Awesome writeup on the mortgage mess and insurer bailout
The Total Stupidity of Crowds: Bad Mortgages and Circular Solutions
First some bad math:
The best part comes at the end:
First some bad math:
So now you've got something labeled as "high quality, low risk" which is formed completely from a collection of shit. But, by golly, it's marketed as high quality, and it's got a nice rate of return! And it's really low risk, because you've distributed the risk into a bunch of independent places, and you're only in trouble if they all fail. (This is bad math point number one: false independence. This scheme only works if there is truly no connection between the failures of the components.)
The insurance companies based their calculations on the same ideas of "safety by distribution" that the banks used when they bundled things together! So the people who are guaranteeing the safety of the loans are relying on exactly the same assumption of safety that they're supposedly insuring. If the insurance is ever needed, it's because the assumption of safety was wrong. But because the insurance company used that same assumption, they're not going to be able to pay it back. (This is big bad math point number two.)
The best part comes at the end:
So - the banks know that they need to stop the insurance companies from collapsing. How can they do that? Here's a truly brilliant idea, which was floating yesterday by a bunch of big banks like Merrill Lynch and Bear Stearns: loan money to the insurance company.
So - the insurance company is guaranteeing the value of the banks mortgage loans, using money that it borrowed from the bank, which the bank had to borrow because it's got these bundles of leans insured by the insurance company. In other words, the banks are insuring their loans themselves, using the loans to pay for the losses on the loans. It's circularity on circularity on circularity - cycles within cycles of stupidity, relying on stupidity to prop it up.
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