Sir Philip Green vs Select committee
Discussion
sidicks said:
avinalarf said:
In order to inform my understanding of the subject,let me agree with you that no laws were broken and therefore no prosecutions should have been sought.
Certainly the majority of those that could be prosecuted were prosecuted.avinalarf said:
In your opinion what caused the banking crisis of 2008 ?
This has been discussed on this forum many times, so we shouldn't take this too far off topic, but it was a combination of:- Greedy individuals borrowing excessively
- Greedy governments encouraging (and in some cases mandating) excessive credit as it helped increase tax revenues and allowed them to spend wildly
- Greedy banks taking advantage of the situation
- Poor regulators who didn't understand what they were regulating
avinalarf said:
What,if any,legislation do you think,should be introduced to avoid or at least alleviate the probability of a similar crisis in future ?
- Tighter controls on credit for individuals- Closer scrutiny of government policy
- Regulators with the right experience and oversight - need the right regulation not just more regulation
- Better risk management within banks
- increased clawback for bank employees
Just one other factor may also be of value :
Aggressive penalties against employee's, especially at Board level, that are proven to have been acting with Corporate negligence.
avinalarf said:
sidicks said:
avinalarf said:
In order to inform my understanding of the subject,let me agree with you that no laws were broken and therefore no prosecutions should have been sought.
Certainly the majority of those that could be prosecuted were prosecuted.avinalarf said:
In your opinion what caused the banking crisis of 2008 ?
This has been discussed on this forum many times, so we shouldn't take this too far off topic, but it was a combination of:- Greedy individuals borrowing excessively
- Greedy governments encouraging (and in some cases mandating) excessive credit as it helped increase tax revenues and allowed them to spend wildly
- Greedy banks taking advantage of the situation
- Poor regulators who didn't understand what they were regulating
avinalarf said:
What,if any,legislation do you think,should be introduced to avoid or at least alleviate the probability of a similar crisis in future ?
- Tighter controls on credit for individuals- Closer scrutiny of government policy
- Regulators with the right experience and oversight - need the right regulation not just more regulation
- Better risk management within banks
- increased clawback for bank employees
I have to agree with all of that.
BTW,the dirivitaves I was referring to were MBS.
Correct me if I'm wrong but was it not,in simple terms,the parcelling up of mortgages,many of which were toxic,in the sense that they were never going to be repaid,the prime reason for the crisis ?
The banks then sold and bought these MBS's which proved toxic.
Apart from greed,did the banks just not concern themselves with the worth of these MBS's ,only to keen to make a buck ?
Or did they know and just passed the parcel ?
And why did it all blow up in 2008 ?
t. Others did not bother to check but relied on ratings agency (AAA/BBB etc) and these very banks, the creators of the MBS pressured the agencies to assign a specific credit rating which as it turned out, did not reflect the true risk.Banks became concerned with their valuation when a few investors took the other side, i.e bet they would fail. Not sure how much you know about MBS or any packaged debt. A bank would not be interested in buying a mortgage from another bank. It's just too small so some bright chap thought about rolling up, say 10,000 mortgages or whatever it was into one package. It's very simplistic. The security must pay interest like any other bond/debt, right. And that interest comes from the down stream mortgage payments. When Joe public started defaulting (they defaulted because so many uncredit worth people had several loans at low rates initially but refinancing started having a profound impact in 2006-8. Like everything, a downward cycle ensued, defaults increased, such that the security trustee would have been unable to meet the interest on the rolled up billion dollar MBS. I recall the market was something like 8.5 trillion in US MBS.
One big difference with property in the US is that in many cases the owner can just hand the keys back to the bank when faced with negative equity. In the UK it wouldn't have been so profound (perhaps) as the buyer is still liable and would try to hang on and pay their mortgage. Not sure about that aspect.
The bank I worked for specialised in CDS, Credit Default Swaps which were insurance against the MBS defaulting. Valuing them was a joke also because the ratings and probability of default which is used in the DCF analysis were wrong (thanks S&P). A domino affect took hold as one bank couldn't pay another which bankrupted the next bank and so on.
Many of the law suites were based on a few banks who did know the loans were toxic and sold them in good faith. The ratings agencies also got huge fines and had to compensate those they wronged (banks).
sidicks said:
avinalarf said:
Thank you.
I have to agree with all of that.
BTW,the dirivitaves I was referring to were MBS.
Correct me if I'm wrong but was it not,in simple terms,the parcelling up of mortgages,many of which were toxic,in the sense that they were never going to be repaid,the prime reason for the crisis ?
The banks then sold and bought these MBS's which proved toxic.
Apart from greed,did the banks just not concern themselves with the worth of these MBS's ,only to keen to make a buck ?
Or did they know and just passed the parcel ?
And why did it all blow up in 2008 ?
I have to agree with all of that.
BTW,the dirivitaves I was referring to were MBS.
Correct me if I'm wrong but was it not,in simple terms,the parcelling up of mortgages,many of which were toxic,in the sense that they were never going to be repaid,the prime reason for the crisis ?
The banks then sold and bought these MBS's which proved toxic.
Apart from greed,did the banks just not concern themselves with the worth of these MBS's ,only to keen to make a buck ?
Or did they know and just passed the parcel ?
And why did it all blow up in 2008 ?
If banks knew they were 'toxic', why did they buy them?
Possible answers..
A) They didn't know.
B) They did know but they were caught up in the feeding frenzy,believing they could pass them on at a higher price to other banks.
Let's say a dealer buys a classic car in a rising market for £200K.
He knows that it needs work doing to make it worth it's money but sells it to a punter at £220K.
The punter is either unaware of the true condition of the car or thinks he can,in the rising market,sell it on in six months and make a £20K profit.
The cycle of the rising market continues,the car is bought and sold several more times and now stands at £400K.
The market has then peaked and crashes.
The guy who then bought the car for £400K is stuck with a lemon.
Burwood said:
Some banks knew they were dog st. Others did not bother to check but relied on ratings agency (AAA/BBB etc) and these very banks, the creators of the MBS pressured the agencies to assign a specific credit rating which as it turned out, did not reflect the true risk.
Banks became concerned with their valuation when a few investors took the other side, i.e bet they would fail. Not sure how much you know about MBS or any packaged debt. A bank would not be interested in buying a mortgage from another bank. It's just too small so some bright chap thought about rolling up, say 10,000 mortgages or whatever it was into one package. It's very simplistic. The security must pay interest like any other bond/debt, right. And that interest comes from the down stream mortgage payments. When Joe public started defaulting (they defaulted because so many uncredit worth people had several loans at low rates initially but refinancing started having a profound impact in 2006-8. Like everything, a downward cycle ensued, defaults increased, such that the security trustee would have been unable to meet the interest on the rolled up billion dollar MBS. I recall the market was something like 8.5 trillion in US MBS.
One big difference with property in the US is that in many cases the owner can just hand the keys back to the bank when faced with negative equity. In the UK it wouldn't have been so profound (perhaps) as the buyer is still liable and would try to hang on and pay their mortgage. Not sure about that aspect.
The bank I worked for specialised in CDS, Credit Default Swaps which were insurance against the MBS defaulting. Valuing them was a joke also because the ratings and probability of default which is used in the DCF analysis were wrong (thanks S&P). A domino affect took hold as one bank couldn't pay another which bankrupted the next bank and so on.
Many of the law suites were based on a few banks who did know the loans were toxic and sold them in good faith. The ratings agencies also got huge fines and had to compensate those they wronged (banks).
Thanks for that,very clear and concise and as I believed was the case.t. Others did not bother to check but relied on ratings agency (AAA/BBB etc) and these very banks, the creators of the MBS pressured the agencies to assign a specific credit rating which as it turned out, did not reflect the true risk.Banks became concerned with their valuation when a few investors took the other side, i.e bet they would fail. Not sure how much you know about MBS or any packaged debt. A bank would not be interested in buying a mortgage from another bank. It's just too small so some bright chap thought about rolling up, say 10,000 mortgages or whatever it was into one package. It's very simplistic. The security must pay interest like any other bond/debt, right. And that interest comes from the down stream mortgage payments. When Joe public started defaulting (they defaulted because so many uncredit worth people had several loans at low rates initially but refinancing started having a profound impact in 2006-8. Like everything, a downward cycle ensued, defaults increased, such that the security trustee would have been unable to meet the interest on the rolled up billion dollar MBS. I recall the market was something like 8.5 trillion in US MBS.
One big difference with property in the US is that in many cases the owner can just hand the keys back to the bank when faced with negative equity. In the UK it wouldn't have been so profound (perhaps) as the buyer is still liable and would try to hang on and pay their mortgage. Not sure about that aspect.
The bank I worked for specialised in CDS, Credit Default Swaps which were insurance against the MBS defaulting. Valuing them was a joke also because the ratings and probability of default which is used in the DCF analysis were wrong (thanks S&P). A domino affect took hold as one bank couldn't pay another which bankrupted the next bank and so on.
Many of the law suites were based on a few banks who did know the loans were toxic and sold them in good faith. The ratings agencies also got huge fines and had to compensate those they wronged (banks).
Your explanation has made my classic car example rather redundant.
avinalarf said:
sidicks said:
avinalarf said:
Thank you.
I have to agree with all of that.
BTW,the dirivitaves I was referring to were MBS.
Correct me if I'm wrong but was it not,in simple terms,the parcelling up of mortgages,many of which were toxic,in the sense that they were never going to be repaid,the prime reason for the crisis ?
The banks then sold and bought these MBS's which proved toxic.
Apart from greed,did the banks just not concern themselves with the worth of these MBS's ,only to keen to make a buck ?
Or did they know and just passed the parcel ?
And why did it all blow up in 2008 ?
I have to agree with all of that.
BTW,the dirivitaves I was referring to were MBS.
Correct me if I'm wrong but was it not,in simple terms,the parcelling up of mortgages,many of which were toxic,in the sense that they were never going to be repaid,the prime reason for the crisis ?
The banks then sold and bought these MBS's which proved toxic.
Apart from greed,did the banks just not concern themselves with the worth of these MBS's ,only to keen to make a buck ?
Or did they know and just passed the parcel ?
And why did it all blow up in 2008 ?
If banks knew they were 'toxic', why did they buy them?
Possible answers..
A) They didn't know.
B) They did know but they were caught up in the feeding frenzy,believing they could pass them on at a higher price to other banks.
Let's say a dealer buys a classic car in a rising market for £200K.
He knows that it needs work doing to make it worth it's money but sells it to a punter at £220K.
The punter is either unaware of the true condition of the car or thinks he can,in the rising market,sell it on in six months and make a £20K profit.
The cycle of the rising market continues,the car is bought and sold several more times and now stands at £400K.
The market has then peaked and crashes.
The guy who then bought the car for £400K is stuck with a lemon.
So relating all this to a fictitious character,let's call him Mr Black.
If a Mr Black owned a quoted company,and systematically bled it dry.
KNOWINGLY did not reinvest to sustain its viability.
KNOWINGLY did not put enough in the pension scheme to keep it viable.
KNOWINGLY sold it to a chancer who he knew would not be able to sustain the viability of that company or the pension fund.
If that Mr Black didn't care a toss but from the day he bought that company BUT had a cunning plan,the Intention of which was to take out as much money as possible and damn the consequences.
A) Is there no legislation in place to stop this happening ?
B)Can either Mr Black and/or the banks and financial agencies that colluded with him be prosecuted for KNOWINGLY allowing this situation to happen?
If a Mr Black owned a quoted company,and systematically bled it dry.
KNOWINGLY did not reinvest to sustain its viability.
KNOWINGLY did not put enough in the pension scheme to keep it viable.
KNOWINGLY sold it to a chancer who he knew would not be able to sustain the viability of that company or the pension fund.
If that Mr Black didn't care a toss but from the day he bought that company BUT had a cunning plan,the Intention of which was to take out as much money as possible and damn the consequences.
A) Is there no legislation in place to stop this happening ?
B)Can either Mr Black and/or the banks and financial agencies that colluded with him be prosecuted for KNOWINGLY allowing this situation to happen?
avinalarf said:
That's what I'm asking you.
Possible answers..
A) They didn't know.
B) They did know but they were caught up in the feeding frenzy,believing they could pass them on at a higher price to other banks.
Let's say a dealer buys a classic car in a rising market for £200K.
He knows that it needs work doing to make it worth it's money but sells it to a punter at £220K.
The punter is either unaware of the true condition of the car or thinks he can,in the rising market,sell it on in six months and make a £20K profit.
The cycle of the rising market continues,the car is bought and sold several more times and now stands at £400K.
The market has then peaked and crashes.
The guy who then bought the car for £400K is stuck with a lemon.
The point is that these were not sold to retail investors, they were sold to institutional investors who should understand what they were buying. My question is 'if they didn't understand what they were buying, why did they buy them'?!Possible answers..
A) They didn't know.
B) They did know but they were caught up in the feeding frenzy,believing they could pass them on at a higher price to other banks.
Let's say a dealer buys a classic car in a rising market for £200K.
He knows that it needs work doing to make it worth it's money but sells it to a punter at £220K.
The punter is either unaware of the true condition of the car or thinks he can,in the rising market,sell it on in six months and make a £20K profit.
The cycle of the rising market continues,the car is bought and sold several more times and now stands at £400K.
The market has then peaked and crashes.
The guy who then bought the car for £400K is stuck with a lemon.
sidicks said:
The point is that these were not sold to retail investors, they were sold to institutional investors who should understand what they were buying. My question is 'if they didn't understand what they were buying, why did they buy them'?!
Once again I refer you to Burwood's post.Do you find fault with his comments ?
Burwood said:
Some banks knew they were dog st. Others did not bother to check but relied on ratings agency (AAA/BBB etc) and these very banks, the creators of the MBS pressured the agencies to assign a specific credit rating which as it turned out, did not reflect the true risk.
Banks became concerned with their valuation when a few investors took the other side, i.e bet they would fail. Not sure how much you know about MBS or any packaged debt. A bank would not be interested in buying a mortgage from another bank. It's just too small so some bright chap thought about rolling up, say 10,000 mortgages or whatever it was into one package. It's very simplistic. The security must pay interest like any other bond/debt, right. And that interest comes from the down stream mortgage payments. When Joe public started defaulting (they defaulted because so many uncredit worth people had several loans at low rates initially but refinancing started having a profound impact in 2006-8. Like everything, a downward cycle ensued, defaults increased, such that the security trustee would have been unable to meet the interest on the rolled up billion dollar MBS. I recall the market was something like 8.5 trillion in US MBS.
One big difference with property in the US is that in many cases the owner can just hand the keys back to the bank when faced with negative equity. In the UK it wouldn't have been so profound (perhaps) as the buyer is still liable and would try to hang on and pay their mortgage. Not sure about that aspect.
The bank I worked for specialised in CDS, Credit Default Swaps which were insurance against the MBS defaulting. Valuing them was a joke also because the ratings and probability of default which is used in the DCF analysis were wrong (thanks S&P). A domino affect took hold as one bank couldn't pay another which bankrupted the next bank and so on.
Many of the law suites were based on a few banks who did know the loans were toxic and sold them in good faith. The ratings agencies also got huge fines and had to compensate those they wronged (banks).
I guess you worked at the same bank as me, but I think you were on the equity side of the business?t. Others did not bother to check but relied on ratings agency (AAA/BBB etc) and these very banks, the creators of the MBS pressured the agencies to assign a specific credit rating which as it turned out, did not reflect the true risk.Banks became concerned with their valuation when a few investors took the other side, i.e bet they would fail. Not sure how much you know about MBS or any packaged debt. A bank would not be interested in buying a mortgage from another bank. It's just too small so some bright chap thought about rolling up, say 10,000 mortgages or whatever it was into one package. It's very simplistic. The security must pay interest like any other bond/debt, right. And that interest comes from the down stream mortgage payments. When Joe public started defaulting (they defaulted because so many uncredit worth people had several loans at low rates initially but refinancing started having a profound impact in 2006-8. Like everything, a downward cycle ensued, defaults increased, such that the security trustee would have been unable to meet the interest on the rolled up billion dollar MBS. I recall the market was something like 8.5 trillion in US MBS.
One big difference with property in the US is that in many cases the owner can just hand the keys back to the bank when faced with negative equity. In the UK it wouldn't have been so profound (perhaps) as the buyer is still liable and would try to hang on and pay their mortgage. Not sure about that aspect.
The bank I worked for specialised in CDS, Credit Default Swaps which were insurance against the MBS defaulting. Valuing them was a joke also because the ratings and probability of default which is used in the DCF analysis were wrong (thanks S&P). A domino affect took hold as one bank couldn't pay another which bankrupted the next bank and so on.
Many of the law suites were based on a few banks who did know the loans were toxic and sold them in good faith. The ratings agencies also got huge fines and had to compensate those they wronged (banks).
The point was a) not the quality of assets in this portfolios (with some exceptions) , b) not the assumption about default rates and c) not the problem with actual defaults.
1. It is entirely feasible (and credible) to create AAA securities with highly risky underlying assets. The key is understanding the performance of those assets in stress scenarios and tranching the structures accordingly.
2. The bigger issue was around the correlation between assets in the portfolio which was much higher than expected / modelled
3. Actual default rates were not that high, particularly in the UK, but it was the leveraged nature of many of the investors in these securities which meant small changes in mark-to-market of the underlying risks could have massive implications that caused the issue. Such investors were often forced to sell investments to raise cash, further depressing the market value of related securities, which led to a vicious cycle.
Note that the AAA rating is a function of overall default probability NOT mark-to-market performance - the actual default of Uk AAA securities was zero (I think) and close to zero in Europe. Default rates were much higher in the US for the reasons you outline.
sidicks said:
desolate said:
sidicks said:
If banks knew they were 'toxic', why did they buy them?
If banks knew they were toxic, why did they package them up and sell them?These were highly qualified people, it would seem remarkable if they didn't.
At best they were willfully ignorant.
sidicks said:
Why did the same 'highly qualified people' buy these instruments in that case?
Greed and the belief that it would be someone else that would pick up the bill. Wiki describe hybris as follows:- a personality quality of extreme or foolish pride or dangerous over-confidence.
In the circumstances that seems apt.
Burwood said:
The classic car is not a good analogy because you can see the car, inspect it and it is clear to see what you are buying. A banking instrument like an MBS was a package of income streams which was labelled AAA i.e low risk, when in fact it was no such thing. With any investment one looks at the risk vs reward. Think Wonga. The rates are high because the borrowers have poor credit ratings. Wong would not have a business if it loaned money at 15% due to the high default rate. A crash can occur for all number of reasons. Cars/Art are discretionary buys when times are good. When the economy falters these sorts of assets are the first to be cashed in. A global economy slowdown needs a big trigger and then it can be pervasive. Sentiment is very powerful, even if one has money, you may not feel like spending money due to uncertainty or the feeling things will continue to get cheaper.
I accept that my analogy was not perfect.The point I was trying to make is that,in a rising market, punters get caught up in the excitement and seeing the opportunity of making a buck,do not pay due diligence.
At the end of the day any product is only worth what another person will pay for it.
The question is,if the buyer does not pay due diligence should the seller be prosecuted,or is it always caveat emptor?
No one forces a buyer to purchase anything.
As regards to the MBS you correctly state that credit agencies gave them an AAA label so the question becomes how much due diligence should you /can you do ?
And even if the seller banks knew that the MBS were a greater risk than the buyer realised what are they guilty of ?
Who's to know if the level of default may have stabilised and overtime the asset would have increased in value ?
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