

Learning to Love Volatility - tokenadult
http://online.wsj.com/article/SB10001424127887324735104578120953311383448.html

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jpdoctor
> _The Romans forced engineers to sleep under a bridge once it was completed._

This is exactly what is missing from the banking system. The mortgage madness
would never had occurred if banks were forced to retain a portion of every
loan (and put that portion in the first-loss position.)

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yummyfajitas
Many banks did retain a portion of their loans. WaMu, for example, and
Countrywide. Typically they would sell off the AAA tranches of the loans to
other banks (for use satisfying reserve requirements) while keeping the
riskier tranches for themselves.

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001sky
nah, the i-banks lost the skin in the game when they went corporate in the
1990s. leveraged loans of various stripes are not held by i-banks, as a rule.
there is also the issue of derivatives, so bottom line is almost all
fudamental underwriting is now a sales-job, a loss-leader and bait entre vous
into a world of mirrors, assymetric information and, opaque market making.
TLDR there is a reason glass-stegal was put in place.

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yummyfajitas
Investment banks generally don't write mortgages, so asking them to keep some
skin in the game is a little silly.

Glass-Steagal had nothing whatsoever to do with preventing savings&loan banks
from making bad loans, nor did it prevent savings&loans from selling mortgages
to third parties for securitization.

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001sky
Not sure this makes sense. The example of leveraged loans is quite distinct
from residential mortages, for example. Also, the credit risk of the latter is
pawned off onto the federal gov't in the US. Either way, banks should be
banks. They should be taking the risk they underwite. Shares and bonds are a
slightly different animal than asset backed secured loans, but they are now
essentially all treated alike: things to pawn off with zero net book exposure.
Investment banks structured as partnerships also had downside risk -- that is
one of the main structural differences in a legal sense -- and that also
should not be overlooked. Lasltly, private capital being more illiquid does
not display the option-like pricing response to Vol that comp tied to public
equity does.

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RickHull
> _Rule 1: Think of the economy as being more like a cat than a washing
> machine._

This one made me smile, thinking of the classic characterization of a
development manager's primary task: herding cats.

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ChuckMcM
Except herding cats is easy, you just paint yourself with tuna fish.

