Hedge Fund question!

[happyducky]

I was looking into how bankers can cause the collapse of market by buying into credit default swaps then essentially causing the panic which causes the crash. But... I was wondering how the FSA didn't call them up on it? How they actually get away with doing something so blatantly engineered for personal gain. Then I read somewhere about something called "financially unregulated instruments." What does that mean? is it something to do with Hedge Fund-ers being able to pull these deals effectively "above board"?

I hope that makes sense and someone can help me - I'm not so business minded!

[R1Geezer]

the crisis is not a hedge fund issue more of a credit rating scandal where toxic mortgages where packaged up and moved around in such a way that they looked like AAA securities. The inevitable loan defaults precipitated the crisis, this explains it:
http://www.ermsymposi...uts/WS/WS1_crouhy.pdf

[kinell]

it goes like this...

the normal lending rate is say 5%

someone with no income, job or assets (a ninja) in a trailor park wants to buy a house

they are a bad risk so they take a loan at 10%

the borrower doesnt care because they arent going to repay whether they borrow at 5% or 10%

the lender doesnt care because there is enough profit in the deal to insure and sell on the loan within packages of mortgage based equities

so you buy mine and i buy yours...seems a good spread of risk

obviously not when these packages are rated AAA when the housing stock behind the valuation is seriously overvalued... and there is no market for the property

so, do we blame the finance salesmen for lending to unsuitable clients irrespective of their position, ability and inclination to pay?

do we blame the ninjas for taking up the loan offer?

do we blame the banks etc for getting involved in this fraud?

i think all three answers are yes, but without the banks thinking this was a great earner none of the problems would have arisen

[jno]

kinell, I wouldn't say the borrowers never intended to repay. There's no need to assume bad faith on the part of consumers; I don't recall any unusual problems with bad debts being reported at the time (I could be wrong). But after a very long bull run, many lost their jobs as things got tighter.

[R1Geezer]

I saw a US documentary on this, what happenned was that mortgages where agressively sold to people who could only just afford them. For example one woman said she could afford $600 a month and duly got a mortgage. Unfortunately the monthly payements of $600 where only for the "discount" period so after 2 years it went up to $900 per month, she tried her best but couldn't make the payments and got reposessed. This happenned to thousands so there are huge estates in the US that are ghost towns, turning the mortgages toxic, this precipitated the crises.

[happyducky]

that's been great, thanks! it makes more sense with the examples.