out of the banking system. Until now the plan is still virtual, still yet there isn't concrete money behind. ECB is at stakes, it riskes its credit and might disappear in the next storm, than means, that any other EU state can be attacked,France, Germany...

Though, if this plan hadn't decided, the crisis that started with a tiny EU country would have become a world crisis, see how the stocks exchanges got mad last week.

This is not the end of the worries, this world crisis will happen anyways, (unless a miracle happens, some new confidence into the marckets...) just that the EU plan delayed it.

The problem in EU is that we aren't really unified !

As far as Maestrich, it has been a smoke screen, no state really respected it as far as their debt rate, and money loans. May-be only ECB with it stabilization rules !

and definitly, the last week-end burried it !

uh who's got to pay for Greece, Spain, Portugal, Ireland...

http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global

but mainly, we, the EU taxpayers !

I wonder why UK didn't want (no I don't) to participate, cause, UK banks are exposed too !

Amazing, the good pupil was cheating:

http://www.spiegel.de/international/europe/0,1518,693973,00.html

your fairness is obvious

you deliberatly read the papers with a negative eye for France

If Germany hasn't the biggest amount of the PIIGS, she has enough of the american bonds to get drowned, and as the last coverage of your income taxes is lagely deficitary, so the alarm will soon ring !

I know this link, I provided it a few times on discussions boards

I have read that the hunting party for gold and silver is hot, and the sources are dry, each country that had the possibility to buy some on the markets have already done it.

Also the the bailing out of the euro is going to need a new bailing out.

Time to think to buy a field and to plant potatoes !

bad news for the euro

http://tinyurl.com/29xtpng Congress blocks indiscriminate IMF aid for Europe c'est fini ni ni for Greece

it’s the end of the beans for german banks (first)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoElolQ0ELXc&pos=6 Swaps Soar on Germany’s ‘Act of Desperation’: Credit Markets

http://finance.yahoo.com/banking-budgeting/article/109581/are-german-banks-short-the-euro

“Observers continue to question Merkel’s motives. It could be argued that the collapse of the Eurozone partnership would strengthen Germany’s financial system because it could go back to its own currency, but the country would then have to deal with significant fallout, some of which is not obvious.

Some financial experts believe that Merkel is acting in the interest of German banks which hold billions of dollars in sovereign paper in Eurozone paper. Defaults could swamp the balance sheets of those banks.

But, the real reasons behind Merkel actions may be more complex and sinister. There is a great deal of evidence that some of Germany’s large banks have bet against both the euro and sovereign debt in the weakest nations in the region. If so, these banks, like other speculators, probably made billions of dollars on such deals.

Merkel may have to deal with the accusation, probably an accurate one, that Germany allowed its banks to take sides against the euro as the government helped drive its value down. How would it look if Germany then left the Eurozone and its banks became, under a set of circumstances helped by Merkel, rich in the process?”

from an American commenter

“Well, well, well. I am hearing some sinister stories about German banks from my ex-colleagues who work at German banks. German banks made massive bets against the Euro and against Greece bonds during this entire downturn in Europe. Effectively German banks are the speculators who Merkel has been protecting all along with this ban annouced this week. This will all come out in the news soon. Merkel has been colluding with the banks all along while watching the Euro dream go down.”

“but for Merkel to come out and say (repeatedly) that these so-called specualtors sending down the currency and that foreign banks (e.g. GS) were to blame when it is so obvious now that she has just been protecting her own banks who were taking these massive trades as she knew exactly what they did and were doing”

hmm, no this person knows well Germany and is American
but it's not the alone paper that says that Germany would like to make a common currency with Austria, and Benelux

http://seekingalpha.com/article/205794-der-tarp-germany-is-hiding-a-big-banking-problem

Germany is hiding a big bank problem