On Jan 7, 2008, at 5:25 PM, Jordan Hayes wrote:
> Yes, and this is important: the sub-prime market didn't come about
> as a
> way to dupe people with lower credit scores than the primes; it came
> about because it once you get your risk-management systems in
> order, you
> can calculate fairly well what a particular drop in creditworthiness
Well yeah, but this also is like Milken's classic junk bond math. He discovered that the default rates on pre-1980s junk was lower than the interest rate suggested, so buying junk was like free money. But that calculation was based on "fallen angels" - firms that had fallen on hard times, most of which eventually recovered. But he pushed new- issue junk from young, untested firms, and default rates were higher thank Milken's historical series. I suspect something similar is happening now - historical subprime default rates were one thing, but they're not good at predicting what is happening now/will happen in the near future because they were pushed in such quantity, and onto a different universe of borrowers.
Doug