Feeding frenzy in the banking sector

[formercia]

There's blood in the water and the sharks are going after each other.....

http://news.bbc.co.uk/2/hi/business/7262288.stm

UBS sued on sub-prime mis-selling
Last Updated: Monday, 25 February 2008, 06:53 GMT


Germany's HSH Nordbank is to sue the Swiss banking giant UBS for mis-selling millions of dollars of investments linked to US sub-prime mortgages.

It wants to recover "significant" losses on a $500m (£253m) portfolio it bought in 2002.

HSH Nordbank alleges that UBS did not manage the assets in line with its "prudent investment objectives".
--snip--

f HSH Nordbank is successful there could be a wave of such legal action from other banks and investors who claim not to have been made aware of how risky CDOs were.

--snip--

[Warpy]

1. "investors who claim not to have been made aware of how risky CDOs were."

If that isn't the line of the century, what is?

Damn, it sure took these smart people a long time to catch on to the fact that loans have been made far in excess of collateral and that they're never going to be paid back. Most of us on the "Economy" board have been telling them that for years.

We have the hedge funds to thank for this mess, cutting bad loans into sections and laundering them into "traunches" based on risk. The first few months of a bad loan were the lowest risk, since people would struggle to make those payments. After that, they were considered high risk, high return. The fact that they were marketed to banks and brokerages as assets lends an element of farce to the whole business.

Laundering a debt into an asset is the scam of the ages. It's why every institutional investor on the face of the planet is going to be in big trouble.

I've had a persistent nightmare about having my microloan customers' repayments providing my only income. I just hope that never comes true.

[sepulveda]

7. pricing risks

one of the ultimate goals of any market, especially a two way auction market like a NYBOT, CBOT, etc. is the pricing of risk.

and simply put, many of these instruments were so frigging exotic that nobody knew how to accurately price that risk.

so, the risk was pawned off, split off, as you said, until nobody really knew what it was.

i make my living assessing risk and price structures - i watch the VIX more than i watch TV :)

but you are totally right. there was a scary disconnect between actual risk and perceived risk. not to mention a liquidity bubble that brings tears to my eyes.

[Warpy]

10. Welcome to DU

and thanks for the vote of confidence from somebody in the biz.

[sepulveda]

11. thanks

to you too.

the first rule i learned as a trader is to define and manage risk.

sadly, too many learn this rule the hard way- myself included :)

[xchrom]

2. recommend -- the evidence from lawsuits like this

could well be the building blocks for needed regulation to morrow.

[1776Forever]

3. I don't pretend to be knowledgable about all this but is this what 1930 looked like? Please read on

What Caused the Great Depression of the 1930's?

http://www.shambhala.org/business/goldocean/causdep.html

(snip)

The market and the economy had buoyed itself from one source of hope to the next for a whole decade. First it was the end of war-related inflation and booming exports for war reparations, next artificially low interest rates in 1925 and 1927 and booming exports due to a reduced value of the Dollar vs. the Pound. There were major tax reductions instituted by the Republicans under Hoover and finally in June of 1929 an international accord was struck with the Germans (albeit short-lived) over the financing of war reparations, a major issue of the decade.

By Monday, October 28, 1929 the Dow had fallen 20% to 300. It fell 40 more points that day and another 30 on Tuesday (Tragic Tuesday) to reach a temporary bottom at 230.07. It was down 40% from the peak 56 days earlier.

George Harrison bravely stepped in to provide tremendous amounts of credit to the banking system. This action prevented immediate bank failures and bankruptcies and a total collapse. The market recovered a good bit of ground but began to fall again before year-end. By mid-1930 this liberal credit policy was to be reversed affecting the money supply crisis discussed below.

In early 1930, there were 60 bank failures per month in the US but when the Fed tightened its purse strings, things got much worse. 254 banks failed in November and 344 in December of 1930. Among these was the Bank of the United States, with 450,000 depositors it was the fourth largest bank in New York. Although it was a private bank, "The biggest bank failure in American history, the Bank of the United States bankruptcy fed a psychology of fear that gripped depositors across the country."

In spite of further tax cuts, public works programs and optimistic speeches, spending and thus economic activity just kept going down. The stock market would make temporary recoveries, sucking buyers in, only to free fall again. The Dow finally hit bottom at the level of 41.22 on July 8, 1932, 10.5% of its peak three years prior.

............

:scared:

[Recursion]

4. The 29 crash was caused by structural weaknesses

Some of those weaknesses we have managed to rebuild, some we haven't.

A big problem in 1929, one that's simple enough to make it into high school history textbooks, is sometimes dismissed for its simplicity, IMO unfairly: the overproduction of durable goods. We don't have that problem except possibly in housing (which isn't really a "durable good" in that sense but has some similarities).

But it's true that another big problem was essentially what we have today: the ability to account debt as an asset. Enron should have been the warning siren (and was for a lot of us), but the allegedly smart institutional investors either missed it or thought they could ride the wave to its crest and get out gracefully, I suppose on the assumption that nobody else would be trying to do the exact same thing.

[1776Forever]

5. Thanks - if you have time can you go into the Enron issue more......

:hi:

[Recursion]

6. That would take days

If you can find it, watch "The Smartest Guys in the Room"

[Mountainman]

8. Eventually the suits will move down the food chain and lenders will sue the buyers for being so

stupid in the fist place.

[Rex]

9. It is just money, no one cares. The little fish will be eaten by the big fish.

Try not to become prey.