Madoff, Lehman, and suicidal stupidity

Posted in Uncategorized with tags on December 18, 2008 by ronaldpputra
source : http://www.bloggingstocks.com/2008/12/15/madoff-lehman-and-suicidal-stupidity/

Any intelligent person recognizes that a Ponzi scheme is, essentially, suicidal. Even in a consistently strong market, there will come a day when people will withdraw from the fund, investigators will shut it down, or the financial house of cards will fall apart. The best that a Ponzi schemer can hope for is that he will die before he is caught or will somehow be able to pull out all funds and make a run for it. In the case of Bernard Madoff, it’s pretty clear that he was counting on the former. While this didn’t work out, one could make a strong argument that Madoff’s life currently isn’t worth a plugged nickel: even if he somehow survives the next few months without suffering a massive coronary, chances are that a former investor or fellow inmate (or both!) will soon introduce him to the business end of a shank.

Regardless of Bernie’s final disposition, the Madoff scandal has highlighted a pretty impressive trend in Wall Street: it’s becoming increasingly apparent that numerous financial players, from investors to managers to CEOs, have been playing the market like there’s no tomorrow. Who can forget, for example, Lehman CEO Richard Fuld’s whine that Lehman was seemingly singled out for failure, while so many others were bailed? Never mind that Lehman was leveraged 32 to 1 during Fuld’s tenure or that big Dick himself was the recipient of hundreds of millions in bonuses. Somehow his willingness to buy into the myth of eternal return transformed Fuld from villain into victim; after all, it’s hardly his fault that the Easter Bunny and Santa Claus don’t really exist.

For that matter, how about Mark Dreier? The Manhattan lawyer was recently caught selling fake promissory notes for numerous firms in a scheme that was so transparently bogus that it was ultimately unraveled by a single receptionist listening in on a single conversation. Somehow, however, for all its patent falsehood, Dreier’s game was able to sucker in colleagues and investors to the tune of $380 million. Granted, it’s not Madoff money, but it’s still a fortune to those of us who aren’t receiving bailout cash. How is it that these wheelers and dealers never bothered to check out the investments that they were purchasing?

From Merrill Lynch CEO John Thain’s (now renounced) claim that he deserves a $10 million bonus to the scalded cat-like cries of Madoff’s burned investors, Wall Street is ringing with the puling complaints of the formerly wealthy who seem to think that they were entitled to reap huge dividends, regardless of the state of the economy. Never mind that only an idiot would fail to question the disturbingly consistent 10% return that Madoff has posted, month after month, for years. Never mind that hundreds of thousands of formerly productive employees are now looking for jobs or that the ripples of this stupidity are only beginning to work their way across the economy. Somehow, America’s (formerly?) monied class seems to feel that the fact that they knew somebody, or that Madoff was their guy, should insulate them from the repercussions of their ignorance.

Of course, the victims of predatory lenders had no such protection. A few months ago, the walls resounded with the self-righteous platitude that ignorance of the economy should not be a protection against its effects; it will be very interesting to see how well that platitude fits when it is applied to the top 1% as opposed to the bottom 50%.

Even under the best of circumstances, schadenfreude is hardly a healthy emotion. In the current situation, however, there is a certain grim satisfaction in extending a hand to J. Ezra Merkin, Fred Wilpon, Norman Braman, Yeshiva University, and Madoff’s other burned investors as they enter the economic wasteland that they formerly disdained. Ladies and gentlemen, welcome to the jungle.

Freeganism, Al-Isra’ dan Kita

Posted in Uncategorized with tags on November 21, 2008 by ronaldpputra

 

Freeganism, Al-Isra’ dan Kita

 

Pernah nggak dengar kata-kata Freeganism atau Freegan lifestyle? Kalau kita buka wikipedia, disitu dikatakan Freeganism is an anti-consumerist lifestyle whereby people employ alternative living strategies based on “limited participation in the conventional economy and minimal consumption of resources”.

                                                                                                          

Kalau kita buka lagi web site mereka (freegan.info), disitu dikatakan bahwa: Freegans embrace community, generosity, social concern, freedom, cooperation, and sharing in opposition to a society based on materialism, moral apathy, competition, conformity, and greed.  

 

 

Baru-baru ini, Oprah Show mengangkat tema freegan lifestyle tersebut dan muncul tayang pada di Metro TV. Mungkin acaranya sendiri sudah lama tapi oleh Metro TV baru dibeli dan baru ditayangkan.

 

Pada acara tersebut, diperlihatkan kehidupan penganut Freeganism yang sangat anti dengan konsumerisme atau hidup berfoya-foya dan memanfa’atkan barang atau makanan yang telah dibuang di tong-tong sampah. Malam hari mereka keluar rumah dan mulai mengais-ngais tong-tong sampah mulai dari tong-tong sampah restoran, mal, supermarket, bahkan tong sampah rumah tangga. Mereka mengumpulkan apa saja yang masih baik, layak pakai dan layak makan.

 

Tak jarang mereka menemukan berbagai jenis makanan yang masih terbungkus rapih dan belum kedaluarsa, yang dibuang begitu saja. Sepasang suami istri bahkan bisa mengumpulkan sebanyak dua ribu lembar amplop yang masih baru dan layak pakai selama mereka melakukan dumpster living atau skipping tersebut. Tak terhitung pula berapa kilo buah-buahan segar atau makanan kaleng yang masih sangat baik dan layak pakai yang mereka pungut dari tong-tong sampah dan terbuang percuma. Bahkan mereka menemukan sebuah meja teh yang masih layak pakai dan sekarang menghiasi ruang makan mereka!

 

Penganut Freeganism mereka bukanlah kelompok masyarakat yang miskin, tapi mereka berkomitment untuk menghindarkan diri dari konsumsi yang berlebih-lebihan atas sumber daya yang ada. Mereka tidak mau berfoya-foya!

 

Al-Qur’anul kariim, telah mendefinisikan orang yang berfoya-foya sebagai saudaranya setan dan inkar kepada Allah. Pada surat Al-Isra’ ayat 27, tertulis:

 

innalmubazziriin na kaanuu ikhwaanas syayaathiin

wakaanas syaithoonu liRobbihi kafuuroo

 

[ Sesungguhnya pemboros-pemboros itu adalah saudara-saudara setan,

dan setan itu adalah sangat ingkar kepada Tuhannya ]

                                                                                                 

Agak susah untuk menjadi bagian dari komunitas Freegan lifestyle disini, karena di Indonesia ini mungkin kita tidak akan banyak menemukan barang-barang konsumsi yang masih layak pakai di tong-tong sampah. Maklum, kita-kita sendiri masih dalam taraf ”belum berlebih” sehingga tidak gampang membuang sesuatu yang masih layak pakai.

 

Tapi coba perhatikan untuk porsi yang lebih kecil saja, piring makan.

 

Pernahkan anda dengan sengaja menghitung berapa suap nasi dan potongan-potongan  lauk yang tersisa di piring makan anda dan keluarga anda lalu kemudian bermuara di bak cuci piring ?

 

Atau, coba kunjungi dapur sebuah restoran dan hitung berapa kilo makanan sisa yang terbuang dalam satu hari. Anda akan kaget. Itu baru satu restoran dan baru satu hari!

 

Jika semua dikumpulkan, mungkin sangat sangat bisa menutupi kekurangan makanan sebagian besar penduduk bumi ini. Kita sangat tahu kok kalau lebih dari setengah penduduk bumi ini untuk satu hari saja bersusah payah mendapatkan sesuap makanan hanya agar tulang punggung mereka bisa berdiri lurus. Mengherankan bukan?

 

Teman, tulisan ini tidak untuk mengajak anda untuk menjalani dumpster living atau skipping dan bergabung dengan komunitas freegan lifestyle. Tidak mengajak anda untuk menjadi Freeganism.

 

Tapi coba perhatikan, mulai dari diri sendiri dan dari rumah kita sendiri, masih adakah anggota keluarga kita yang menyisakan makanan di piring-piring mereka sedangkan sebagian orang sangat susah mendapatkannya ? Nabi SAW menjilati jari-jari beliau kalau selesai makan. Beliau bahkan memerintahkan kita untuk menghabiskan makanan karena bisa jadi sisa makanan tersebut yang justru mengandung berkah dari Allah.  

 

Kita akan susah untuk menjadi freeganism disini, susah untuk menjalani dumpster living atau skipping tersebut. Tapi, susahkah untuk tidak menyisakan makanan di piring-piring kita ? Rasanya tidak susah dan mudah dilakukan, asal ada kemauan tentunya.

 

So, temans …apalagi yang ditunggu ?

 

Jika anda ingin bersyukur atas nikmat dan rezeki dari Allah

Jika anda tidak ingin termasuk ke dalam kelompok orang-orang yang inkar kepada Allah

Jika anda termasuk orang yang khawatir tidak mendapatkan berkah dari makanan yang anda makan

 

Dan, demi rasa empati kita kepada sebagian besar manusia yang masih hidup dibawah garis kemiskinan…

 

Jangan lagi sisakan makanan di piring anda, ajak keluarga anda melakukan hal yang sama, dan mulailah saat ini juga!

 

Mudah bukan ?

 

 

[ronald]

 

 

                                                                                         

 

 

ONLY FEMALE BEES PRODUCE HONEY

Posted in Uncategorized with tags on October 23, 2008 by ronaldpputra

source : http://www.islamcan.com/cgi-bin/increaseiman/htmlfiles/static/106860416959681.shtml

“And Your lord inspired the bee, to build your dwellings in hills, on trees, and in (human’s) habitations. Then, to eat of all the produce and follow the ways of your Lord made easy. There comes forth from their bodies a drink of varying colour, wherein is healing for men: Verily, in this is a sign for those who give thought.”(The Quran, 16:68-69)

The imperative “build” above is the translation of the Arabic word “attakhithi”, which is the feminine form (Arabic grammar unlike English, differentiates between the sexes). The feminine form is used when all of those it refers to are female, whereas the masculine is used when a group consists of at least 1 male.

Therefore the Quran is in fact saying “build, you female bees..”

A swarm of bees , which collect honey and build the hive, are female only.

Thus, the phrasing of this command is in agreement with the scientific fact tht male bees do not partake in the construction of the hive.

Microscopes were not invented until 1610, when Galileo invented one of the first microscopes almost a thousand years after Prophet Muhammad (peace be upon him). It is only Allah, the Creator of all things, who revealed such details over 1,423 years ago. This one word of the Quran is sufficient to prove that Quran is from non other than Allah!

Obtained from The Islamic Bulletin, August 2000 Issue,

 

San Francisco, USA.

Alan Greenspan : We will never have a perfect model of risk

Posted in Uncategorized with tags on October 11, 2008 by ronaldpputra

Published: March 16 2008 18:25 | Last updated: March 16 2008 18:25

source : http://www.ft.com/cms/s/0/edbdbcf6-f360-11dc-b6bc-0000779fd2ac.html?nclick_check=1

Bromley illustration

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes – those belonging to builders and investors – have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic.

The American housing bubble peaked in early 2006, followed by an abrupt and rapid retreat over the past two years. Since summer 2006, hundreds of thousands of homeowners, many forced by foreclosure, have moved out of single-family homes into rental housing, creating an excess of approximately 600,000 vacant, largely investor-owned single-family units for sale. Homebuilders caught by the market’s rapid contraction have involuntarily added an additional 200,000 newly built homes to the “empty-house-for-sale” market.

Home prices have been receding rapidly under the weight of this inventory overhang. Single-family housing starts have declined by 60 per cent since early 2006, but have only recently fallen below single-family home demand. Indeed, this sharply lower level of pending housing additions, together with the expected 1m increase in the number of US households this year as well as underlying demand for second homes and replacement homes, together imply a decline in the stock of vacant single-family homes for sale of approximately 400,000 over the course of 2008.

The pace of liquidation is likely to pick up even more as new-home construction falls further. The level of home prices will probably stabilise as soon as the rate of inventory liquidation reaches its maximum, well before the ultimate elimination of inventory excess. That point, however, is still an indeterminate number of months in the future.

The crisis will leave many casualties. Particularly hard hit will be much of today’s financial risk-valuation system, significant parts of which failed under stress. Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief. But I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.

The problems, at least in the early stages of this crisis, were most pronounced among banks whose regulatory oversight has been elaborate for years. To be sure, the systems of setting bank capital requirements, both economic and regulatory, which have developed over the past two decades will be overhauled substantially in light of recent experience. Indeed, private investors are already demanding larger capital buffers and collateral, and the mavens convened under the auspices of the Bank for International Settlements will surely amend the newly minted Basel II international regulatory accord. Also being questioned, tangentially, are the mathematically elegant economic forecasting models that once again have been unable to anticipate a financial crisis or the onset of recession.

Credit market systems and their degree of leverage and liquidity are rooted in trust in the solvency of counterparties. That trust was badly shaken on August 9 2007 when BNP Paribas revealed large unanticipated losses on US subprime securities. Risk management systems – and the models at their core – were supposed to guard against outsized losses. How did we go so wrong?

The essential problem is that our models – both risk models and econometric models – as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality. A model, of necessity, is an abstraction from the full detail of the real world. In line with the time-honoured observation that diversification lowers risk, computers crunched reams of historical data in quest of negative correlations between prices of tradeable assets; correlations that could help insulate investment portfolios from the broad swings in an economy. When such asset prices, rather than offsetting each other’s movements, fell in unison on and following August 9 last year, huge losses across virtually all risk-asset classes ensued.

The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model’s structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.

The contraction phase of credit and business cycles, driven by fear, have historically been far shorter and far more abrupt than the expansion phase, which is driven by a slow but cumulative build-up of euphoria. Over the past half-century, the American economy was in contraction only one-seventh of the time. But it is the onset of that one-seventh for which risk management must be most prepared. Negative correlations among asset classes, so evident during an expansion, can collapse as all asset prices fall together, undermining the strategy of improving risk/reward trade-offs through diversification.

If we could adequately model each phase of the cycle separately and divine the signals that tell us when the shift in regimes is about to occur, risk management systems would be improved significantly. One difficult problem is that much of the dubious financial-market behaviour that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share.

Risk management seeks to maximise risk-adjusted rates of return on equity; often, in the process, underused capital is considered “waste”. Gone are the days when banks prided themselves on triple-A ratings and sometimes hinted at hidden balance-sheet reserves (often true) that conveyed an aura of invulnerability. Today, or at least prior to August 9 2007, the assets and capital that define triple-A status, or seemed to, entailed too high a competitive cost.

I do not say that the current systems of risk management or econometric forecasting are not in large measure soundly rooted in the real world. The exploration of the benefits of diversification in risk-management models is unquestionably sound and the use of an elaborate macroeconometric model does enforce forecasting discipline. It requires, for example, that saving equal investment, that the marginal propensity to consume be positive, and that inventories be non-negative. These restraints, among others, eliminated most of the distressing inconsistencies of the unsophisticated forecasting world of a half century ago.

But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling – the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters’ concerns should be not whether human response is rational or irrational, only that it is observable and systematic.

This, to me, is the large missing “explanatory variable” in both risk-management and macroeconometric models. Current practice is to introduce notions of “animal spirits”, as John Maynard Keynes put it, through “add factors”. That is, we arbitrarily change the outcome of our model’s equations. Add-factoring, however, is an implicit recognition that models, as we currently employ them, are structurally deficient; it does not sufficiently address the problem of the missing variable.

We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response.

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

The writer is former chairman of the US Federal Reserve and author of ‘The Age of Turbulence: Adventures in a New World’

Who Is To Blame For The Subprime Crisis?

Posted in Uncategorized with tags on October 10, 2008 by ronaldpputra

 

by Eric Petroff

Anytime something bad happens, it doesn’t take long before blame starts to be assigned. In the instance of subprime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world’s central banks, homeowners, lenders, credit rating agencies and underwriters, and investors. Let’s investigate.

The Mess
The economy was at risk of a deep recession after the dotcom bubble burst in early 2000; this situation was compounded by the September 11 terrorist attacks that followed in 2001. In response, central banks around the world tried to stimulate the economy. They created capital liquidity through a reduction in interest rates. In turn, investors sought higher returns through riskier investments. Lenders took on greater risks too, and approved subprime mortgage loans to borrowers with poor credit. Consumer demand drove the housing bubble to all-time highs in the summer of 2005, which ultimately collapsed in August of 2006. (For an in-depth discussion of these events, see The Fuel That Fed The Subprime Meltdown.)

The end result of these key events was increased foreclosure activity, large lenders and hedge funds declaring bankruptcy, and fears regarding further decreases in economic growth and consumer spending. So who’s to blame? Let’s take a look at the key players.

Biggest Culprit: The Lenders
Most of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. (To learn more about subprime lending, see Subprime Is Often Subpar.)

When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.

In defense of the lenders, there was an increased demand for mortgages, and housing prices were increasing because interest rates had dropped substantially. At the time, lenders probably saw subprime mortgages as less of a risk than they really were: rates were low, the economy was healthy and people were making their payments.

As you can see in Figure 1, subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations; lenders were clearly willing and able to provide borrowers with the necessary funds to purchase a home.

Figure 1
Note: The data presented herein are believed to be reliable but have not been independently verified.  Any such information may be incomplete or condensed.

Partner In Crime: Homebuyers
While we’re on the topic of lenders, we should also mention the home buyers. Many were playing an extremely risky game by buying houses they could barely afford. They were able to make these purchases with non-traditional mortgages (such as 2/28 and interest-only mortgages) that offered low introductory rates and minimal initial costs such as “no down payment”. Their hope lay in price appreciation, which would have allowed them to refinance at lower rates and take the equity out of the home for use in other spending. However, instead of continued appreciation, the housing bubble burst, and prices dropped rapidly. (To learn more, read Why Housing Market Bubbles Pop.)

As a result, when their mortgages reset, many homeowners were unable to refinance their mortgages to lower rates, as there was no equity being created as housing prices fell. They were, therefore, forced to reset their mortgage at higher rates, which many could not afford. Many homeowners were simply forced to default on their mortgages. Foreclosures continued to increase through 2006 and 2007.

In their exuberance to hook more subprime borrowers, some lenders or mortgage brokers may have given the impression that there was no risk to these mortgages and that the costs weren’t that high; however, at the end of the day, many borrowers simply assumed mortgages they couldn’t reasonably afford. Had they not made such an aggressive purchase and assumed a less risky mortgage, the overall effects might have been manageable. (To learn about moral debate surrounding all things subprime, read Subprime Lending: Helping Hand Or Underhanded?)

Exacerbating the situation, lenders and investors of securities backed by these defaulting mortgages suffered. Lenders lost money on defaulted mortgages as they were increasingly left with property that was worth less than the amount originally loaned. In many cases, the losses were large enough to result in bankruptcy.

Investment Banks Worsen the Situation
The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum. (For a crash course on the secondary mortgage market, check out Behind The Scenes Of Your Mortgage.)

A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.

The chart below demonstrates the incredible increase in global CDOs issues in 2006.

Image courtesy Hammond Associates. The data presented herein are believed to be reliable but have not been independently verified.  Any such information may be incomplete or condensed.
Figure 2

Rating Agencies: Possible Conflict of Interest
A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the ‘AAA‘ rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. (To learn more on the ratings system, see What Is A Corporate Credit Rating?)

Moreover, some have pointed to the conflict of interest between rating agencies, which receive fees from a security’s creator, and their ability to give an unbiased assessment of risk. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency (or the security not getting rated at all). However, on the flip side, it’s hard to sell a security if it is not rated.

Regardless of the criticism surrounding the relationship between underwriters and rating agencies, the fact of the matter is that they were simply bringing bonds to market based on market demand.

Fuel to the Fire: Investor Behavior
Just as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.

Much of the blame here lies with investors because it is up to individuals to perform due diligence on their investments and make appropriate expectations. Investors failed in this by taking the ‘AAA’ CDO ratings at face value.

Final Culprit: Hedge Funds
Another party that added to the mess was the hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem. (To learn more. check out Taking A Look Behind Hedge Funds.)

To illustrate, there is a type of hedge fund strategy that can be best described as “credit arbitrage“. It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem. Moreover, because leverage was involved, this set the stage for a spike in volatility, which is exactly what happened as soon as investors realized the true, lesser quality of subprime CDOs.

Because hedge funds use a significant amount of leverage, losses were amplified and many hedge funds shut down operations as they ran out of money in the face of margin calls. (For more on this, see Massive Hedge Fund Failures and Losing The Amaranth Gamble.)

Plenty of Blame to Go Around
Overall, it was a mix of factors and participants that precipitated the current subprime mess. Ultimately, though, human behavior and greed drove the demand, supply and the investor appetite for these types of loans. Hindsight is always 20/20, and it is now obvious that there was a lack of wisdom on the part of many. However, there are countless examples of markets lacking wisdom, most recently the dotcom bubble and ensuing “irrational exuberance” on the part of investors.

It seems to be a fact of life that investors will always extrapolate current conditions too far into the future – good, bad or ugly. 

For a one-stop shop on subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.
by Eric Petroff,

Eric Petroff is the director of research of Wurts & Associates, an institutional consulting firm advising nearly $40 billion in client assets. Before joining Wurts & Associates, Petroff spent eight years at Hammond Associates in St. Louis, another institutional consulting firm, where he was a senior consultant and shareholder. Prior to Hammond Associates, he spent five years in the brokerage industry advising retail clientele and even served as an equity and options trader for three of those years. He speaks often at conferences and has published dozens of articles for Investopedia.com and the New Zealand Investor Magazine.

** This article and more are available at Investopedia.com – Your Source for Investing Education **

Subprime mortgage crisis

Posted in Uncategorized with tags on October 10, 2008 by ronaldpputra

 

From Wikipedia, the free encyclopedia

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The subprime mortgage crisis is an ongoing economic problem that became more apparent during 2007 and 2008, and is characterized by contracted liquidity in the global credit markets and banking system. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework.

The crisis began with the bursting of the United States housing bubble[1][2] and high default rates on “subprime” and adjustable rate mortgages (ARM), beginning in approximately 2005–2006. For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.[3]

Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008.[4][5] In addition, the ability of corporations to obtain funds through the issuance of commercial paper was affected. This aspect of the crisis is consistent with a credit crunch. The liquidity concerns drove central banks around the world to intervene by bailing out defaulting financial corporations in order to encourage lending to worthy borrowers at the expense of tax payers.

The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal Reserve to cut interest rates and the economic stimulus package passed by Congress and signed by President George W. Bush on February 13, 2008.[6][7][8] During the week of September 14, 2008 the crisis accelerated, developing into a global financial crisis. Following a series of ad-hoc market interventions to bail out particular firms, a $700 billion proposal was presented to the U.S. Congress in September, 2008. These actions are designed to stimulate economic growth and inspire confidence in the financial markets. On 3 October 2008, the amended version of the bill was signed into law.

Subprime Loan

Posted in Uncategorized with tags on October 10, 2008 by ronaldpputra
Subprime Loan
What does it Mean? A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.
 
Investopedia Says... Subprime loans tend to have a higher interest rate than the prime rate offered on traditional loans. The additional percentage points of interest often translate to tens of thousands of dollars worth of additional interest payments over the life of a longer term loan.

However, getting a subprime loan could still be a good idea if the loan is meant to pay off a higher interest debt (such as credit card debt) and the borrower has no other means for payment. 

The specific amount of interest charged on a subprime loan is not set in stone. Different lenders may not value a borrower’s risk in the same manner. This means that a subprime loan borrower has an opportunity to save some additional money by shopping around.

source : http://www.investopedia.com/terms/s/subprimeloan.asp