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Thread: The Big Short

  1. #11
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    Quote Originally Posted by doctrine View Post
    This group of people were fundamentally lucky, not smart. If they started even a little sooner, they would have been wiped out, like thousands of other people were. If they started after the bubble burst, they wouldn't have made money - in fact, if you start shorting too late, you can also lose everything - and this happened to thousands as well.
    Right. The protagonist was a serious gambler, and he got lucky. This was a giant speculation and he almost got destroyed because of it.

    As Nelley points out, he was also reckless and irresponsible with his duty to his investors.

    On the other hand, every person who invested in the market from 2007 or earlier have all made money if they bought and held, if they could have withstood the drops.
    That's absolutely not true for investors who bought & held many popular bank stocks (C, BAC, CFC, FNM, FRE, LEH, MER, WM just to name a few). These stocks never recovered.

    Broad index investors fared well, though.

    Many investors in individual stocks got wiped out, especially if they had the mentality that you should buy & hold no matter how rough the market gets or how low a stock goes. This is a very dangerous mindset.

    It applies to Canadians too, and most people don't realize how close they came to losing their shirts. For example both CIBC and BMO's equity was entirely wiped out during the crisis and on fundamentals, the banks were worthless. Only incredible amounts of American & Canadian government support kept the companies from failing.

    Unfortunately most people walked away with the lesson "Canadian bank stocks always recover", which isn't the right lesson at all. The correct lesson is more like, "worthless stocks you hold may recover when there's enormous government intervention".

    Last edited by james4beach; 2017-03-21 at 05:09 AM.

  2. #12
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    What neither the book nor the movie say is that Goldman Sachs insured itself against what happened. They shorted the mortgage backed bonds, which they also sold and bought. So not all big financial institutions were quite as dumb as the book makes out, but some were. And GS were fined for it.

    Foreclosing defaulted secured debt is absolutely the right thing to do. There is a reason interest rates on secured debt are a lot lower than on unsecured debt. Of course in most cases Americans who defaulted simply walked away from their debt obligations.

    The root cause of the problem was the government which forced the industry to give mortgages to people who couldn't afford it. It was done for ideological reasons; apparently poor people in inner cities deserve to own houses.

    In Canada we have largely avoided the worst of the housing crises. And seem to be walking into the exact same mistakes. It was particularly sweet of the BC Libs to encourage first time buyers to take out larger mortgages. Politically smart. And Home Trust qualified people who couldn't afford mortgages by even Canadian rules that are stunningly lax. Home Trust got caught and didn't get as much as a slap on the wrist. Meanwhile Torontonians just can't get enough bidding up prices by the hundreds of thousands.

    A crisis plays a useful role. People don't learn from others mistakes.

  3. #13
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    Foreclosing on defaulted secured debt is the wise thing to do if you can sell the asset to pay off the debt.

    The banks underestimated the number of foreclosures and ended up with millions of homes sitting vacant and losing value.

    They should have made arrangements with the home owners.....not to save the homeowners but to save themselves.

    From a purely cynical capitalist viewpoint, let the people stay, pay something on the debt, and maintain the property.....and then boot them out and sell the home when the crisis is over.

    Banks had so many foreclosed properties on their books listed at full value, that it made their financial records worthless.

    There are lots of videos on Youtube of people driving through whole subdivisions of homes that were destroyed by vandals.
    Last edited by sags; 2017-03-21 at 01:09 PM.
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  5. #14
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    The whole thing was shot through with fraud from top to bottom. You would have to follow the story from the beginning as I did to have even a clue what was going on. Michael Lewis and Matt Taibbi are two reporters who tried to get to the bottom of it but there are others. The Tea Party was started specifically to fight the bailouts before it was highjacked and derailed. There used to be several web sites reporting on it but nothing was done, the scandal was papered over and charged to the taxpayer. Here we are 10 years later and nothing has been done, nothing has changed, the same sleaze balls are still running things. Wonder where the next scam/bubble will blow up? Will it be student loans, car loans, another real estate bubble, or perhaps something in a foreign country?

  6. #15
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    I agree that fraud was pervasive through that US system. I spent some time short selling Countrywide Financial which was one of many fraudulent players.

    Still, I think Canada is failing to acknowledge the similar risks we have. The CMHC has pumped about $800 billion into housing. It's not as bad as Fannie Mae, but it's a similar scheme: the state takes mortgage risks from banks, which allow the banks to aggressively grow and lend. The banks are shielded from the core risk of mortgage lending.

    Both Fannie Mae and CMHC have helped to establish nationwide housing bubbles, as have a slew of smaller and more aggressive mortgage lenders. We've even seen a proliferation of these small lenders, which you can find mentioned in the threads where people talk about savings accounts promotions: Peoples Trust, Equitable Bank, etc.

    If the Canadian housing bubble collapses, I expect that some of those mortgage-focused trust banks will fail. Big Six banks will take a bit hit as well, and even though the government will assist them, their equity could be heavily diluted as they are forced to raise more capital.

    This is a reason I feel great about my un-bundled XIU. As with Argo's 5 pack, it diversifies my sectors and reduces my concentration in financials. The TSX 60 is 41% financials!!
    Last edited by james4beach; 2017-03-21 at 02:04 PM.

  7. #16
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    As happened in the past, as some of the posts in the past on CMF discussed, is that when the Canadian housing market starts to nose dive the alternative lenders will flee the Canadian marketplace.

    What happened then and will likely happen again, is the lenders retrench and refuse to renew mortgages.

    This puts their customers in a financial bind if their home values have declined lower than the mortgage or if their creditworthiness is less than traditional banks will accept. They either have to come up with big amounts of cash or don't qualify at all.

    It happened to my sister, who was notified her mortgage would not be renewed by a small US based lender, and she could not qualify at a big bank because her income was based on disability pension and income from offering child care.

    She ended up having to legally "sell" her home to her son who qualified for the mortgage. She now rents it back from him.

    Mortgage qualifications have been raised since some people obtained their original mortgages. The ability to pay the mortgage is now calculated at the benchmark interest rate, rather than a discounted rate. Some people may not qualify now.

    If home prices start to collapse, the government needs to "switch tracks" for the coming train wreck to provide stability in the market.

    Guaranteed mortgage renewals, extended amortizations, and other measures are possible if not left until it is too late.

    The worst possible scenario would be to let the market collapse.
    Last edited by sags; 2017-03-21 at 03:02 PM.
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  8. #17
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    Wonder where the next scam/bubble will blow up? Will it be student loans, car loans, another real estate bubble, or perhaps something in a foreign country?

    You are right. Nobody learned anything from the past.

    We own 2 vehicles bought new in 2014. The dealer has been contacting us to "upgrade" to new vehicles.

    They say......."we can get you into a brand new vehicle for the same monthly payment".

    I say......." we wouldn't get enough from our vehicles to pay off the loans yet".

    They say........."it doesn't matter. We do it all the time. We just "roll in" the old loan into a new bigger loan".

    Same old...........same old. This won't end well again.
    Someone planted a tree a long time ago so I can sit in the shade.

  9. #18
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    They learned all right. They learned they can rob the public, sell fake securities, and get bailed out by the taxpayers when their scams blow up in their face. There is NO incentive to be honest and every incentive to lie, scheme, chisel and steal.

    I haven't forgotten that thanks to changes in the law, Canadian banks have no responsibility to give their customers back their deposits. As the law stands now when you give your money to the bank it is the bank's money and they have the right to a 'bail in' which means they can keep your money if they think they need it more than you do.
    Last edited by Rusty O'Toole; 2017-03-21 at 05:54 PM.

  10. #19
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    Wouldn't it be better to go back to the old system we had from the thirties to the eighties when banks were regulated and held responsible and the financial system never blew up? Where at worst we had the collapse of one fly by night institution at a time that did not affect the system as a whole?


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