The 2008 Financial Crisis - the “Racquel Welch” Effect This was my riposte on: http://www.thetaoofmakingmoney.com/2007/03/28/303.html

Guan Khoo 12.03.07 at 9:57 pm

Hi, My riposte on the subprime:

Racquel Welch (alias NR), The Subprime Mess & A New Order

By Guan Seng Khoo

Fantastic Ratings! A re-make of the 1966 movie, Fantastic Voyage was shot in the summer of

2007 and won an Oscar for its surprising effects, an Oscar which I believe was well deserved.

Although the effects have dated in the sense that they appear to be in a very 1960s

psychedelic style, they are still impressive.

The storyline has a medical ratings team reduced to the size of microbes, who are given the

task of being injected into a CDO body to cure him of an incurable blood clot in the brain in

the subprime region. They have to navigate their way around the CDO structure and layers of

artificial tranches, previously rated as healthy, in a green-powered submarine which has also

been miniaturized. There are lots of action in the film, witness the volatility and liquidity

crunch in the voyage - and the presence of Racquel Welch alias NR* (*Northern Rock) in any

film makes it more than watchable! Other cast members include the nursing members of the

CityBears' team, the ML (mortgage lenders, etc.) team and other luminaries on WS.

The premise of the re-make was based on the fact that prior to miniaturization, the health of

the CDO was mistakenly rated and diagnosed based on its bodily (portfolio) measures like

BP, BMI, etc., which tended to be very static in the corporate body framework, rather than on

the dynamic unhealthy delinquency rates of the underlying retail loan organs . Investors

depended heavily on these ratings/measures as the underlying parts of most CDOs,

especially those that were retail-based and asset-backed, were very opaque.

Intermediaries, financial health structurers and insurers like CityBears and the other WS

firms, typically also received the health information at the portfolio body level, rather than at

the granular loan organ level. As the affliction grew from the subprime region and spread to

the rest of the body (housing market), encompassing even the so-called healthier HB (home

buyers) organs, the deteriorating prices rapidly impacted on those ARM and HEL drug

treatments re-setting to higher thresholds, further exacerbating the crisis!

While part of the blame lie at the doors of the aggressive sales brokers, who reaped huge

commissions by selling these exotic ARM treatments, one fundamental flaw as depicted in

the re-make, Fantastic Ratings!, is the whole process of structuring and treating the CDO

bodies, where the medical ratings team used an approach more suitable for a fairly static

environment of a corporate body framework, rather than the more dynamic rating on the

granular retail organs, where health delinquency rates may change more quickly. While the

health ratings of bodies like CityBears tend to remain pristine, in spite of the widening

spreads, at the microbial consumer organ level, if the individual cells lose their functions

(jobs), their credit-worthiness would simply deteriorate. Here then, lies the nub of the

subprime mess! Thank you.