Economic Meltdown

I hate when my economy

melts down

Alice Mercer cc licensed except iStockphotos where noted

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What the heck happened?

From http://www.istockphoto.com/

Money goes looking for a home

In the aftermath of various bubbles in

the 1990s, there was a lot of money in

the “market” looking for an

investment with high yields and low

risk.

Instead, it ended up being money in

search of a bubble to invest in.

The new home for those $s...

…your home (or your neighbors).

From http://www.istockphoto.com/

The Rule they ignored…

Pile in markets!

http://flickr.com/photos/define23/2610038054/

More money, more money…

Source: NYT (http://www.nytimes.com/2007/03/11/business/11mortgage.html?partner=permalink&exprod=permalink) and S&P Press Release (http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_082653.pdf)

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“Who turns down money?”

said the home buyer/owner

From http://www.istockphoto.com/

“Hey, they can refi in a

few years, and ARMs give me a

better commission, besides I’m

not carrying it.”

said the Mortgage Broker

From http://www.istockphoto.com/

“Hmmm, I think I have an idea!”said the Investment Banker

Hmm, didn’t they try that here?http://en.wikipedia.org/wiki/Long_term_capital_management

We could reduce risk, by spreading it all around. Complexity is good!

From http://www.istockphoto.com

Slice ‘em up

http://flickr.com/photos/cayusa/2173546553/

Re-package ‘em

http://flickr.com/photos/tjflex/1347490869/in/photostream/

and build a giant house of cards… out of housing

Does anyone like the SOB who bets against the shooter in craps?

“Any number of speculators, who do not

own the original security, can place side bets on whether that security

defaults.”WaPo http://tinyurl.com/3kotw9

From http://www.istockphoto.com

This isn’t heading anywhere good

Source: Bureau of Economic Analysis via Sequoia Capital (http://tinyurl.com/3ttyng)

But I can’t pay the mortgage!Delinquencies Q 1 2008

0% 5% 10% 15% 20%

Data from WaPo http://tinyurl.com/3kotw9 and FRB

“Normal” level

Securitization brings multiple creditors with multiple “approaches” to

renegotiating loans

Hey, I’m in an ‘A’ rate tranche, I don’t have to make a deal

I’ll take the risk! I got this cruddy MBS didn’t I?

I have no idea what to do, or why I bought this lousy bond in the first place

Talk to my lawyer!

baaah

We want our money!

From http://www.istockphoto.com/

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The loans become “road kill”

http://flickr.com/photos/jganderson/2387722255/

The Mortgage Backed Securities became cow patties

http://en.wikipedia.org/wiki/Image:Nagasakibomb.jpg

And the derivatives

that were supposed to

insure the whole thing

are radioactive

The Risks of Large Complex Systems

(Benoît) Mandelbrot…looking at how markets trended…discovered …tail risk…the possibility of extreme events is higher than any of the standard models predict…

-- Yves Smith on Bloggingheadshttp://bloggingheads.tv/diavlogs/14850

Photo: http://en.wikipedia.org/wiki/Image:Toppledominos.jpg#filelinks