Monday, April 25, 2011

Michael Lewis (Wall Street Insider) Mikhail Taufiq (Venture Capitalist) and the Subprime Bust

MICHAEL LEWIS - Wall Street Insider. There is another route, another path to mystical enlightenment which is open to you, Wall Street. In the warped and magical world of subprime mortgage, you may find transcendental formulae and concepts beyond mortal understanding, and certainly beyond reason. Hehehe. It is called greed, and it is the art of creating value from nothing, the 'originating' and 'selling' of junk subprime mortgages (lets just call it loans), ie giving money to credit-strapped borrowers in exchange to their almost certain likelihood of default (made especially more likely with the floating interest rate which would come into effect after the earlier 2 years 7% easy-peasy interest and whack the borrower in the 3rd year of their loan, already struggling to pay off the loan, with a whopping double increase in their payable interest rates). Then these originaters and sellers quickly offload their junk loans to Wall Street banks who then package these loans into securitised debt instruments (ie Subprime Bonds) breaking them up into tranches with differing payment timeline and interest (to attract the high-risk and low-risk investors). The original idea was to give Americans unable to get good credit, the chance to exchange high interest credit card loans to low interest mortgage loans. Perhaps it was a good idea, but the idea has been corrupted almost beyond recognition. I have read Micheal Lewis's first (brilliant and hilarious) book, 'The Liar's Poker' about the crazy 80s which saw the first Wall Street boom in the bond market, and I must say that 'The Big Short' is an excellent follow-up and analysis of the subprime bust.

MIKHAIL TAUFIQ - Venture Capitalist. Mika was in bed one day, when I asked him, "What do you want to be when you grow up, MIka? My son mused for a second before replying, "I want to be a venture capital." What? He reiterated his reply, "A venture capital, Papaaa...". "What the...??", I thought and then ventured a suggestion, "You mean a venture capitalist?" He nodded rigorously, "Yes, yes, a venture capitalist".

I don't think he knows what he's talking about, "Mika, do you know what a venture capitalist does?"

"That's easy, Papa. I borrow some money from the bank, then I buy a shop. Then... I sell the shop at twice the price I paid to buy it. The money I then split half-half with the bank."

Oh my God, I thought. The answer, given by a 7-year old, is quite right. Now I am going to ask him explain to me the arcane science of collaterized debt instruments (Correction 26.04.11 - it should be CDOs, Collaterized Debt Obligations. Apologies, sunshine) and how to offload junk mortgage out of my books and rig my accounts to record unrealized profits...

Are we not always surprised by our children, sunshine? God bless their curious minds.

Pax Taufiqa.

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