A couple of readers have sent me email asking if there a more concise way of illustrating the “Credit Crisis”/”Subprime Meltdown” than the 23 comic panels in my earlier posting, The Credit Crisis, Illustrated. There is a single illustration that captures the essence of what caused the crisis, although it’s missing a lot of the background information:
Click the photo to see the obituary.
A Man for All Seasons wouldn’t have been the same without you, big guy.
I thought I’d show another explanation of what’s being referred to as the “Subprime Meltdown”, “Subprime Mortgage Crisis” or “Credit Crunch”, this time using comics.
(I linked to the New York Times’ recent explanation in this entry.)
If you’re still wondering what the connection between people with no business carrying a mortgage and the collapse of Bear Stearns is, you might find the illustrations below useful. I’ve assembled them from two sources: a black-and-white stick figure slide presentation that Anne Onimos pointed me to and a six-panel colour comic sent to me by my friend Miss Fipi Lele. Enjoy!
High-Risk Customer: Gee, I’d like to buy a house, but I haven’t saved any money for a down payment and I don’t think I can afford the monthly payments. Can you help me?
Mortgage Broker: Sure! Since the value of your house will always go up, we don’t need down payments anymore!
Mortgage Broker: And we can give you a really, really low interest rate for a few years. We’ll raise it later, okay?
High-Risk Customer: Sure. Ummm…there’s one other thing — my employer is a real prick and might not verify my employment. Would that be a problem?
Mortgage Broker: Nope — we can get you a special “Liar’s Loan” and you can verify your own employment and income!
High-Risk Customer: You guys are awesome! You’re really willing to work with guys like me.
Mortgage Broker: Well, we don’t actually lend you the money. A bank will do that. So we don’t really care if you repay the loan. We still get our commission.
High-Risk Customer: Wow! Let’s get started!
Banker: I’d better get rid of these crappy mortgage loans. They’re starting to stink up my office. Thankfully, the really smart guys in New York will buy them and perform their financial magic! I’ll call them right away!
Investment Banker Boss: Phew! We’d better get rid of these shitty mortgages before they start attracting flies.
Investment Banker Underling: But who would buy this crap, boss?
Investment Banker Boss: I’ve got it! First we’ll create a new security and use these crappy mortgages as collateral. We’ll call it a CDO (or maybe a CMO). We can sell that CDO to investors and promise to pay them back as soon as the mortgages are paid off.
Investment Banker Underling: But crap is crap, isn’t it, boss? I don’t get it.
Investment Banker Boss: Sure! Individually, these are pretty crappy loans, but if we pool them together, only some of them will go bad — certainly not all of them. And since housing prices always go up, we really have very little to worry about.
Investment Banker Underling: I still don’t get it.
Investment Banker Boss: The new CDO will work like this: it’ll be made up of three slices or tranches and we’ll call them:
Investment Banker Boss: If some of the mortgages fail, as surely some might, we’ll promise to pay investors holding the “Good” tranche first. We’ll pay the “Not-So-Good” investors second, and the “Ugly” investors last.
Investment Banker Underling: I’m starting to get it. And because the “Good” investors have the least risk, we’ll pay them a lower interest rate than the other guys, right? The “Not-So-Goods” will get a better interest rate and the “Ugly” guys will get a nice fat interest rate.
Investment Banker Boss: Exactly. But wait — it gets better. We’ll buy bond insurance for the “Good” tranche. If we do that, the rating agencies will give it a really good rating, in the AAA to A range. They’ll likely give the “Not-So-Good” tranche a BBB to B rating. We won’t even bother asking them to rate the “Ugly” tranche.
Investment Banker Underling: So you’ve managed to create AAA and BBB securities out of a pile of stinky, risky mortgage loans. Boss, you’re a genius!
Investment Banker Boss: Yes, I know.
Investment Banker Underling: Okay, now who are we going to sell the three tranches to?
Investment Banker Boss: The assholes at the SEC won’t let us sell this stuff to widows and orphans, so we’ll sell them to our sophisticated institutional clients.
Investment Banker Underling: Like who?
Investment Banker Boss: Like insurance companies, banks, small towns in Norway, school boards in Kansas — anyone looking for a high-quality, safe investment.
Investment Banker Underling: But surely nobody would buy the “Ugly” tranche, would they?
Investment Banker Boss: Of course not — nobody’s that stupid! We’ll keep that piece and pay ourselves a handsome interest rate.
Investment Banker Underling: This is all great, but since we’re only using the smelly mortgages as collateral on an entirely new security, we haven’t really gotten rid of them. Don’t we have to show them on our balance sheet?
Investment Banker Boss: No, of course not! The guys who write the accounting rules allow us to set up a shell company in the Cayman Islands to take ownership of the mortgages. The crap goes on their balance sheet, not ours. The fancy name for this is “Special Purpose Vehicle”, or SPV.
Investment Banker Underling: That’s great, but why would they let us do that? Aren’t we just moving our own crap around?
Investment Banker Boss: Sure, but we’ve convinced them that it’s vitally important to the health of the U.S. financial system that investors not know about these complex transactions and what’s behind them.
Hi, I’m Joe. Managing partner of Joe’s Hedge Fund LLC. My buddies have given me $100 to invest. And I get to keep huge fees in return!
I am investing in bonds backed by mortgages, which pay me 8 percent. If I invest my $100, I’ll make my investors $8 a year.
Hi, I’m Bob. Of Bob’s Bancorp. Joe, if you put up your $100, I’ll lend you another $3,000 to buy those mortgage securities. I’ll charge you 6 percent interest because money is cheap and the credit rating agencies say these bonds are rated AAA.
Joe: This means I can invest $3,100 in these mortgage bonds. At 8 percent, that will pay me $248. Even after I pay your $180 in interest, I still have $68 left. Which means I have earned a 68 percent return on the original $100 I invested. Even after I take out my fees, my investors will be very happy.
Bob: And my shareholders are happy to see us getting this business.
Bob: Um, Joe, it looks like those mortgage bonds weren’t worth quite what we thought. A bunch of the mortgages they contain are going bad and that’s making me nervous about whether you’re going to be able to pay my $3,000, so I can only lend you $1,000 and I need back the other $2,000 I lent you.
Joe: But these bonds are worth 5 percent less now. If I sell off the bonds I bought for $2,000, I will have to take a $100 loss. Which means I’m wiped out, considering I only put up $100 to begin with.
Bob: Well, we really need our money back.
Joe: But everyone else is getting these calls at the same time, and selling their bonds. So the price is now down 20 percent, which means I’m taking a $400 loss. That means not only am I wiped out, but you’re out $300 too.
Go ahead, I dare you:
Photo courtesy of Miss Fipi Lele.
According to the site, it’s “the most important questions you’ll ever ask yourself”: How many cannibals could my body feed? Answer a few questions and you’ll be given an estimate of the number of cannibals that your body would feed. Here’s my result:
Click the badge above to take the test yourself!
This is just what I was looking for: a reasonably simple explanation of the credit crisis, courtesy of the New York Times. If anyone knows of any other simple explanations that do a better job, please let me know in the comments!
My first week with b5media was my best first week on the job ever. On my very first day, I boarded a plane and flew to Austin to attend the South by Southwest Interactive conference, one of the biggest events in our industry. For a week, I attended interesting sessions, met new coworkers and colleagues, caught up with old friends, played a lot of accordion and enjoyed more than my fair share of beef, Tex-Mex and booze. We stayed on a ranch just out of town with my coworkers, where we had bonfires, a big end-of-week barbecue, breakfasts prepared by b5’s Director of Sales Chad Randall and the enjoyable company of a mellow Black Labrador named “Teaspoon”. We even saw a dead goat with a vulture circling overhead! (More about the dead goat in a later entry.)
With the conference wrapped up, it was time to go back to our respective offices, whether in Canada, the U.S. or Australia. I’m in the Toronto office, which is located in a converted warehouse building in the Queen/Spadina neighbourhood. Here’s what I saw when I first set foot in the office:
My welcome message, which was waiting for me on my first day at the office.
After I filled out the form for my benefits package, Darcie saw my real name, Jose Martin deVilla, and updated the whiteboard accordingly:
My welcome message, modified.
(Actually, it should be “Jose Martin”. It’s a double name, like “Billy Bob” or “Peggy Sue”.)
The office is similar to my first workplace out of university: a converted warehouse with hardwood floors and high ceilings in a funky neighbourhood. Here’s a shot of the main workspace:
The workspace, starring Darcie, Lee and Laura.
That’s Office Manager Darcie Vany in the foreground, Server Administrator Lee Newton’s arm in the middle, and Executive Assistant Laura Keeling in background.
We have a boardroom in the back, which doubles as a place to unwind. Like a number of high-tech companies, we’ve got an XBox 360 with Guitar Hero 3 and Rock Band. Here’s CEO Jeremy Wright taking a quick Rock Band break:
A number of people I talked to at South by Southwest told me that they have Rock Band at the workplace.
Here’s my desk, located near the front door. Note the wall behind the desk — that’s a baseboard-to-ceiling whiteboard:
My desk. The whiteboard behind it is a little more filled-in now, and the desk sports a few more tchochkes.
And yes, the computer on the desk is a Toshiba — a 17″ Satellite P200 which I’ve dubbed “The Coffee Table” because of its size. Although my preference would be to get a MacBook or MacBook Pro, b5 had this machine, brand new and still in its box, waiting for whoever filled the Technical Project Manager position. Having to use Windows as my primary operating system — something I’ve done for about half my career — is a small downside compared to the upsides and many perks of working for b5. Besides, it’s one of the best specced — if not the best — specced machines in the shop. (Perhaps after some time, when I’ve proven myself and earned one, I can hit them up for a Mac.)
Setting up “The Coffee Table”, my company-issued laptop. It’s surprisingly light, given its size.
(Yes, I tried installing Ubuntu Linux on it and couldn’t get the sound, SD card reader or built-in camera working and it took some tweaking to get the graphics card working properly. The card reader and camera I can live without — although the card reader is useful — but I need sound because I have regular meetings with the development team over Skype voice chat.)