
We Bought A Toxic Asset; You Can Watch It Die - gcheong
http://www.npr.org/templates/story/story.php?storyId=124491608
======
tc
Everyone is still mistaking why these bonds were/are 'toxic.' It isn't that no
one wanted to buy them. It's that no one wanted to buy them for the price at
which the banks needed to sell them to remain solvent.

The bonds were 'toxic' because if the banks sold any of them for their market
value, the banks would have had to mark down the value of the bonds still on
their books. That would have shown that the banks were insolvent. By not
allowing a market value for the bonds to emerge, the banks could maintain the
illusion that their assets were greater than their liabilities.

~~~
diroussel
I think the term toxic comes from the idea that you can be damaged by being in
contact with one.

CDSs and CDOs are contracts that carry cash flows in both directions. When you
sell a CDS you receive the premium, but if there is a credit event you have to
pay out way more than the premium. If you sold one in the good times you'd now
be stuck with a contact to payout a whole load of money an no way to sell it
off.

For a CDO you have a similar upside and downside, but it's a bit more complex.
You can be in the position where your cotract exposes you to alot of risk, and
no matter how cheap you make it no one wants to buy it. That's a toxic asset.

~~~
jacoblyles
CDOs are a bit trickier. If the issuing company held onto the lowest tranche
then they were required to hold the debt and assets on-balance sheet and it
was essentially a form of financing like any other. If they sold all the
tranches, then they could keep the issuing fees and push all the debt and
assets off-balance sheet. There usually was no recourse to the company for
off-balance sheet CDOs, but there were some complicated and obscure
exceptions.

------
geoffc
I have a good story about this market. A friend of mine is doing this and he
bought a $20M portfolio of bad boat loans for less than 1/2 cent on the
dollar. He closes on the portfolio and the next day gets a call from a bank in
Texas that has repossessed a boat in the portfolio and wants to know his
address so they can ship it to him. He tells them to sell the boat ASAP and
send him the proceeds. The boat sells for more than he paid for the entire
portfolio. There is some gold in this muck.

One word of caution on this is that to collect mortgage payments you have to
be licensed as a bank in that state and some states have hefty penalties for
illegal collection if you aren't.

~~~
hga
Right; these assets are "toxic" not so much because they are of low or
perceived as having no value but because it's difficult to impossible to
correctly price them.

If you hold them to maturity, you might make out pretty well.

------
keltex
A good story. You can listen to the whole thing on the planet money podcast:

[http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...](http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890)

------
tocomment
That sounds like an interesting investment. Is there a way I as an individual
can buy something like this?

~~~
simon_
I have firsthand knowledge of this market. Unfortunately, it's very difficult
to buy bonds like this for yourself if you are not an institutional investor.

~~~
chubbard
If that's so how did NPR go talk to this guy in Kansas and get one? They don't
have a lot of money, and they aren't a bank. I bet this guy in Kansas is
getting a lot of phone calls like this one.

~~~
simon_
It's not impossible, just hard. There's no exchange you can go to, and dealers
will generally not work with you if you're a small fry.

In NPR's case, I'd say: (a) it looks like they worked directly with the
seller, not with a bank/broker/dealer, and (b) their foundation has $250MM of
assets, so they're not exactly a small fry
([http://www.npr.org/about/statements/fy2008/fy08nprfoundation...](http://www.npr.org/about/statements/fy2008/fy08nprfoundationreport.pdf)
[pdf]).

------
bradford
The 'interactive' portion is a very cool display of data. You can view the
history of the asset over time (the asset looks like it was originally created
in december 2006). Over time, a large number of houses in the asset go
delinquent, and then bankrupt.

It lets you experience, from a distance, the panic that the original investors
must have felt as they saw their hopes for the asset melt away.

I also like it because you can see it going south long before 2008, which is
when economic panic started going public.

------
aero142
I just can't understand how there isn't fraud involved here. If someone claims
that they have a mortgage back security that was worth $2.7 million, and is
now worth $36,000, that is 1.3c on the dollar. I just can't believe that these
things are backed by real houses. I don't understand how any house, no matter
how overinflated, could be worth so little. Even houses purchased in the worst
bubble market, foreclosed on, where the previous owners punched holes in the
sheet rock on the way out, and sold at auction, shouldn on average be worth
only $36,000 now. There must have been fraud about what is actually backing
these securities.

~~~
cperciva
Collateralized debts are sold in tranches: One guy gets the first 50% of the
money, the next guy gets the next 20%, the next gets the next 20%, and the
final sucker gets his share back only after the other 90% has all been paid
off. (Actually, it's a bit more complicated than this, but you get the idea.)

Even with a 50% drop in market prices, the guy with the "senior" tranche is
happy; he's getting his money back. The guy with the last 10% was never
expecting to get all of his money back, so while he's disappointed about being
completely wiped out, he's not altogether shocked.

The collateralized debt crisis is basically all about those people in the
middle -- the 50%-90% range. They thought their money was safe (they couldn't
imaging the market dropping by more than 10%) and they paid a correspondingly
high price as a result (i.e., they didn't get much of a discount vs. the face
value of the debts), but it turns out that they're taking some of the losses
too.

~~~
motters
Sounds like a pyramid scheme to me.

~~~
p0ppe
More about pricing risk. Everyone can choose how much risk they're willing to
take.

------
ars
Quick! Find out which mortgages are part of the NPR bond. Make sure to pay
them so they write a good news story and the whole country thinks things are
great.

In other words, I'd rather look at the market as a whole not just a tiny piece
of it.

~~~
wmeredith
I think this is pretty obviously an investigative human interest story, not an
economics piece.

~~~
cperciva
People aren't good at understanding big numbers. Slicing off a small part of
the mortgage crisis and providing a detailed history of that small part makes
it much easier for people to understand what's going on.

It's just like unemployment rates -- saying "ten million people are out of
work" doesn't mean as much to most people as "one of your ten closest friends
is out of work".

~~~
ars
And what happens if your little piece acts totally different than the rest of
the market?

~~~
cperciva
Then you write "we were lucky, and most investments did much worse than this".
But it looks like the slice involve here is large enough that it will probably
do a good job of illustrating things.

------
nazgulnarsil
So, show of hands signal to noise ratio on HN dropped significantly recently?
Seeing a lot of content free articles.

~~~
olefoo
Complaining about noise and conducting straw polls about noise are also noise.

Many of us watched the same thing happen to reddit.

Re-read Shirky's classic talk on the topic
<http://www.shirky.com/writings/group_enemy.html>

~~~
rapind
I never read this before. Great read. Thanks for the link man.

