King of the Click Business Insider has alerted us all to an obscure comment on a proposed SEC rule for Nationally Recognized Statistical Rating Organizations. William J. Harrington, is a former Moody's Senior Vice President in the derivatives analyst group from 1999-2010. In Harrington's 80 page comment, he starts with this opening salvo:
Moody’s argues that RMBS committees could not have factored the collapse of real estate prices into their opinions, given that the scale of the collapse was both unprecedented and unforeseeable. This rationale is as unconvincing as it is disingenuous, for it pretends that Moody’s and other financial players were not designing and operating the conveyances that carried real estate prices to unsustainable levels in the first place. A roller coaster inexorably chugs up to stomach-turning heights before it hurtles downward, and both a carnival operator
and a thrill seeker understand the nature of the ride’s operations.
The rationale of “who could know?” is wholly undone through even a cursory examination of the actions of Moody’s and other financial players in the structured finance sector. Moody’s and other financial players took care to protect their earning should the real estate bubble that they were ushering into the world subsequently collapse.
Ah, facts and more facts, yet nothing changes. The Senate Permanent Subcommittee on Investigations released a mammoth report in April on the financial crisis, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, which is available here.
Thought bail outs were over? Think again. Last Friday the government bought $50 billion in toxic assets from three corporate credit unions.
The government’s National Credit Union Administration seized three corporate credit unions on Friday and announced a plan to separate the $50 billion of troubled assets from the industry.
What is a corporate credit union you ask? A corporate credit union is kind of a wholesale or bank to the regular credit unions which consumers use.
The NCUA press release overviews their Corporate System Resolution to deal with buying billions of worthless crap derivatives. What are they doing? Repackaging $50 billion in worthless derivatives as $35 billion in government backed derivatives. I kid you not. The government is in the securitization business.
La de da, look at the NCUA's statement on how the corporate credit unions got into trouble:
Several large corporate credit unions made large investments in private label mortgage-backed securities that are now worth much less than the amount the corporates originally paid for them. This affected corporate credit unions in two significant ways.
Over and over again, we discover, upon some obscure audit or forensic accounting report being published, derivatives were the real culprit behind some bank/credit union/country failing.
Now we have Greece considering suing U.S. banks over credit default swaps on their sovereign debt and other derivatives.
Greece is considering taking legal action against U.S. investment banks that might have contributed to the country’s debt crisis, Prime Minister George Papandreou said.
“I wouldn’t rule out that this may be a recourse,” Papandreou said.
While this interview is making headlines buzz, to read the details of why Greece would consider suing U.S. banks click here and here
What a surprise, having a vehicle that pays out hansomely if a nation defaults on their debt might create some shady dealings. Bloomberg:
European Central Bank President Jean-Claude Trichet said May 6 that he was concerned about speculation in bond markets using credit default swaps. “By first buying the CDS and then trying to affect market sentiment by going short on the underlying bond, investors can make large profits,” he said.
If ya all are wanting some blood on the floor, the Goldman Sachs hearing may give it to you. Below is Senator Levin questioning a Goldman Sachs internal email labeling a toxic asset, a CDO called Timberwolf, as caca:
What Arora et al. prove is not only are many derivative mathematical models impossible to compute, never mind in real time, because they require more computing power than the world possesses, the missing information to run a mathematical model is a very good place to cheat with.
To understand what CDOs, derivatives are, see this post, complete with video tutorials. For some background on the mathematics behind derivatives, read We Want the Formula and this one on some of the probability functions.
Onto the paper. Firstly this quote:
One of our main results suggests that it may be computationally intractable to price derivatives even when buyers know almost all of the relevant information, and furthermore this is true even in very simple models of asset yields.
It's Friday Night! Party Time! Time to relax, put your feet up on the couch, lay back, and watch some detailed videos on economic policy! Well, not really this evening. It is more like time to breath. We need an educational catch up on the real causes of this financial crisis and resulting bail out, which is derivatives (and not falling housing prices per say).
This weeks video clip theme is education on derivatives and credit default swaps (CDS). These vehicles are so complex frankly it's tough to find material which explains them clearly.
King of the Click Business Insider has alerted us all to an obscure 
It's Friday Night! Party Time! Time to relax, put your feet up on the couch, lay back, and watch some detailed videos on economic policy! Well, not really this evening. It is more like time to breath. We need an educational catch up on the real causes of this financial crisis and resulting bail out, which is derivatives (and not falling housing prices per say).
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