Monday, May 03, 2010
write "In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors..."
Well... I'm not privy to the details of this particular bond... and I don't work or cover Wall Street... but I do know that line is very misleading, as while it is true that some investors may have lost $280 million, other investors would have made almost as much in profits. (not exactly as sexy a story, is it, to have to write that there were winners as well as losers?)
Wall Street is a zero-sum game, what one investor makes in profit another investor loses... and when one investor loses money, there is someone else putting profits into their pocket.
Yes, it is possible that one $38 million bond could have had multiples of that floating around in the form of derivative wagers. Exclude the $38 million in original mortgages and there could have been $242 million in derivative bets floating out there. But, as with Las Vegas or your neighborhood bookie, if you win that means someone else lost. You can't have two winners, you can't have two losers, you can't have a winner without a loser and you can't have a loser without a winner. That means that for every investor who took a hit of part of that $242 million in losses, there are investor who won $242 million.
As for the original mortgages, those buying the mortgages lost their $38 million investment. But here too there can't be losses without winners. In this case, the winners were those people who sold their houses for prices higher than they would have been able to get if mortgages were limited to buyers with prime credit.
So how and why do so many business writers fail to pick up simple pieces of reality? Do they, like their political colleagues, know better but are trying to push a particular agenda? Or do they really not know any better?