

"Toxie," NPR's adopted 'toxic asset,' is dead - ben1040
http://www.npr.org/templates/story/story.php?storyId=130079590&ps=cprs

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hvs
It's a little gimmicky, but I have to say that it is a clever bit of
journalism that really helps to make the whole ordeal a slightly more
understandable to less financially literate (like myself).

~~~
goatforce5
I'm repeating myself, but Planet Money's podcast is genuinely very good. It
was spun out as it's own entity after an episode of This American Life about
the financial crisis got really good feedback.

They explain some fairly complicated financial stuff in an easy to understand
way, without dumbing it down. They have lots of good, heavy-hitting guests on.

Go subscribe to the podcast. It's free:

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

~~~
16s
You should avoid everything that requires an expert "explaining" things in an
"easy to understand way".

Avoid religion and stocks markets. No one understands either. Both require a
great deal of faith. And only a few people (ministers and stock brokers)
proclaim to speak expertly on them... the rest of us just have to give them
our cash and believe.

~~~
lmz
A lot of things fall into that category. Among others: computer programming,
government bureaucracy, global warming. Should they be avoided too?

~~~
lzw
Global warming.... A hilarious topic you hear a lot of lies about. It is
actually a simple topic since the ear is getting cooler and it is easily
proven. What's complicated is the extensive lengths the global warming
religion will go to to try and pretend like this totally politically motivated
movement has a relationship with science.

It is amazing what you can get people to believe by constantly repeating
unscientific claims and the mantra that "all scientists agree" even though in
grade school you should have learned that this is not how science works.

PT Barnum was right... I didn't believe it myself, until I tried to talk about
global warming with NPR programmed automatons.

~~~
lmz
That may be true. Haven't looked into it myself. (I didn't downvote you BTW).

I think the problem is that the world simply cannot sustain the entirety of
its population living with first-world standards. Better medicine in
developing countries makes this worse since they now have as many children as
before, but more of them survive - taking up resources. The global warming
alarmists are probably keen to bring down the standards of the first world and
handing it over to the rest of the world via carbon credits and the like. That
strikes me as a traitorous view to take given that most of them are from the
first world.

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mattmaroon
Ironically mortgage bonds were invented to solve the opposite problem:
mortgages getting paid off (when moving or refinancing). People tend to do
those things when interest rates go down. Investors didn't want to buy a bond
that paid low rates of return when interest rates were high (as most bonds do)
and then might get repaid in full with no penalty when the rates lowered.

The answer, of course, was to roll a bunch of mortgages together into a
special purpose vehicle (SPV) then sell bonds to fund it, then divide those
bonds into tranches such that the lower tiers got repaid in full when the
refinancings started. Kind of hard to believe now that investors used to be
worried about people paying their mortgages off too soon.

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maukdaddy
Direct link to the data visualization:
[http://www.npr.org/templates/story/story.php?storyId=1245783...](http://www.npr.org/templates/story/story.php?storyId=124578382)

~~~
mortenjorck
It looks a little complicated at first glance, but it's an excellent
visualization, especially once you get the relationship between the "How we
are doing" and "How long we have left" graphs (the left not mattering until
January 2010). Watching the right one throughout the history of the asset is
actually a little horrifying.

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kls
Yeah the thing that I don't understand is, so it is dead with no payments but
their is collateral behind that asset so what happens when the foreclosures
are sold. Do they receive a check for their portion of the asset sale? That
would offset the the numbers I should imagine. So if they have collected
roughly $450 of their $1000 investment and then receive a $300 check from the
asset sale. that is $750 of their principal returned. In regards to the banks
that hold these assets they received a bailout so I would assume that they
still see a profit on these "Toxic"assets due to the bail out. As well this
asset was purchased in the middle of the housing fall out while some of the
other assets had been producing returns for some time before this whole mess.
Also what about that PMI they make people buy if they finance more than 80%
that is supposed to protect the mortgage holders principal, in the event of a
default. One of the reasons I love math is one of the reasons I hate it the
numbers are so easy to skew, to someone who does not know what variables to
look for. I am not accusing NPR of anything here after all they are journalist
by trade not economists or bankers, but I think there are some missing
variables here.

~~~
anigbrowl
My understanding of these things is that this kind of debt is mostly
unsecured. If a house is repossessed and sold at a loss after the mortgage has
fallen into arrears by more than a certain percentage, the unsecured creditors
get nothing. Of course, now nearly every repo is sold at a loss, and there are
2x as many empty properties sitting on the books as are advertised for sale,
so that's not going to change for a while.

Remember that the toxic asset is not a collection of salami slices from
different mortgages - there are laws against dividing up a mortgage or loan
interest that way, I believe. The slices were claims on the _profit_ \- the
sum of mortgage payments minus cost of capital, and were paid out in exchange
for cash up front.

Holding these assets seemed like a good idea at the time they were issued,
because even if Joe Blow lost his job or whatever, the rising property market
meant that he or the loan service company just had to be patient for a few
months - then the house could be sold for more than the value of the debt, the
unsecured creditors would be OK. Joe Blow himself would have a clean slate
unless he was truly incompetent, because before the bubble burst it was fairly
easy to offload the property and look like a responsible individual who
serviced debt promptly. I heard of people doing that and ending up with a
_better_ credit rating as a result, because on paper they were now the sort of
person that does profitable 6-figure real estate transactions. The smart ones
gave classes, the stupid ones believed their credit reports and started
thinking they were financial wizards.

On the issue side, it worked like so: I give Joe Blow a $500k mortgage, he is
supposed to give me back $1m over 20 years or whatever the compound interest +
principal amounts to. Well great, but now I have to wait a decade before I
start actually making money on the deal. Traditionally, banks' business model
is to control enough capital and manage risk well enough to play that long
game, in fact to play a longer game than anybody else on the market. But in
recent decades, so much money had gone into the stock market via retirement
funds etc. that bringing in your profit over a 10-30 year period looked rather
tame. Sure, there were big profit multiples in the credit card business, but
it takes time for most people to run up substantial credit card debt, and the
kind of people who rack up house-size debts quickly are unfortunately the sort
of people who tend to pay them off too because they understand how to use
credit effectively, so they are not generating any profit. And in a rising
market, those long-term profits seem to have a very high opportunity cost,
because although they are secured by property, I could probably double my
money faster by investing it in some dot com thing, whatever that means...

Meanwhile, I'm out the $500k I just gave to Joe Blow, and my competition
across the street is just celebrating an IPO of clueless,com that paid off at
32:1. Damn! But wait - YOU look like a smart guy. Look, I have this mortgage
on Joe Blow's house, and 99 others just like it. Houses - lovely solid assets,
not like those inflationary stocks. They're even better than gold, because you
can't live in a goldbrick, amirite? And who invests in gold, that's no way to
make money any more, the 70s were a long time ago.

I'm gonna collect $500k from Joe over the next 20 years! He'll pay because
it's his house, duh. My cost of capital from the federal reserve? Cheap, they
only want $100k in interest, God bless Alan Greenspan. No, you can't raise
capital there, you need a banking license like I have but they're like taxi
medallions, you gotta wait years to get one. But look, about this $400k profit
I make after I pay the Fed off. Times 100 mortgages that I've issued, that's
$40 million dollars of _pure profit_ \- and this profit is on debt secured
with _$50 million_ worth of houses...at today's prices. And they're not making
any new land, heh heh!

Oh, you wish you could get in on this? Yeah, too bad you don't have a banking
license like me...but come to think of it, don't a lot of taxi guys rent out
their cab, and everybody wins? Yeah! How about this: you give me $50 million,
and I'll split the $40m profit with you, even Stevens, $20 mil each and I'll
do all the hard work of collecting the payments each month and I'll hold all
the risk. What's in it for me? Well, I'll issue some more mortgages, I got
people trying to buy property faster than the hired help can build it. What's
in it for you? $20 million my friend, and peace of mind. How long do you think
this bank has been here?

OK, it was more complicated than that - there was an investment bank in the
middle giving the sales pitch and gift-wrapping the item, and they were
getting paid a commission up front. But this was the basic transaction that
both sides suckered themselves into, and on which both sides lost money while
the investment bank kept its cash commission.

~~~
fanboy123
"My understanding of these things is that this kind of debt is mostly
unsecured."

The debt is secured by the home itself. It is a mortgage-backed security. In
some places it is a non-recourse loan which means that once you hand over your
house the lenders have no claim to the rest of your assets unlike a credit
card loan.

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jeebusroxors
Does someone care to explain how it died? The article mentions loan
modifications - does that mean the loans in Toxie were replaced by other
loans?

~~~
btilly
The way that these deals are structured is that a bundle of loans are
aggregated in a broad river of money over a period of time, and then the money
is sliced by time into bonds. (Not entirely by time, it is usually structured
so that later bonds get appropriate interest payments.) If you're in one of
the later time slices and money doesn't come in, you don't get paid. If you're
in one of the earlier time slices, you still get paid. This means that every
deal generates bonds with a range of risk from extreme to AAA. (Unless the
risk models are wrong, in which case the "AAA" can turn out to be risky. As
happened.)

When you have a loan modification, the principal owed drops. That means that
the total amount of money coming into the deal goes down. Those losses hit the
bottom bonds first. As you reduce principal, you reduce interest. Once enough
money has gone out of the deal, those bonds won't pay anything more, and the
bond is dead.

(I haven't been in finance for several years, but I used to be in the CMBS
world.)

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Zak
It seems to me that a modification to the interest rate or amount owed should
not be allowed when the debt is owned by a third party - at least without that
third party's consent. When a bunch of loans are rolled up in to a security,
it's not practical to get the consent of all the shareholders.

~~~
jrockway
_it's not practical to get the consent of all the shareholders_

Well, you get that when they buy the security. "By signing, you agree to
accept..."

Except unlike for DVDs, this sort of thing is actually legally binding. Part
of the whole subprime crisis was that nobody actually read these things, and
they were caught by surprise when conditions changed. ("If 3 people default on
their loans, your 50 billion investment is worthless." That's kind of bad when
it's your own money, but really bad when you borrowed those 50 billion from
someone else. Hence, a recession.)

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cturner
Do on scale. When people purchase, send them a high-quality plush toy
representing their toxic asset, with crossed stitching for eyes, and a
username and password.

This login accesses an online app that tracks their asset. You can link it to
your facebook account, so that progress updates will appear like farmville
messages.

If the asset gets profitable, they receive the eyes for the plush toy. Either
way, once it's wound up they get a framed certificate to celebrate their
participation in helping America out of deep financial shit.

Imagine buying a close relative a toxic asset pack for Christmas. It's a bit
like giving someone a plant. You get to watch it after the day. But it's more
edgy gift, because of the faint chance it will make money.

------
flipbrad
strange data on the pie chart for september, unless I'm misreading it or toxie
is magic... the percentages add up to 150%, don't they?

------
tokipin
NOOOOOOOOOOOOO

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VladRussian
don't forget guys that toxic mortgage bonds (say totaling X) were "covered" by
something like 10X of CDS (sold for the price of 0.01X), so whenever toxic
bold holder (state teacher pension fund) lose the X, the CDS holders (smart
Wall St guys like Paulson) make 9.99X. So the failure of the toxic bonds was
historically necessary and thus unavoidable. The more toxic the toxic bonds
are, the better it is for the CDS holders.

~~~
jrockway
_So the failure of the toxic bonds was historically necessary and thus
unavoidable._

Why? There were lots of people on the other side of the transaction, too. The
money paid to the collectors of the CDSes did not come out of thin air, after
all.

~~~
VladRussian
you hit the bull eye on both points:

"There were lots of people on the other side of the transaction, too. "

Absolutely. When you look into the current crisis, you'll notice that it isn't
a crisis of "net loss". This crisis is just redistribution of money - for each
loser there is a winner. No money or value was "net lost", instead it was
redistributed. For each homeowner "B" who bought overpriced house, there is a
previous owner "A" who made nice profit which is pretty much equal on average
to what mortgage note holders lost when "B" foreclosed.

" The money paid to the collectors of the CDSes did not come out of thin air,
after all."

Again, absolutely right. The CDSes were paid by taxpayers - government bailout
of AIG and others. So what taxpayers lost, CDS holders won (as they are just
better politically connected, surprise!). No net loss again.

~~~
flatulent1
In some cases those profiting from the earlier higher priced sale of a
property, and the commissions, were committing fraud. One of the story links
indicates that Toxie was connected to a known case.

A realtor flipped a property back and forth between friends multiple times, it
being sold for a higher price each time. The banks were happy to make the
loans on the property that was increasing in value. The people involved shared
the gains along the way, then the last one defaulted. The selling back and
forth could happen normally... it seems the fraud was in the parties obtaining
loans for an owner occupied property. It was apparently empty the whole time.

These people didn't need an economic downturn to default. It was planned.

[http://www.npr.org/blogs/money/2010/07/23/128720556/atc-
flip...](http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flipping)

