Dec 29, 2008

Miscellaneous Musings on the Financial & Economic Crisis

I'm feeling tired.

I work in an investment bank. I also specialise in derivatives. In addition, I am a lawyer.

Put that all together, throw in the financial crisis, and what it really means is that life at work has been hectic for me, for many months. The crazy market conditions have thrown up all sorts of unprecedented fires that need to be put out.

That includes, among other things, legal disputes with defaulting clients who will do anything they can to extricate themselves from a deal gone bad.

I can't give details here, of course. Confidentiality, and all that. But if you read the financial news from around the world, you'll get a sense of what I'm talking about. It's a global phenomenon.

Here's one example that I can discuss, since it's from the other side of the world, and very public, and has nothing to do with me:

President says Ecuador will default on debt
By GONZALO SOLANO – Dec 12, 2008

QUITO, Ecuador (AP) — President Rafael Correa announced Ecuador will not meet a debt payment next week, making good on threats to default on debts his government considers illegitimate.

Correa told a news conference Friday in the city of Guayaquil that Ecuador will not make a $30.6 million interest payment due Monday on $510 million in bonds due in 2012.

"This foreign debt will not continue to be paid," Correa said. Ecuador will offer a restructuring plan to creditors in hopes of avoiding a drawn-out legal battle, he said.

Correa threatened to default on Ecuador's foreign debt before his landslide victory in 2006, and his government has spent heavily on social programs like monthly payments for single mothers, seeds for farmers and building materials for new homeowners.

The still-popular president recently warned that falling oil prices may force his hand on a default. Oil is Ecuador's top source of foreign income, accounting for 40 percent of the national budget.

.... A presidential commission last month recommended that Ecuador default on almost 40 percent of its $10 billion foreign debt, accusing former officials and bankers of profiting irresponsibly from bond deals.

Correa, a leftist U.S.-trained economist, said then that he would seek to halt payment on the loans and hold foreign investment banks and ex-government officials responsible.
What does this mean? Well, in a nutshell, Ecuador doesn't have much money. We know why. Ecuador sells oil, and oil prices have collapsed, so Ecuador is broke. So Ecuador decided not to pay its creditors.

Next, you need to find a reason not to pay. So you set up an official presidential commission and have it recommend that Ecuador should refuse to pay interest on USD $4 billion of its debt. Need some moral justification? Well, just accuse the banks of making irresponsible profits out of these deals. But didn't Ecuador's own government approve of these deals in the first place? Oh. Well then, let's just choose a few government officials and make accusations against them too. Simple as that.

So in the past few months, this is the repeating story of my working life. As mentioned earlier, I'm not involved in the Ecuador matter at all, but I am looking at many cases where the client is broadly just doing the same thing - in other words, anything and everything it can to try to wriggle out of a deal gone bad. That includes employing tactics which are dishonest and unethical, and sometimes frivolous to the point of being baffling.

I spend hours on conference calls and meetings just unravelling and deciphering all this nonsense. Well, on the positive side, I guess this means I still have a job. I think. Haha.

Lots of people must be worried about their jobs right now. Tan Kin Lian had a suggestion on how to save jobs. The suggestion is so simple that I suspected that there must be something wrong with it. This is the problem when I do too much work of the kind of work I do - my mind grows too complicated for its own good.

Okay, let me put it simply. Tan Kin Lian's suggestion is simple. And good. Read it here.

53 comments:

Anonymous said...

The Ecuador president should say they will pay back the debt in 30 years time, just like LKY said of the GIC investments with 30 year horizon for payoff, never mind short term mind boggling losses.

Also reminds me of our CPF money. They will come up new rules and policies (annuity, bigger minimum sum, later withdrawal age, etc)to delay your withdrawal, saying that this is to plan for enough in your retirement. And they will shift and shift the goal post from time to time just as you are about to kick in the ball.

Anonymous said...

Understand what you mean but this is a case of reaping what was sown, isn't it? What was represented to the client then? What and how were the contracting documents drafted then? How much you have to do would really depend on how much work was done upfront, before the trade...

If the suits pile up, there's always folks from external legal counsel to spread out the case load. (just need to ask your boss that you'll be blowing the external LC budget for the next few years due to these extraordinary circumstances)

And it's really hard to argue misrepresentation in the courts these days, especially in the case of corporate clients.

So be easy for you... (just dont lose any...)

;-)

Jack Ryan

Jonathan Wong said...

I am not a lawyer or a banker, but please help me understand this:

Legalities aside, whenever one party essentially lends (transfers, invests, whatever) money to another party, isn't it always a risk that the receiving party will default and not pay back? Via ethical or non-ethical means or otherwise?

And isn't this risk always assessed and incorporated as part of the due diligence (from both parties) when deciding whether to go through with the transaction or not?

I guess what I'm trying to say is this:

Everyone walks into a deal with their eyes wide open, knowingly that no one can be 100% trustworthy or reliable to pay back anything (except maybe US treasury bonds), and thus they should factor in the risk (however small) that defaults will and do happen.

So is it relevant to discuss whether the techniques used by the defaulting party are unethical, dishonest or frivolous? (Which honestly, I have no doubt they probably are.)

Tattooed Banker said...

The whole financial crisis suddenly makes you see the worst side of human nature. People are crying wolf and everybody is playing victim to get their money back at all cost.

Not the best time to be a banker eh?

Anonymous said...

Dear Mr. Wang,

My interest is piqued as to why you think Mr. Tan's proposal is too good to be true.

Would you care to elaborate?

Regards.

Anonymous said...

"Also reminds me of our CPF money. They will come up new rules and policies (annuity, bigger minimum sum, later withdrawal age, etc)to delay your withdrawal, saying that this is to plan for enough in your retirement. And they will shift and shift the goal post from time to time just as you are about to kick in the ball."



These are clear signs of a Ponzi scheme in operation. SGians have been warned.

Anonymous said...

CPF. Mr Wang, don;t you think it is weird that the day after financial meltdown, that the CPF Board released INCREASED limits before CPF withdrawal?

Are the scholars again doing discrete mathematics in seclusion behind walls of stacked USD100 and Euro100 notes with their names stamped on?

In recession, nobody can possibily INCREASE CPF contributions with retrenchments and wage cuts! And what if they cut employer CPF rates again? With all the contribution cuts, they expect us to be able to meet HIGHER limits? Does this not sound like rocket science maths to you?

Or maybe GIC and Temasek are really doing such a fine job, they will be topping up SDG100,000 per CPF account in January 2009?

I just cannot believe the wonders of planning and disengagement with real world dynamics of the elite group!

Anonymous said...

Doesn't this sound familiar Mr Wang? :)

When times are good, you need to pay for my talents which made it possible. Without us, you are shit.

When times are bad, it is because the other countries made it so and the world is bad. Not my fault.

Anonymous said...

Mr. Wang, will u be in a better position if u are working out of a law firm advising the banks on such matters ? To me with your commercial experiences any law firm will make u their partner straight away.
Then u will be less emotionally involved. Now your mind tends to associate any lost to the bank as partly yours. U r part of the bank.

Mr Wang Says So said...

Jonathan:

Here's a post which Tattooed Banker wrote, which might help you to see what I mean.

Liar Liar.

Anonymous said...

Mr Wang. I have been an educationist for over 40 years and in my time have been seen many ups nd downs. I am very sad that we have become a society of material worshippers (which is worse than to be a materialistic)blind to human values, arrogant to a fault and uncaring for the poor, the defeated and the disadvantaged. We worship American material values and pay lip service to the rich cultural and religious traditions we possess making ruthlessness an acceptable synonym for pragmatism. This is but a wake up call. Things will get uglier before they get better. Do our scholars have the answer? A Chinese saying goes, "Feed an army for a thousand days and use it for one day." But in our case there is no pay back time! When the crunch comes it will be the Ah Bengs and Ah Tus, the Ahmads and Silvas that bear the brunt and find a way out.

Jon said...

All misery comes from oneself.
Lamentations are meaningless.

Be glad for your hours spent on conference calls and meetings, unraveling deciphering nonsense.

For while you toil, are rewarded handsomely.

While those unable to toil, are rewarded with nothing.

Anonymous said...

"We worship American material values and pay lip service to the rich cultural and religious traditions we possess making ruthlessness an acceptable synonym for pragmatism."

Asians are perfectly able to worship our perfectly Asian material values, too.

Anonymous said...

Dear Wang

I fear that the only solution may be to the current crisis is for Mr Obama to do an Ecuador and to put you out of a job ... i.e annull\void all the CDOs and CDSs.

NoName

Anonymous said...

Derivatives are so complex that I doubt anyone could say precisely what they are exactly.

They shouldn't be allow to exist in the first place.

Warren Buffett calls them the financial weapons of mass destruction.

Mr Wang Says So said...

Actually, derivatives are nothing new. Many people think that it all began around the year 1865 with the Chicago Board of Trade, but actually you can trace the history back to much earlier times. For example, the Yodoya rice market in Osaka, Japan was already using derivatives in the year 1650.

Anonymous said...

That's an old photo of Ivanchuk?

Anonymous said...

There are many forms of derivatives but CDS is a recent invention.

Mr Wang Says So said...

Yes, Ivanchuk. Is that you, Jr?

---

CDS is about 10 years old. However, similar instruments such as loan trading and insurance have been around for much longer.

Anonymous said...

somebody should offer his services for free.

and you think no pay leave is the solution? how about a no pay leave for 30 months by a local airline?

Anonymous said...

In order for companies to survive, I think a pay cut works better than no pay leave, if everything else remains constant.

In both situations, the worker gets less, but more work is done and productivity is maintained with pay cut. No pay leave reduces cost as well as productivity with less work done.

People should be willing to work harder to keep their jobs during bad times and not expect to remain at status quo.

Tan Kin Lian is encouraging a take-and-no-give mentality, a self-centered one.

Anonymous said...

Insurance is a science.
CDS is gambling (and open to manipulation).
And how is CMB different from melamine?

Pay cut with more work is a great solution just like welfare is evil. And regulation is bad. And means-testing and GST is to help the poor.

*yeah rite*

Anonymous said...

It does not serve you any good to be skeptical about everything. Don't want pay cut? Insist on your entitlements? Recession is a lame excuse?

Say goodbye to your job then. There are many, with a better attitude, waiting to take your place.

And that is your choice, don't blame the company for sacking you.

James said...

"I'm feeling tired."


You need rest. The sort of rest that shows you how to carry your labor, making the yoke of labor light. Relax, use a light touch.

Anonymous said...

To Anon at 11:35

A general pay cut in a highly competitive (eg the IB) industry sounds great but in reality will spell the beginning of the end for that firm\bank.

A recession\depression will pass eventually. The trust that is lost will take much longer to rebuild. if ever.

Nobody (competent) will want to work for a sweatshop.

The fact is that there is simply less work to go around in most industries and it is pointless to pay people (even on lower wages) to hang around doing nothing.

Anonymous said...

There are many, with a better attitude, waiting to take your place.
Yes yes yes. many Phillipines, China, India, Bostwana, North Korean, Cuban, Vietnam, Indonesia willing to work for half your pay to be able to buy land and build house twice our HDB size, freehold, in a third of the time we take to repay HDB for "subsidised" housing!

You are an employer without sense of nationalistic notions right? Do not have sense of real and nominal wage right? Insisting that you must have a new BMW every year, and new house, landed property to compare to other employers overseas right?

WHAT ABOUT YOUR EMPLOYEES?

Anonymous said...

Have you ever wondered why the government keeps importing what you would regard as foreign trash?

Nobody owes you a living. Get real. Be thankful you still have a job.

I am no PAP worshipper. I am just as pissed at many of their policies, including FTs.

But it is precisely because of this I-am-entitled-to-my-rights mentality that makes such people lose their jobs to FTs.

Look at yourself before pointing all fingers at others.

A company that tries to keep it's staff by slashing pay is any time better than one that resorts to retrenchment. Although I would even venture to say retrenchment is a valid option if all else fails. If the company doesn't survive, where would your rice bowl be?

Anonymous said...

"Nobody (competent) will want to work for a sweatshop."

Beggars can't be choosers. You think you are competent, there are many more competent than you. Nobody is indispensable.

While I agree that trust is important, it has to be both ways. I would rather have a less competent employee who can be trained and trusted to stick with the company through good and bad times, rather than keep one with an over-sized ego, who would only issue more threats and blackmail if I give in to his unrealistic demands.

"The fact is that there is simply less work to go around in most industries and it is pointless to pay people (even on lower wages) to hang around doing nothing."

That should necessarily be the case. Demand may be down, but that does not mean banks should be closed half the time, or malls should only operate half-days. And would you rather our million dollar ministers take no pay leave?

People will not be sitting around doing nothing if management knows how to redeploy resources and work on other competencies to prepare for a strong comeback when things get better.

Anonymous said...

Correction. That should not necessarily be the case.

lh said...

Mr Wang, you talk about conscious living. now that your work involves people who wiggle out of their way (when you know they may do so delibrately), which sounds tiring, how can you apply what you advocate?

LuckySingaporean said...

Mr Wang,

What do you expect people who can't pay their debts to do? ....the honest thing? - say they can't pay thereby encouraging the banks to take legal action and threaten them.

It is natural when a person can't service his debts or losses to cook up stories. The difference is how good the stories are. People own up only when you make it easy to own up. If debt collectors call up and say "Sir, if you have difficulty paying, we can do a workout with you..." they will get a better response. But in most cases it is "You have until xxx to pay up otherwise we will come after you" it simply forces the person to lie to avoid the threat.

I spoke to a concellor at the CCS once and debtors under financial strain routinely lie, toss letters into dustbins without reading, lose their temper, etc. It may be amusing to you the stories you're told but at the other end is a person under tremendous strain and it is painful and difficult for him to be honest.

Anonymous said...

Hi Lucky

I suspect Mr Wang is dealing counterparties such as other banks\hedge funds\etc.

Quite different from the desperate folks.

Anonymous said...

"And would you rather our million dollar ministers take no pay leave?"

This is entirely different. I think most singaporeans would gladly have less of them :-)

Anonymous said...

"But it is precisely because of this I-am-entitled-to-my-rights mentality that makes such people lose their jobs to FTs."

Actually the more common reasons are (one or combo):
-FT can do it cheaper
-FT has the skill set which we don't
-FT hires FT from same culture

In SG, employees (FT or local) are usually well aware that they have few rights.

Anonymous said...

Anon:

"But it is precisely because of this I-am-entitled-to-my-rights mentality that makes such people lose their jobs to FTs."

Wow,that is too general a statement to make.

You paint all those who lost their jobs under one brush,sorry,I simply cant accept that LKY style,non-negotiable type of attitide.Even I do not have employment but rather on the other side of the coin.

Anonymous said...

"This is entirely different. I think most singaporeans would gladly have less of them :-)"

I won't disagree with that :D

As for the other Anon, up to you to accept or reject. It is not LKY style. It is the real world.

Anonymous said...

Ultimately, it is not your company. You don't call the shots. Take it or leave it.

Anonymous said...

I said, "But it is precisely because of this I-am-entitled-to-my-rights mentality that makes SUCH people lose their jobs to FTs."

I don't think this is a generalization. Any employer worth his salt will not put up with unreasonable employees who would not do their part to help the company, who only expect pay rise, but not a cut.

What have you done YOURSELF, to save your own jobs? By insisting on non-existent rights?

You must be kidding. And please do not assume I haven't gone through recession or retrenchment. I am speaking from experience.

Anonymous said...

New Year! Cannot argue! Listening to nice songs will calm all of you down :)

Anonymous said...

Non-existant rights?

How can what is written in contracts be non-existant?

The ones going on non-existant rights are the employers! Just read the news. Sub-contractors who "cannot afford" o hire Singaporeans can afford to stay in semi-detached housing with BMWs! And they are exposed only when the FTs they can "afford" sat in front of their houses asking for contractual work promised but not delivered!

It is time the gahmen slap the employers into decency.

Workers have rights. Citizens have more rights than to suffer the greed of a few!

Eaststopper said...

Investment banks? Do they still exist? I thought they are now all bank holding companies?
happy new year Wang.

Anonymous said...

"How can what is written in contracts be non-existant?"

And what exactly is written in your employment contract? That bosses cannot retrench you or cut your pay? Can only promote and raise your pay?

Wow. You must be a super duper award-winning employee without which your company will sink!

Even the CEO of a certain big corporation has just been replaced recently.

Anonymous said...

In the first place, investment banks and the "products" they peddle(like derivatives) are the source of this financial crisis. People working in such institutions provide little to no value to human society. Hence, sorry to say this, but these people deserve to lose their jobs. Time to go get a real job finance people. The only real upside to this financial meltdown is seeing finance people get screwed big time. Nice.

Anonymous said...

That was ... a rather ignorant remark. Derivatives are not all that mysterious, and you encounter them more often than you probably realize. When you exchange money at your moneychanger before going on holiday, that's already one kind of derivative. When you borrow money from a bank for your housing loan and you choose to have a fixed rate loan, or a lock-in rate for the 1st three years etc, well, essentially that's a derivative product too.

Anonymous said...

Hi Anon,

With regards to the earlier comment, the holiday example is probably not too accurate.

To be more precise (but still broadly speaking), a derivative is basically an item (ie. a contract) whose value is dependent on the changes in value of another item (ie. the underlying).

Therefore, it is not exchanging monies with the moneychanger before going on a holiday that makes it a derivative contract per se... but making an prior agreement with the moneychanger to change your monies at a rate at a later time that makes it a derivative (ie. a FX Forward Contract).

Between the day in which you make the agreement and the day in which you actually change your monies, there is value in that agreement and it's value would fluctuate in accordance to the market rates of the currencies concerned.

If you decide to not go for the holiday, and if the agreement with the moneychanger is transferable, you could well sell this agreement to another party for a gain. (if the contract is "in-the-money") As such, this agreement you made, which really is made out of 'nothing' (other than a verbal / written contract), suddenly has value.

Anyway, totally agree with your point (and those of others here) that despite the bad publicity, derivatives are really an essential element in today's economies and it is not going to go away anytime soon.

Just like knives, it's not the knives per se that are evil but how it is used by humans. And because of it's fundamental use in daily life, it's not a tool that can just go away.

Let's all try to keep the intellectual element of these conversations.

Jack Ryan

Robert L said...

Umm... guys, it's awkward to debate when everybody leaves it to the default to sign off as "anonymous". If you can't leave a name, put up a number 1, 2, 3, or something. Click the Name/URL button.

Anonymous (Jan 5 4:30 am) is not wrong. He did not say ALL investment banks and ALL products are the problem. He did not say ALL derivatives are bad. It's up to us individuals to pick and choose derivatives which are good and disagree with him, or pick derivatives which are bad and agree with him.

I'll choose to move the debate forward by agreeing with him. It's the derivatives that are toxic debts and peddled by bankers that caused the mess. Get it?

What's this toxic debts all about? Initially, they were mortgage loans that clearly cannot be serviced by the borrowers. As if that is not bad enough, these debts are repackaged by derivatives to sell to investors/suckers - thus the banks free themselves of the bad risks and can go on to the next cycle to lend out more bad loans. The derivatives create a condition that enable banks to stay within regulatory requirements, and yet offload an unsupportable mountain of bad debts to the retail public.

Bankers surely must know how bad these derivatives are, so they had to peddle them to an unknowing retail public. They are peddled by Relationship Managers, Wealth Managers, all those pimps who get paid by the amount of sales they made. These culprits in the banks provide little to no value to human society, to say the least. They should really go get a real job - even sweeping the road is of better value than peddling toxic derivatives.

Anonymous said...

Dear Robert,

Anon had written the following...

"...investment banks and the "products" they peddle(like derivatives) are the source of this financial crisis."

"People working in such institutions provide little to no value to human society."

"...these people deserve to lose their jobs. Time to go get a real job finance people."

"The only real upside to this financial meltdown is seeing finance people get screwed big time. Nice."

These are hardly intellectual remarks.

You had written that you agreed that "derivatives that are toxic debts and peddled by bankers that caused the mess".

You further added "all those pimps who get paid by the amount of sales they made"... (noting the word 'pimps') and... "These culprits in the banks provide little to no value to human society, to say the least. They should really go get a real job - even sweeping the road is of better value than peddling toxic derivatives."

I think it is very easy to make such simplistic, sweeping blame statements like these and perhaps one can understand this as the current situation as it is not an easy industry to understand. The vast amount of information / disinformation out there can also be tough to digest.

Sometimes, I wonder why Mr Wang, being in the industry himself, does not dump the popularity cloak and seek to clarify further the true state of affairs but chooses to write such an indirect article to hint his frustration.

Banks are obviously an easy target to blame for the state of affairs but there are really many more participants with equal or more share of the pie. Laying the blame game at only investment bankers fails to advance everyone's understanding of what is really happening. What about other factors?

Originating Banks / Housing loan providers?
Government regulators / quasi govt. agencies?
Rating agencies?
Low interest rates?
Demand for higher-yielding assets?
Consumption-driven market economies?
China?
US Presidents? US Congress?
Failure of democracies? Voters? All of us?

If anyone is really keen to understand more, there is a good, well-produced documentary here:

http://online.wsj.com/video-center/the-end-of-wall-street.html

So Robert... an interesting question...

if you say that RMs in these banks are pimps, then what then is Mr Wang, a derivatives legal counsel in a investment bank whose full time job is to work on such deals?

I lament that in this day and age, despite all the incredible resources made available by infocomm technologies like the internet, so few takes the time to really understand anything anymore. All folks want to see are what they already believe in.

A pity.


Jack Ryan

Mr Wang Says So said...

Well, Robert, your view IS quite oversimplified.

Banks can have many different reasons for wanting to transfer particular risks.

Eg suppose a bank has lent a lot of money, say, in a particular country or to companies in a particular industry. The bank may then decide that it's lent too much risk in that particular country or to that particular industry's companies. So it decides to transfer some of the risk. Ir doesn't necessarily mean that the debt is "bad" or "toxic". Similarly, if you invest your own money, you too want to diversify and not hold too much in any one asset class.

Derivatives are also used to hedge risks. Of course those can go wrong too. For example, at a certain time you might be afraid that the price of oil would go higher and higher. So you hedged in a certain way, to guard against it going higher. Then to your surprise, oil instead goes lower and lower and lower and lower. So you lose money. Does this mean that there's something inherently wrong with hedging your risk with commodity derivatives?

That would be like saying, "Damn it, I'm so old yet still alive. The life insurance company has cheated me. Insurance is such an evil thing."

Robert L said...

Dear Mr Wang, thank you for your response.

You felt that my view is oversimplified. I'll say it's focused and targeted. Not simplified or oversimplified.

You listed many examples where banks do their normal business of hedging. These examples do not negate what I said. I had clearly started by making a distinction between derivatives that are good and derivatives that are bad. I then moved the debate forward by focusing on toxic derivatives.

These are called toxic because they are repackaged from loans that are certain to default, and they are peddled to unknowing retail investors through dubious marketing.

Hence what I said are targeted on bad derivatives.

To: Jack Ryan, two answers...

[You had written that you agreed that "derivatives that are toxic debts and peddled by bankers that caused the mess".]

I see now that what I wrote could be taken in two different ways.
(1) That I have defined derivatives as toxic debts, or
(2) That I had separated out derivatives that are toxic and focused on them.
It's unfortunate that you had chosen (1) and proceeded to disagree with me. Enough said.

Regarding "a derivatives legal counsel in a investment bank..." I see the corresponding role of legal counsel for a murderer or rapist. It's standard procedure and should not require any judgement.

Anonymous said...

Hey Robert.

Focused and targeted?. Hmmm...

You specifically wrote: "derivatives that are toxic debts and peddled by bankers that caused the mess".

You added "all those pimps who get paid by the amount of sales they made" and

"These culprits in the banks provide little to no value to human society, to say the least. They should really go get a real job - even sweeping the road is of better value than peddling toxic derivatives."

Could you help clarify in all our minds how "focused and targeted" are these statements?

If you are implying that there are 'good' and 'bad' derivatives and 'investment bankers and that you are focusing on just the bad ones, can you enlighten all of us on how we can differentiate these 2 categories? (...before consumers like ourselves buy these products of course. Hindsight, while 20/20, is really not helpful in these situations)

And what if the folks who produced these good and bad ones are actually the same persons? Anyway, is there anyway we can be more focused and targeted?

If you are able to provide that magic formula, we can market this to all the financial institutions and they can all close up their compliance departments and save some serious money!

Further you wrote: "I see the corresponding role of legal counsel for a murderer or rapist. It's standard procedure and should not require any judgement."

I think you may lack the insight into what a derivatives legal counsel in an Investment Bank does.

The legal counsel of a murderer helps to defend the accused and get him exonerated... AFTER that person commits the act of murder and is arrested for the crime.

A derivatives legal counsel is an active participant in a transaction. In your example, the legal counsel would be more like an accomplice, giving another person a gun BEFORE the act, so as help him commit the murder and then AFTER the act, helping the murderer clean up!

Just to be clear, you also haven't answered the question pertaining to the original context of the prostitution trade that you have posed... Which is...

"if the Relationship Manager (RM) is liken to be a pimp, what then would the legal counsel, like Mr Wang, in this context?"

Look Robert, it's all well and fun trading these flippant remarks like this but rather then add to all the misinformation, suggest you go watch that documentary:

http://online.wsj.com/video-center/the-end-of-wall-street.html

After watching the documentary, I hope you can realise that the villains aren't those banker folks, it's someone else and it's a much, more familiar person that you will know... think about it.

I will not comment further on this topic. Bye.

Jack Ryan

Mr Wang Says So said...

"These are called toxic because they are repackaged from loans that are certain to default ..."

LOL, and you know this because ...? The borrower told you?

Robert, if you were going to lose your job and become broke, would you know first, or would your bank?

Robert L said...

Hi, Mr Wang - glad you posed that question. We may be near to the crux of the problem.

Bad loans - most of us here in Singapore do not fully appreciate how widespread and entrenched they are, for the simple reason that 99.9999% of private housing loans in our country do not have that problem. The sub-prime crisis occurred in USA, not here. From newspaper reports, it appears that housing loans in USA were granted even for applicants with insufficient income, or even jobless, in a banking culture that assumed the property prices would continue to rise.

If you, Mr Wang, do not agree that the sub-prime loans in America were made even though the banks knew that their customers cannot service the loans, then the two of
us have not been reading the same newspapers and it's fruitless to continue this exchange.

Mr Wang Says So said...

I understand that there is a distinctive feature about housing loans / mortgages in the US, which is quite different from the rest of the world. Mortgages in the US are non-recourse.

(Whether it is a good feature or a bad feature is another question - however, it is important to note that this feature has been in their system for a very long time, well before CDOs were common).

What non-recourse means is that
in the US, if you default on your mortgage payments, the bank can foreclose and seize your property. That is all. Apart from seizing your property and selling it, the bank cannot take any other action against you.

Example:

Suppose the bank gives you a 30-year housing loan. You make your mortgage payments for one year, and then you decide not to pay the bank anymore.

All the bank can do is seize your property and sell it. If the sale proceeds are insufficient to cover the outstanding amount of the loan, the bank CANNOT sue you for the difference.

It doesn't matter that you may actually be drawing a steady salary from your job; or that you actually have millions of dollars stashed away elsewhere. The bank can't touch any of that.

From this, you may realise why US banks didn't seem to care that much about checking the borrower's income. There's no point checking something that can't help you. Instead banks would focus on the property valuation, since the property is what the banks would have recourse to, if the borrower were to default.