Brokers hedged their position to reduce the risk of rate rises, and when the Fed came in and helped them out, they're now complaining they can't also claim from the hedge. That's like blaming firemen for putting out your house fire because you now can't claim as much from your insurance.
And some Brokers over-hedged. That's speculation and that's exactly what unsophisticated, under capitalized, unregulated (for this purpose) retail brokers are explicitly banned from doing. So again, what the fuck? They should get margin called all the way to bankruptcy!?
There are a long list of laws dating back centuries about not being able to insure property for more than it's worth. And that's what over hedging is in this case: betting against the very product you create. It needs to be banned. The people doing it need to be prosecuted, not offered sympathy.
The fed intervened by lowering rates and now their positions are liquidating. Apparently, this is not only gambling money and they might have over-leveraged themselves with other money they legally/morally should not use.
Now they are calling for the FED to intervene and help them with their mistakes. We'll see how this is going to unfold.
https://www.statista.com/statistics/275746/rmbs-issuance-in-...
[0] https://en.m.wikipedia.org/wiki/Troubled_Asset_Relief_Progra...
Am I wrong?
This seems to be a perfectly reasonable use of derivatives - as a mitigation of short-term risk... That happened to fall apart, because the Fed stepped in, as an 'irrational' market actor.
It's like an oil company shorting oil, to hedge the risk of the market moving against them, before they can sell their inventory.
The problem is that the fed is now buying every asset under the sun, and instead of their loan and their short being inversely correlated, they are now uncorrelated, which is killing them.
The equivalent would be the oil company's oil dropping in price... While the price of oil increases, this killing their short. This doesn't really happen in properly functioning markets, but markets currently have huge liquidity problems.
At least, that's what it sounds like.
Can someone explain this statement?
Typically a bank will have a roughly hedged position: if one of its assets goes down in value, another one goes up and it uses the variation margin on one to pay off the other. But consumer mortgages don't get variation margin: the homeowner doesn't pay the bank if interest rates drop and he now is locked into (in hindsight) a bad deal. Instead he just pays the bank over the odds for the next 10 or 30 years.
In some products you square up the variation margin every day or every week. It sounds like the mortgage bonds aren't done that rigorously and the dealers square them up whenever they feel like it, or when the regulator insists. Here some mortgage banks are going to have to find the cash flow to pay that variation margin, if they owe their dealer more than $250k in total.
It is quite hard to have inflation without either near full employment (can't hire workers without increasing wages) or forex problems (foreigners stop wanting dollars which seems .. unlikey)
What this is mostly doing is stopping a huge property crash. Maybe that's overdue, but it would also mean ruining the retirement of a lot of the middle class.
This just sounds like people decided to take huge risks on rental properties and now that risk is catching up to them.
Now we have the same choice. We can prop it all up again, in the vague hope that bankers will change their behaviour. Or we can let Wall St go to the wall.
If we do prop it up, we have to know that we'll need to do that again in another 10 years, and again after that, and so on. Until the bankers change their behaviour.
After 2008, if the government had allowed the housing market to actually be a market, then we wouldn’t have the housing crisis of today.
Instead, corporations with access to cheap money, spent billions to buy distressed houses on the cheap, and held it for a few years, until it became extra profitable for them to flip it at a very healthy profit.
The game is rigged, fellas.
How is this not a market? If the market were "more free", the same issue would have still arisen, namely:
> corporations with access to cheap money, spent billions to buy distressed houses on the cheap
Would be a much better market if supply were not restricted by so many zoning laws. Something like Japan does would be much better. http://urbankchoze.blogspot.com/2014/04/japanese-zoning.html
Except that the average person doesn't have the same access to financing as some minority of well connected entities to financing bodies. Access to cheap or even free lending. The fed prints more money than the economy actually creates.
It's a rigged market. That's why it doesn't work. Limiting properties would attenuate the problem, but it's just a bandade solution, and a few will again find loopholes to benefit.
If those responsible got life sentences en masse for their crimes which probably killed far more people than any serial killer could hope for, then maybe their ilk would think twice before doing that. When punishment is effectively ZERO, then why not risk it?
In some sense, Wall Street has been a zombie since 2008.
At that time, mortgage-backed securities were one problem. Today auto loans are supposedly pretty frothy.
how risky are you willing bet when you know that you only have to fail really hard to get bailed out?
Servicer does not own the loan, they simply paid an upfront cost to have the right to collect payments from homeowners (from which they take a cut). So the owner can sell their MBS to Fed to reduce uncertainty on their balance sheet, but servicer is just stuck servicing the loan — they already paid the upfront cost for the right to service the loan. That’s why they hedge by shorting MBS.
That's .. also a market. The institutions have substantially greater ability to pay back, and in the case of banks, capital requirements that reduce their credit risk. They don't have the same loss of income risks as a human. Nobody should expect a market to produce a fair outcome from an uneven initial distribution.
Is there any evidence that access to Fed capital is controlled by political connections on an institution by institution basis?
It's there for a reason, the same reason it's not stopping.
Unless there is a chance to beleive in representatives to truely represent the population, it's a dead game.
We will slowly turn to cryptocurencies and detach ourself from this non sense system of taxation and fiat decisions that are totally out of our control.
What prevents the same sort of tight community of crony elites from developing in such a system? It seems to me the course of action should be precisely opposite: greater democratic control, better institutions, more literacy and education so people can make informed decisions and pressure their representatives.
to answer your second question: if you, a private individual, bet all your money on investments that go belly up, you're just screwed. if you're a large financial institution, you get to argue that your going under would create rippling consequences that outweigh the erosion of moral hazard that comes with a bailout. it's not fair or reasonable, but it's reality.
Fairly certain source of income isn't the only variable. What about rainy day fund? Aren't individuals encouraged to have 3-6 months worth of expenses in cash for emergencies? Shouldn't the lender assure that this is the case before lending?