Reddittors vs Wall Street

[lpm]

As for The Big Short itself, one of the things I found most shocking was that the credit raters (Moodys and S&P) were aware of the issue, but continued certifying the junk bonds way above their true value so as not to lose business to a competitor. That's the sort of structural issue that needs addressing if teh marketz are to function as intended and correctly value things.

I'd suggest that that kind of objective assessment doesn't necessarily benefit from the profit motive, and might be a role more sensibly allocated to a statutory regulator.

Anyway AFAIAA no big changes to regulation have happened that would prevent an analogous situation occurring again.

There are stronger Chinese walls in rating agencies today - you can't discuss the bill for rating your bond with the people doing the rating. But yes, should be split off even more.

And the mortgages Northern Rock offered back in the day - 125% value etc - can't now be offered. Let alone the mad American sh.t like Ninja mortgages - No Income, No Job.

And banks are now required to hold far more capital than before, getting more severe stress tests they must pass and so on.

On the other hand, this means it's harder for young people to get on the housing ladder. Moan about not being able to get 100% mortgage, moan about the days when banks recklessly offered 100% mortgages...

Hence, it's not accurate to say there have been no big changes to regulation, although we can of course argue about whether's its big enough. The same situation shouldn't happen again - but regulators are always getting the defences needed to fight the last war not the next.

[El Pollo Diablo]

Forgive my ignorance on this (the 2007/08 crash was something that was largely over my head at the time), but what happens to someone with a mortgage when the financial institution goes bust?

[lpm]

Nothing. You still owe your mortgage.

Technically Northern Rock didn't go bust, it was nationalised. Northern Rock mortgages continued to be paid to the same legal entity, but the government owned that entity.

[Bird on a Fire]

As for The Big Short itself, one of the things I found most shocking was that the credit raters (Moodys and S&P) were aware of the issue, but continued certifying the junk bonds way above their true value so as not to lose business to a competitor. That's the sort of structural issue that needs addressing if teh marketz are to function as intended and correctly value things.

I'd suggest that that kind of objective assessment doesn't necessarily benefit from the profit motive, and might be a role more sensibly allocated to a statutory regulator.

Anyway AFAIAA no big changes to regulation have happened that would prevent an analogous situation occurring again.

There are stronger Chinese walls in rating agencies today - you can't discuss the bill for rating your bond with the people doing the rating. But yes, should be split off even more.

And the mortgages Northern Rock offered back in the day - 125% value etc - can't now be offered. Let alone the mad American sh.t like Ninja mortgages - No Income, No Job.

And banks are now required to hold far more capital than before, getting more severe stress tests they must pass and so on.

On the other hand, this means it's harder for young people to get on the housing ladder. Moan about not being able to get 100% mortgage, moan about the days when banks recklessly offered 100% mortgages...

Hence, it's not accurate to say there have been no big changes to regulation, although we can of course argue about whether's its big enough. The same situation shouldn't happen again - but regulators are always getting the defences needed to fight the last war not the next.

Thanks for the extra info. I was thinking about ratings regs specifically rather than banking in general (but I admit to having a fairly flimsy grasp of all this stuff). The holding of extra capital is a good thing, I think, even if it makes it harder for me to get a mortgage

How well do you think self-regulation via things like Chinese Walls works in practice? Stuff like the LIBOR fixing came about because of unethical collusion - I'm assuming its not actually impossible for an investor to work out who's rating their bonds, or vice-versa? They probably all drink in the same champagne bars etc.

It strikes me that while the stock market originally had a fairly well-defined and useful purpose (valuing public companies), a lot of the practices and conventions and instruments that have arisen have an orthogonal primary purpose, to deliver a return on an investment. It would be super interesting to see a data-driven review of different kinds of investing activities and the extent to which they're important for correcting market values. My hunch is that there's a whole bunch of stuff that would currently look harmless but fairly useless - those things would be candidates for banning now, before they create some crazy Black Swan event, instead of waiting till afterwards.

[dyqik]

Forgive my ignorance on this (the 2007/08 crash was something that was largely over my head at the time), but what happens to someone with a mortgage when the financial institution goes bust?

Someone buys up the package of mortgages cheaply to pay some of the creditors of the institution. Or the creditors take the mortgage packages as an asset.

However, in the 07/08, a whole lot of the US sub-prime mortgages had been packaged up and sold on already. The retail bank that sold the mortgages mostly wasn't holding the dodgy mortgages any more. I don't know if Northern Rock was holding on to its mortgages, was buying up packages as investments or was just caught holding ones it hadn't been able to sell yet.

[Imrael]

I'm just about old enough to remember the Lloyds Equitas scandal, where Lloyds of London (the Insurance market not the bank) and their "Names" (sort of rich retail investors) got into trouble through re-selling packaged risks.

Seems to be the regulations tend to fix the last crisis and inventive people are probably even as we speak generating the circumstances for the next one. If I knew what it was I'd be rich of course

[lpm]

How well do you think self-regulation via things like Chinese Walls works in practice? Stuff like the LIBOR fixing came about because of unethical collusion - I'm assuming its not actually impossible for an investor to work out who's rating their bonds, or vice-versa? They probably all drink in the same champagne bars etc.

A debt issuer not only knows the people rating their bonds but goes and meets them. Has regular annual update meetings.

However it's not incestous or anything. Moodys, S&P and Fitch aren't located in the same office. Completely separate buildings. OK, so they are in next door buildings at Canary Wharf. But there's no revolving door between the rating agencies and banks. Except for, you know, all the rating agency experts getting recruited by the banks to tell them exactly how a bond will be rated.

But the one thing that will never ever happen is issuers drinking at the same champagne bar as rating agency people. This is because the people in rating agencies are unbelievably boring. They are the most tedious people I have ever met and would never do anything as over-stimulating as going to a champagne bar. Clever? Yes. Interesting? No. Common sense? Absolutely none.

[plodder]

Forgive my ignorance on this (the 2007/08 crash was something that was largely over my head at the time), but what happens to someone with a mortgage when the financial institution goes bust?

Someone buys up the package of mortgages cheaply to pay some of the creditors of the institution. Or the creditors take the mortgage packages as an asset.

However, in the 07/08, a whole lot of the US sub-prime mortgages had been packaged up and sold on already. The retail bank that sold the mortgages mostly wasn't holding the dodgy mortgages any more. I don't know if Northern Rock was holding on to its mortgages, was buying up packages as investments or was just caught holding ones it hadn't been able to sell yet.

Kinda related to this, there's a charity in the UK that buys up debt for pennies in the pound, then cancels it. I think a more equitable (and sustainable model) might be to offer the v. cheap debt to the person who owes it, at cost price. I wonder if it's possible to choose who's debt you buy? Could you buy your own?

[plodder]

Forgive my ignorance on this (the 2007/08 crash was something that was largely over my head at the time), but what happens to someone with a mortgage when the financial institution goes bust?

Someone buys up the package of mortgages cheaply to pay some of the creditors of the institution. Or the creditors take the mortgage packages as an asset.

However, in the 07/08, a whole lot of the US sub-prime mortgages had been packaged up and sold on already. The retail bank that sold the mortgages mostly wasn't holding the dodgy mortgages any more. I don't know if Northern Rock was holding on to its mortgages, was buying up packages as investments or was just caught holding ones it hadn't been able to sell yet.

Kinda related to this, there's a charity in the UK that buys up debt for pennies in the pound, then cancels it. I think a more equitable (and sustainable model) might be to offer the v. cheap debt to the person who owes it, at cost price. I wonder if it's possible to choose whose debt you buy? Could you buy your own?

[basementer]

Forgive my ignorance on this (the 2007/08 crash was something that was largely over my head at the time), but what happens to someone with a mortgage when the financial institution goes bust?

Although the words are often used synonymously, there's a difference between a mortgage and a home loan. The mortgage is the legal instrument that places the lender first in line for any proceeds when the property is sold. It's the security for the loan. If a lender were to go bust, its mortgages (being useful assets) would go to the highest bidder or, in the case of Northern Rock, the government. The mortgages having cost them money, they would want to recover their costs, and they would be in a position to have a rather one-sided discussion with you about the new terms of your loan.

[lpm]

No. Your contract wouldn't be changed. Consumer protection is very strong. You could keep the mortgage running for its remaining term. Obviously they wouldn't be offering you cheaper remortgaging though.

[basementer]

I believe that lpm knows more about consumer protection than I do.

[headshot]

No. Your contract wouldn't be changed. Consumer protection is very strong. You could keep the mortgage running for its remaining term. Obviously they wouldn't be offering you cheaper remortgaging though.

I had Northern Rock mortgage when they went under. Everything was fine as a borrower whilst the Govt took it all over, but we had to transfer the mortgage a couple of years later. I can’t remember if the terms were changed, but we just remortgaged for a better deal with someone else.

[Millennie Al]

When I worked at the stockbroker I could go into a customer's shareholding and see the serial numbers of the shares they owned if I wanted to, there was never really a need but it was an option, so I can tell you now AS A FACT that it is definitely possible to prevent the same share being lent more than once!

Was that quite some time ago when companies still routinely issued share certificates? And if you can tell shares apart, perhaps you could have a word with HMRC which claims you can't (so HMRC decides which ones you are trading for CGT purposes).

[Millennie Al]

I'd suggest that that kind of objective assessment doesn't necessarily benefit from the profit motive, and might be a role more sensibly allocated to a statutory regulator.

On the contrary, it is an ideal situation in which to exploit the profit motive. You require a credit rating agency to hold securities in proportions which reflect the ratings they give. That way agencies which give correct ratings make a profit and can expand, while those who get it wrong lose money until they are driven out of business. The nice feature of doing it that way is that it works even if nobody understands what they are doing.

[Bird on a Fire]

I'd suggest that that kind of objective assessment doesn't necessarily benefit from the profit motive, and might be a role more sensibly allocated to a statutory regulator.

On the contrary, it is an ideal situation in which to exploit the profit motive. You require a credit rating agency to hold securities in proportions which reflect the ratings they give. That way agencies which give correct ratings make a profit and can expand, while those who get it wrong lose money until they are driven out of business. The nice feature of doing it that way is that it works even if nobody understands what they are doing.

Unless you're reselling. Then you have the "our vendor's panels are certified fireproof" problem.

[Millennie Al]

Kinda related to this, there's a charity in the UK that buys up debt for pennies in the pound, then cancels it. I think a more equitable (and sustainable model) might be to offer the v. cheap debt to the person who owes it, at cost price. I wonder if it's possible to choose who's debt you buy? Could you buy your own?

That's obviously not going to work. If the debt holder is willing to sell a debt to you, then they'd be just as willing to take that money from the debtor - they get the same price and it's probably significantly cheaper in transaction costs.

You you can buy your own debt, but why not just buy it direct from the current debt holder?

[plodder]

Kinda related to this, there's a charity in the UK that buys up debt for pennies in the pound, then cancels it. I think a more equitable (and sustainable model) might be to offer the v. cheap debt to the person who owes it, at cost price. I wonder if it's possible to choose who's debt you buy? Could you buy your own?

That's obviously not going to work. If the debt holder is willing to sell a debt to you, then they'd be just as willing to take that money from the debtor - they get the same price and it's probably significantly cheaper in transaction costs.

You you can buy your own debt, but why not just buy it direct from the current debt holder?

It obviously does work because bad debts are sold off cheaply all the time.

[plodder]

would it be illegal for me to secretly buy my own debts on the cheap?

What if I was a silent partner in your firm, and you bought them all up?

If a debt is worthless because I’m not going to pay it, why shouldn’t I be able to pay fair market price for it? That’s exactly what City boys do for a living?

[nezumi]

When I worked at the stockbroker I could go into a customer's shareholding and see the serial numbers of the shares they owned if I wanted to, there was never really a need but it was an option, so I can tell you now AS A FACT that it is definitely possible to prevent the same share being lent more than once!

Was that quite some time ago when companies still routinely issued share certificates? And if you can tell shares apart, perhaps you could have a word with HMRC which claims you can't (so HMRC decides which ones you are trading for CGT purposes).

No, it was 2014-17ish and while there were still share certs knocking about it was mostly digital.

[Woodchopper]

would it be illegal for me to secretly buy my own debts on the cheap?

What if I was a silent partner in your firm, and you bought them all up?

If a debt is worthless because I’m not going to pay it, why shouldn’t I be able to pay fair market price for it? That’s exactly what City boys do for a living?

I don't think that would be illegal. Probably not possible though as as far as I know they sell of debt wholesale and don't sell individual accounts.

But the bank will only sell your debt for a small sum if it believes that you have no money with which to pay it off. If you actually have enough assets to be able to finance buying up the debt then the bank should view you as a more secure prospect and charge you a higher price for your debt.

The only way out of that Catch 22 would be to lie to the bank about your assets. Which probably would be illegal.

[lpm]

would it be illegal for me to secretly buy my own debts on the cheap?

What if I was a silent partner in your firm, and you bought them all up?

If a debt is worthless because I’m not going to pay it, why shouldn’t I be able to pay fair market price for it? That’s exactly what City boys do for a living?

There are multiple schemes to allow people to restructure their debts. These range from the electricity company offering you a deal where you repay £10 a week for a year and the rest is written of, to multiple ways of getting personal bankruptcy protection. The regulations are really kind to humans in these situations because we don't live within a Dickens novel, although Mr Plodder would be a good Dickens name.

Too many people struggle on under the hassle of debt collection agencies, instead of taking hold of the situation and cutting a deal. Anybody can, in effect, buy up their own debts and pay 20p on the £1 for them or whatever. Of course, your credit rating will be pretty terrible from the moment you started to pay bills late and future access to cheap credit will be denied you.

The underlying problem is that people with chaotic lives are more likely to be people with debt problems, while more organised planning type people who could arrange optimal debt relief packages are less likely to get badly into debt in the first place.

[plodder]

How do I buy an individual’s debt then?

Mr Plodder would like to release Master Chops from the tyrannical clutches of Madame Liverpool. In Dickens it would be a flowery conversation with a cruel lawyer in attendance, with a “if you want to take trouble with that ne’er do well then be my guest” as a parting shot.

But how does it work nowadays? Is there a website where bad debts are listed? How do I register? What certificates do I need?

[lpm]

It's all wholesale. Portfolio theory.

Vodafone has 10,000 customers who've stopped paying their monthly iPhone direct debits. They sell the batch to Fingerbreakers debt collection agency for 20p/£. The whole point is not to scrutinise each individual, at most they are identified by standard credit worthiness ratings.

Fingerbreakers know from long experience that 3,000 of these customers are outright fraud and won't ever be found, 3,000 simply can't pay, 4,000 will cough up half what they owe. If Fingerbreakers perform well they'll profit, if they're rubbish they'll make a loss.

Going to an individual level is unnecessary, it's all about averaging across large populations.

Obviously there's no website listing people's bad debts. That might be, shall we say, "problematic" for EU data protection laws. But presumably the UK can now go it alone and this can be a Brexit benefit.

[Bird on a Fire]

So plodder would have to buy the whole portfolio containing the debt of interest, and forgive everybody?

I think they did that on Last Week Tonight (under merkin rules, of course).