I just realized that some terms in that post might not be understood by the 'cool' guys who are not finance nerds...so i have attempted to explain some of the terms here -
1. mortgage - Americans call a home loan a mortgage. The monthly payment on the home loan is generally called a mortgage payment.
2. Mortgage Lender - The financial institution that gives you the loan. Unlike in India, where most lenders are also banks like ICICI, here you have specialized lenders like Countrywide.
3. Sub-prime Mortgage - Generally mortgages are defined by the interest rate that is charged on the original loan. A Prime rate is the standard bank rate, and denotes a borrower of moderate risk or low risk. A sub-prime mortgage is where the interest rate is higher than the prime rate, to account for the increased risk of some borrowers (people like the guy i explained below, or like me...;-) )
4. mortgage securities - a fantastic invention by a Salomon Brothers guy by means of which the mortgage lender can essentially take the loans that it gives out, put all of them in a big pool, and sell it as bonds to suckers like pension funds and hedge funds. Essentially, the bond payment is the mortgage payment (or the EMI, as they call it in India)
5. Credit Rating Agency - Agencies like Moody's, Standard and Poor's and Fitch. These guys analyze companies, governments and other organizations and rate their bonds ranging from 'investment grade' meaning really, really good organizations with no chance of default (yeah, right...); to 'junk' meaning you might as well buy the lottery (or General Motors stocks)
Monday, September 24, 2007
'Heinlein was wrong - there is such a thing as a free lunch'. Re: the US sub-prime mortgage bailout
Picture this...you are a 30 yr old renter in a suburb in Midwestern US. You have a family, a new job with a not-so-steady salary, old parents on Medicare (US govt. healthcare for seniors) but with increasingly unmanageable healthcare costs, and you an barely make ends meet. However, you believe in the American dream...you believe that, eventually, you will be able to buy a house.
Enter this nice broker from one of the biggest morgage lenders in the country. She offers you a house (your own!), with no credit check, no income verification, no down payment, and nominal payments for the next year. Never mind that little 'adjustable' clause, where your payments increase exponentially after that. Never mind that a house like this is way beyond what you can afford, never mind if a 3rd grader could tell you that the math doesn't make sense. Hey, prices are going up, you can always sell the house, right?
So you take the mortgage, and enter your own house. The mortgage broker makes a ton of money on commissions, the lender makes a ton of money on fees. As for the money the lender gave you, it just uses a bank and a friendly credit rating agency to package it into investment grade securities (suddenly, Wall St trusts you more than the Govt. of India or Brazil). They sell it to the pension fund that holds your risk-averse neighbor' retirement money. The bank, the agency, the lender all make a ton of money. Everyone's happy, most of all you, right?
Right, till you realize that there are such things are taxes and maintenance costs, which the broker glossed over when she sold you the loan. Suddenly its tough for you to find work, and you can barely manage to pay the low initial interest payments. Just when you think things cant get any worse, the 'adjustable' clause kicks in, and you are left with monthly payments bigger than your current income. You default, and you go to the nearest bar, and the nearest foreclosure lawyer for sustenance. Meanwhile each default of yours is another nail in the coffin of that sexy investment grade security your mortgage had become, and your lender, bank and your neighbour's pension fund are all looking at losses. Things look really bad, right?
Wrong. for here's where the fun begins. Papa Govt., aided by some scathing New York Times editorials, orders a stay on foreclosures, and directs lenders to give you the option of a kinder mortgage rate, which you can pay at your leisure. You can even take your sweet time with the payments, no one will kick you out of your house. Meanwhile, Santa Bernanke decreases interest rates, and allows banks to borrow at a lower rate and keep their crap mortgage securities till the next boom. This way everyone's happy.
Everyone, that is, except that poor pension fund, which invests only in investment grade securities. It cannot unload its securities, the banks will not give it a loan, and its value halves, along with the value of your neighbor's nest egg. So Heinlein was right after all, there IS no such thing as a free lunch for America. Contrary to what the public believes, the greedy get rich and the risk-averse suffer not in a free-market economy, but in a turncoat economy thats capitalist when the goings good and that protects you from any loss when the going's bad.
I guess Indians would get deja vu on reading this, having witnessed countless UTIs and co-operative bank bailouts ourselves...
Enter this nice broker from one of the biggest morgage lenders in the country. She offers you a house (your own!), with no credit check, no income verification, no down payment, and nominal payments for the next year. Never mind that little 'adjustable' clause, where your payments increase exponentially after that. Never mind that a house like this is way beyond what you can afford, never mind if a 3rd grader could tell you that the math doesn't make sense. Hey, prices are going up, you can always sell the house, right?
So you take the mortgage, and enter your own house. The mortgage broker makes a ton of money on commissions, the lender makes a ton of money on fees. As for the money the lender gave you, it just uses a bank and a friendly credit rating agency to package it into investment grade securities (suddenly, Wall St trusts you more than the Govt. of India or Brazil). They sell it to the pension fund that holds your risk-averse neighbor' retirement money. The bank, the agency, the lender all make a ton of money. Everyone's happy, most of all you, right?
Right, till you realize that there are such things are taxes and maintenance costs, which the broker glossed over when she sold you the loan. Suddenly its tough for you to find work, and you can barely manage to pay the low initial interest payments. Just when you think things cant get any worse, the 'adjustable' clause kicks in, and you are left with monthly payments bigger than your current income. You default, and you go to the nearest bar, and the nearest foreclosure lawyer for sustenance. Meanwhile each default of yours is another nail in the coffin of that sexy investment grade security your mortgage had become, and your lender, bank and your neighbour's pension fund are all looking at losses. Things look really bad, right?
Wrong. for here's where the fun begins. Papa Govt., aided by some scathing New York Times editorials, orders a stay on foreclosures, and directs lenders to give you the option of a kinder mortgage rate, which you can pay at your leisure. You can even take your sweet time with the payments, no one will kick you out of your house. Meanwhile, Santa Bernanke decreases interest rates, and allows banks to borrow at a lower rate and keep their crap mortgage securities till the next boom. This way everyone's happy.
Everyone, that is, except that poor pension fund, which invests only in investment grade securities. It cannot unload its securities, the banks will not give it a loan, and its value halves, along with the value of your neighbor's nest egg. So Heinlein was right after all, there IS no such thing as a free lunch for America. Contrary to what the public believes, the greedy get rich and the risk-averse suffer not in a free-market economy, but in a turncoat economy thats capitalist when the goings good and that protects you from any loss when the going's bad.
I guess Indians would get deja vu on reading this, having witnessed countless UTIs and co-operative bank bailouts ourselves...
Sunday, September 23, 2007
only in new york...
On a lazy Sunday morning after a mad booze and puke-filled party the night before, Hema dragged me (along with Samcho and Vikrant, who were crashing at my place) to Union Square as she had an appointment with the hair stylist. While waiting for her, we guys were browsing through the Sale section of the Strand at 12th and Broadway. Most of the books were for a buck, and I was looking at some good ones on american history (have been trying to understand what exactly makes this country so much richer than India, its certainly not the intellect...), when i noticed this handwritten note inside one of the books. Untitled and unsigned, it was likely written by some couple trying to start a family, or could be just a bored co-ed, there was no way of knowing. It was pretty sweet, though. I've reproduced it below, go through it, its a nice read -
Once upon a time, not so long ago, there lived a happy couple called Sandra and Eddie. 'Yes', they said, 'we are very happy', 'But', declared Sandra, 'If we had a baby then we would be the happiest people in the world', and Eddie agreed.
So they set out to get a baby. They wished upon the stars - can you please give us a baby, but they only smiled and twinkled back, 'we are too far away to give you a baby', 'perhaps you can try someone else.'
They followed a rainbow and found a leprechaun sitting on a crock of gold. 'Mr. Lep, can you give us a baby', asked Sandra and Eddie. 'A baby?!' said the leprechaun gruffly, 'I can't give you a baby - I can give you this crock of gold, perhaps you can try the Easter bunny.' But that is not what Sandra and Eddie wanted, a crock of gold is not a baby. So off they went and asked the Easter bunny 'Mr. Easter bunny can you please give us a baby'. 'A Baby?', said the Easter bunny twitching its nose, 'I can't give you a baby - I can give an Easter egg perhaps you can try the stork.'
So off went Sandra and Eddie and asked the stork, 'Mr Stork can you give us a baby?'. 'A baby', said the stork peering down his glasses, 'I can't give you a baby, its thanksgiving and I am on my way to Florida, its far too cold here. Perhaps when I get back I can give you a baby'. 'But we want one this year', cried Sandra and Eddie.
Poor poor Sandra and Eddie, they were so sad. 'Now what do we do?' asked Sandra, 'Its almost Christmas and we have no baby.' Then Eddie had an idea, 'I know, lets write a letter to Santa Claus...
And there it ended, evidently incomplete. Extremely cheesy, but it struck a chord with my dehydrated, hungover, post-pukescent brain... I showed it to Samcho, he liked it too. I gave the parchment to Vikrant to read, he glanced over it, murmured something inaudible and went back to a book on automobiles that he had unearthed from the junk...Just then the missus came out with no apparent change in hair length or texture (in fact, it seemed as if her hair had magically grown longer), and asked, 'hows my hair?' After the obligatory comments on how they make her look thin, smart, sexy, young, successful and so 'New York', I eagerly gave her the piece of paper to read...'See what I found!' She took it from my hands, went through it slowly, and as always, had the last word...'But why didn't they just have sex?'...
Once upon a time, not so long ago, there lived a happy couple called Sandra and Eddie. 'Yes', they said, 'we are very happy', 'But', declared Sandra, 'If we had a baby then we would be the happiest people in the world', and Eddie agreed.
So they set out to get a baby. They wished upon the stars - can you please give us a baby, but they only smiled and twinkled back, 'we are too far away to give you a baby', 'perhaps you can try someone else.'
They followed a rainbow and found a leprechaun sitting on a crock of gold. 'Mr. Lep, can you give us a baby', asked Sandra and Eddie. 'A baby?!' said the leprechaun gruffly, 'I can't give you a baby - I can give you this crock of gold, perhaps you can try the Easter bunny.' But that is not what Sandra and Eddie wanted, a crock of gold is not a baby. So off they went and asked the Easter bunny 'Mr. Easter bunny can you please give us a baby'. 'A Baby?', said the Easter bunny twitching its nose, 'I can't give you a baby - I can give an Easter egg perhaps you can try the stork.'
So off went Sandra and Eddie and asked the stork, 'Mr Stork can you give us a baby?'. 'A baby', said the stork peering down his glasses, 'I can't give you a baby, its thanksgiving and I am on my way to Florida, its far too cold here. Perhaps when I get back I can give you a baby'. 'But we want one this year', cried Sandra and Eddie.
Poor poor Sandra and Eddie, they were so sad. 'Now what do we do?' asked Sandra, 'Its almost Christmas and we have no baby.' Then Eddie had an idea, 'I know, lets write a letter to Santa Claus...
And there it ended, evidently incomplete. Extremely cheesy, but it struck a chord with my dehydrated, hungover, post-pukescent brain... I showed it to Samcho, he liked it too. I gave the parchment to Vikrant to read, he glanced over it, murmured something inaudible and went back to a book on automobiles that he had unearthed from the junk...Just then the missus came out with no apparent change in hair length or texture (in fact, it seemed as if her hair had magically grown longer), and asked, 'hows my hair?' After the obligatory comments on how they make her look thin, smart, sexy, young, successful and so 'New York', I eagerly gave her the piece of paper to read...'See what I found!' She took it from my hands, went through it slowly, and as always, had the last word...'But why didn't they just have sex?'...
Tuesday, September 18, 2007
veni, vidi...and i'm back for more
So here I am, back at the drawing board, trying to make sense of my life in the big, bad city of New York. A lot of things have happened in the interim. I started my new job as a business analyst at the Prime Brokerage/Securities Lending arm of a major bank at Wall St (for the uninitiated, thats the division where banks trde and borrow stocks for hedge funds). The hours are definitely crazier, what with me having to reach office at 7:30 am, and staying till atleast 6/7 pm. Hence the delay in putting down any random gyan in the old blog...
Meanwhile, life goes on...Another government learns (again!) that give a man a loan, and you get a global sub-prime mortgage crisis. The average citizen, meanwhile, learns (again!) that greed is good, as long as a large enough number of people are greedy. You always have the govt. to bail you out during those annoying foreclosures. In the middle of all this, Wall St, of course, sells crap with an investment grade rating and gets another 50 basis points off the fed funds rate by Santa Bernanke. (Read this article for more - http://online.wsj.com/article/SB119016992710232040.html?mod=googlenews_wsj )
Alan Greenspan starts speaking to people who have not paid 50 grand to hear him, once again, and this time, somebody actually manages to translate him into English and bring out the most eagerly awaited book of the year (read the review http://www.latimes.com/features/books/la-et-book17sep17,0,3146931.story?coll=la-home-center )
A couple in delhi manufacture (don't ask how) babies from 12 yr old girls that they kidnap, then sell the babies. (see http://www.ibnlive.com/news/impact-police-arrests-delhis-baby-traders/47977-3.html)
Ram Gopal Verma manages to commit sacrilege all over again by daring to reinvent what is arguably the best hindi movie of all time, while the Big B indulges in his late life crisis....
Oprah cosies up to Obama (sorry Bill, my heart might beat for you but my purse opens for my fellow Chicagoan). SRK gets abs while Britney loses hers (along with her mind, and maybe her kids)...A beauty queen in North Carolina presents her credentials to become the next president of the United States, Vikram flatters to deceive in Bheema, while he just might redeem himself in Kandasamy ( this last re:tam movies, for everyone else)
Yep, life as know it, goes on...faster than I can even muse about it...but I'm gonna try, by God...and this time, a bit more regularly. So for the few stoned slackers who actually read my bilge (Jon Stewart, love u man)... heres the scoop...I'm back, and I'm worse than before...
Meanwhile, life goes on...Another government learns (again!) that give a man a loan, and you get a global sub-prime mortgage crisis. The average citizen, meanwhile, learns (again!) that greed is good, as long as a large enough number of people are greedy. You always have the govt. to bail you out during those annoying foreclosures. In the middle of all this, Wall St, of course, sells crap with an investment grade rating and gets another 50 basis points off the fed funds rate by Santa Bernanke. (Read this article for more - http://online.wsj.com/article/SB119016992710232040.html?mod=googlenews_wsj )
Alan Greenspan starts speaking to people who have not paid 50 grand to hear him, once again, and this time, somebody actually manages to translate him into English and bring out the most eagerly awaited book of the year (read the review http://www.latimes.com/features/books/la-et-book17sep17,0,3146931.story?coll=la-home-center )
A couple in delhi manufacture (don't ask how) babies from 12 yr old girls that they kidnap, then sell the babies. (see http://www.ibnlive.com/news/impact-police-arrests-delhis-baby-traders/47977-3.html)
Ram Gopal Verma manages to commit sacrilege all over again by daring to reinvent what is arguably the best hindi movie of all time, while the Big B indulges in his late life crisis....
Oprah cosies up to Obama (sorry Bill, my heart might beat for you but my purse opens for my fellow Chicagoan). SRK gets abs while Britney loses hers (along with her mind, and maybe her kids)...A beauty queen in North Carolina presents her credentials to become the next president of the United States, Vikram flatters to deceive in Bheema, while he just might redeem himself in Kandasamy ( this last re:tam movies, for everyone else)
Yep, life as know it, goes on...faster than I can even muse about it...but I'm gonna try, by God...and this time, a bit more regularly. So for the few stoned slackers who actually read my bilge (Jon Stewart, love u man)... heres the scoop...I'm back, and I'm worse than before...
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