Lehman goes down

Discussion in 'The ChitChat Lounge' started by bjr, Sep 15, 2008.

  1. alpha1

    alpha1 I BLUES!

    ^ My comment was neutral. I am not in for closed economy.

    Anyways, the subprime model is bound to fail in recessive economies.
    What happens is that bank finances the "home loan" and sell that contract in the market.

    Ofcourse, in such a situation, the bank will have not much interest in verifying the borrower credentials, when it knows that it can sell the morgage contract in the market (just like stock market). Someone else will take care of it.

    And we see the effects now. Borrower is not in position to repay. ...
     
  2. alpha1

    alpha1 I BLUES!

  3. nebuchadnezzar

    nebuchadnezzar G34r G33k

    There was too much leveraging going on for last 5 years..Complex products worth 50-60x underlying real asset value were designed and distributed to the world.Now that the real estate bubble has burst in the US, people are unable to meet the margin calls. Still, a lot of hedge funds and domestic mutual funds are yet to see severe redemption pressure.When that happens..god save us.But I am following Buffet's philosophies and investing now. I still have a huge amount of money stuck in stock market from last year:eek::

    Indian real estate loans are mostly given to prime candidates and with large down payments. There is a lot of black money and NRI money invested in the system for speculative gains. I see the RE prices in any city in India and it looks like a bubble waiting to burst..but as of now both buyers and sellers are holding tight with only a marginal price fall.It should come down to realistic levels in the next year but who knows for sure.

    This crisis may have come at the right time as a warning to people to desist from their complacent borrowing ways.. I see people here following the American way..they want everything NOW whether they can afford it or not.A home loan cannot be avoided, but people taking loans for buying cellphones and furniture is the beginning of a dangerous trend.
     
  4. angel_of_sin

    angel_of_sin bassist.....

    ohk da citibank took over wachovia and da bail out plan was dropped by da house of representatives..........wat is gonna be da outcome of da latter on da world economy and da indian economy oder dan insecurity among investors?????????
     
  5. alpha1

    alpha1 I BLUES!

    OK, here is derivatives market (including sub-prime and mortage) for Dummies:
    And this is how it went wrong in US.

    Once there was a little island country. The land of this country was the
    tiny island itself. The total money in circulation was 2 dollar as there
    were only two pieces of 1 dollar coins circulating around.

    1) There were 3 citizens living on this island country. A owned the land. B
    and C each owned 1 dollar.

    2) B decided to purchase the land from A for 1 dollar. So, A and C now each
    own 1 dollar while B owned a piece of land that is worth 1 dollar.

    The net asset of the country = 3 dollar.

    3) C thought that since there is only one piece of land in the country and
    land is non produceable asset, its value must definitely go up. So, he
    borrowed 1 dollar from A and together with his own 1 dollar, he bought the
    land from B for 2 dollar.

    A has a loan to C of 1 dollar, so his net asset is 1 dollar.

    B sold his land and got 2 dollar, so his net asset is 2 dollar.

    C owned the piece of land worth 2 dollar but with his 1 dollar debt to A,
    his net asset is 1 dollar.

    The net asset of the country = 4 dollar.

    4) A saw that the land he once owned has risen in value. He regretted
    selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar
    from B and and acquired the land back from C for 3 dollar. The payment is by

    2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to
    C. As a result, A now owned a piece of land that is worth 3 dollar. But
    since he owed B 2 dollar, his net asset is 1 dollar.

    B loaned 2 dollar to A. So his net asset is 2 dollar.

    C now has the 2 coins. His net asset is also 2 dollar.

    The net asset of the country = 5 dollar. A bubble is building up.

    (5) B saw that the value of land kept rising. He also wanted to own the
    land. So he bought the land from A for 4 dollar. The payment is by borrowing

    2 dollar from C and cancellation of his 2 dollar loan to A.

    As a result, A has got his debt cleared and he got the 2 coins. His net
    asset is 2 dollar. B owned a piece of land that is worth 4 dollar but since
    he has a debt of 2 dollar with C, his net Asset is 2 dollar.

    C loaned 2 dollar to B, so his net asset is 2 dollar.

    The net asset of the country = 6 dollar. Even though, the country has only
    one piece of land and 2 Dollar in circulation.

    (6) Everybody has made money and everybody felt happy and prosperous.

    (7) One day an evil wind blowed. An evil thought came to C's mind. "Hey,
    what if the land price stop going up, how could B repay my loan. There is
    only 2 dollar in circulation, I think after all the land that B owns is
    worth at most 1 dollar only."

    A also thought the same.

    (8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar
    coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned
    which he thought worth 4 dollar is now 1 dollar. His net asset become -1
    dollar.

    C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset
    is still 2 dollar, his Heart is palpitating.

    The net asset of the country = 3 dollar again.

    Who has stolen the 3 dollar from the country ?

    Of course, before the bubble burst B thought his land worth 4 dollar.

    Actually, right before the collapse, the net asset of the country was 6
    dollar in paper. his net asset is still 2 dollar, his heart is palpitating.

    The net asset of the country = 3 dollar again.

    (9) B had no choice but to declare bankruptcy. C as to relinquish his 2
    dollar bad debt to B but in return he acquired the land which is worth 1
    dollar now.

    A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset
    is 0 dollar. ( B lost everything ) C got no choice but end up with a land
    worth only 1 dollar (C lost one dollar) The net asset of the country = 3
    dollar.

    ****************End of the story***************************

    There is however a redistribution of wealth.

    A is the winner, B is the loser, C is lucky that he is spared.

    A few points worth noting -

    (1) When a bubble is building up, the debt of individual in a country to one
    another is also building up.

    (2) This story of the island is a close system whereby there is no other
    country and hence no foreign debt. The worth of the asset can only be
    calculated using the island's own currency. Hence, there is no net loss.

    (3) An overdamped system is assumed when the bubble burst, meaning the
    land's value did not go down to below 1 dollar.

    (4) When the bubble burst, the fellow with cash is the winner. The fellows
    having the land or extending loan to others are the loser. The asset could
    shrink or in worst case, they go bankrupt.

    (5) If there is another citizen D either holding a dollar or another piece
    of land but refrain to take part in the game. At the end of the day, he will
    neither win nor lose. But he will see the value of his money or land go up
    and down like a see saw.

    (6) When the bubble was in the growing phase, everybody made money.

    (7) If you are smart and know that you are living in a growing bubble, it is
    worthwhile to borrow money (like A ) and take part in the game. But you must
    know when you should change everything back to cash.

    (8) Instead of land, the above applies to stocks as well.

    (9) The actual worth of land or stocks depend largely on psychology.
     
    elfascinating likes this.
  6. alpha1

    alpha1 I BLUES!

    Nebu, long time no see.
    What are you upto these days?
     
  7. nebuchadnezzar

    nebuchadnezzar G34r G33k

    Nothing much man...same old..you still in Pune?
     

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