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In regards to the movie "Inside Job" we watched in class today and the topic of securitization I am uploading my part of a presentation from last semester. I discussed securitization, how it works, and its role in the financial crisis. I uploaded it as a Googledoc so hopefully everyone can take a look...
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0ByYM71NDWX5iNzllMmM5ZmEtNGNlOS00MjliLTkzMjQtNjc4ZjU0MWZiMTY4&hl=en&authkey=CKLl-JED
Unfortunately, this is only the powerpoint which doesn't have all my speaking notes so it might be hard to follow, but I am hoping everyone can get the gist of how the math works.
My thought on the topic is that securitization is a good idea gone wrong. What is everyone's response/reaction to "Inside Job", securitization, and the role of CDOs?
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I like your powerpoint a lot. Very clear presentation of securitization which comes from the word security. Not very secure investments, were they? It is hard to believe that Inside Job is real, isn't it? That these things really happened? Yet, the carnage is still continuing because the banks are so large and our governance institutions seem inadequate to regulate or control their excesses.
ReplyDeleteYeah this powerpoint and the movie cleared up what can seem like a confusing issue. It is pretty scary that so many people missed or ignored information. (strong correlations in defaults vs. basically zero correlation) that was so central to the validity of their models.
ReplyDeleteStill a bit fuzzy on the math, I guess I am getting confused on the difference between the two green boxes in the first math formula slide. Is it the difference between regular mortgages and the ones that did not background check?
ReplyDeleteChris, nice slides. I wouldn't be opposed to one more 5 min run down of them in class... either i'm not 100% following or what happened was really that convoluted.
ReplyDeleteThe movie has similar tones to Michael Moore's Capitalism: A Love Story. Thoughts?
Think of the green boxes as two different mortgages. In this case they are two separate mortgages for $1000 each. Each one has a 10% chance of defaulting and a 90% of the individual paying it back. Securitization is the process of combining this two mortgages into a portfolio and then issues bonds attached to their performance. So the two green mortgages are combined and then the bank will issue the blue and yellow bonds, which are supposed to be attached to the performance of the portfolio...
ReplyDeleteI think I recognize that PPT :)
ReplyDeleteDr. McKinney, you mentioned that these MBS were not very secure investments. Hindsight here is absolutely 20-20, but I think the motivations for the innovation of MBS-related financial instruments was genuine. These instruments allow for investors to diversify their investment portfolios, and provide them with "spread out" risk in the ownership of home loans. There are many things we can learn from this subprime mortgage crisis, but by no means do I believe that we have seen the last of MBS.
In response to Chris's question of my reaction to Inside Job, I have a few observations:
ReplyDeleteIt's certainly hard to produce a completely unbiased (politically) documentary based on the financial crisis. With that said, I noticed that Inside Job leaned quite a bit more in one direction than in the other. Without turning this into a discussion of political bias, I just want to point out two things about the movie:
1: Inside Job specifically blamed the financial institutions and their greedy employees for their predatory lending and moral hazard, and the politicians for their corruption and deregulation. But don't "we" have culpability here? "We" bought the houses that could not be realistically afforded. "We" lived outside of our means and did not recognize that the growth in home values was unsustainable.
2: I have noticed over the last few years that for some reason most individuals perceive banks as a service entity, and our friends. But in reality, bankers are just like any company, they exist to make AS MUCH money as possible, not to help us.
These are just a few things to think about...
in response to Jared...
ReplyDeleteMost people, unfortunately, are uninformed and gullible. They go to the bank or financial advisers with their money because they do not know what they should be doing, and trust these people to help them. Most of them also trust the banks to follow a moral code... which does not appear to exist. The same goes for at least some of the purchases of houses. There are people who saw a chance to get what they wanted even though they knew they couldn't realistically afford it. They had no way of foreseeing what was going to happen.
Oh also for Chris, what class did you make that powerpoint for?
ReplyDeleteIt was for a presentation we made in Money and Banking, Chris cut it down to the slides pertaining to Securitization.
ReplyDeleteI think Jared has a good point. During the movie I also thought that there were serious issues of personal responsibility that were ignored. Education is lacking, but common sense can serve to let us know that if something seems too good to be true it probably is. It doesnt make sense to buy a house that is several times your annual income and not even put any money down.
ReplyDeleteThere is plenty of blame to go around though, the banks and financial institutions did clearly do some things wrong. I think the conflicts of interest the movie pointed out go beyond violating a "moral code" and should be illegal.
That brings up another issue, all the times big corporations were caught in wrongdoing they simply paid the fine and moved on. They probably just look at the fines as a business expense. We give corporations many of the same legal rights as U.S citizens but do not hold them accountable in the same way. An individual who committed theft or fraud or whatever, multiple times would be imprisoned at some point, not issued a ticket.
Jared makes an excellent point. Although I wasn't enrolled in class for Tuesday Nights movie showing, I have seen portions of Inside Job and think it really points out the truth behind the financial crisis. The movie definitely has a similar objective as Michael Moore's movies Sicko and Capitalism: A Love Story. Another film that Dr. McKinney has screened is I.O.U.S.A and it outlines the large deficit and the mortgage crisis very well. I thought the movie was spectacular. The fact that so many people who were direct contributors to the crisis are still in positions of enormous importance in industry and government is very alarming. I feel like moral code and ethics go hand in hand here and agree with Eric M. that those who stray from these codes or ethics should be held accountable.
ReplyDelete