[lbo-talk] Group of Five: origins of the subprime bubble

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Tue Dec 18 17:55:17 PST 2007


This is a lot of fun, but I think you're confused about a lot of the issues. However, I'm a sucker for this kind of thing, so here goes:


> Which means the (sub prime) market collapsed synthetically, as a
> result of the change in position of the few players.

No, what happened is that banks wrote risky mortgages because they thought they were off the hook due to the business shift of selling rather than keeping these loans and institutions bought CDOs because they thought the ratings were accurate and comparable. The music stopped playing (in part due to core interest rates rising), rate resets on the mortgages triggered defaults, and everyone headed for the door. FWIW, I continue to believe this is an over-reaction, but there you have it. Regardless: the ABX market is smaller (unlike many established derivative markets) than the underlying mortgage market, so your idea that the ABX "caused" anything is way off base.


> Could the banks have helped to avert the collapse? If they wanted to.

This part is true. If it were the case that banks were holding those loans today, restructuring them would be much easier. But: if the banks were holding these loans, they never would have made them in the first place. See figure 1.

/jordan



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