Oh Boy, Oh Boy, Oh Boy!

This is the second book about the financial crisis of 2008 that I have read this year. What "The Big Short" does that "The Greatest Trade Ever" did not was to expose the greed and corruption behind the scenes that created these toxic loans.

I would recommend this book to anyone who wants a better understanding about what happened during the 2008 financial collapse. The following is my rudimentary understanding of the situation.

A bond is a promise, usually from the government or a corporation, to pay regular payments for a specific amount of time. They are rated by bond rating agencies such as Moody's or Standard and Poor's and given a score: the higher the score (AAA) the better the chance that they will be paid off by the borrower.

In the 1980's the bond market expanded from boring corporate and government bonds to begin to pool mortgage loans together into their own bonds. The problem with that was mortgage holders could refinance loans and pay them off early. To address this, the bonds were broken into "floors". The "bottom floors" got the lowest rating because they are the loans that were paid off early: the higher the floor, the higher rating; and the higher the quality of loan, or so it seems.

Several things happened in the 1990's. First, Wall Street was making piles of money on these bonds which caused the demand to skyrocket. Lenders stop caring who they were giving money to and began offering more and more outrageous deals to entice more and more borrowers. Deals like an Adjustable Rate Mortgage (ARM) which offers a low introductory interest rate that rises quickly to exorbitant rates. These offers got even more ridiculous; no interest loans for a period, no payment loans that would add interest back into the loan. What kept this ponzi scheme afloat was that housing prices were rising and home owners could keep refinancing pulling more and more money out of their homes. As a result, the bonds created from these loans became more and more toxic representing debt that risked default rather than just prepayment if home prices stop rising.

What should have become apparent to investors (poor quality loans) were hidden by the bond rating agencies who used old corporate and governmental bond formulas to rate these sub-prime mortgage loans. Little was done to investigate the quality of loans within these pools. To make matters worse, Wall Street started to bundle the “bottom floor” of hundreds of different mortgage bonds and have them rated. 80% of these bonds were rated AAA, the same ratings at US Treasury Bonds. Crazy!!!

Several people saw the impending doom and began betting against these bonds. They believed that if as few as 8% of the loan began to default the “Bottom Floor” would be worthless. For a small premium (less than 2%), investors could buy insurance on these bonds called Credit Default Swaps (CDS) in essence getting paid if the loans defaulted. They defaulted big time.

This was an excellent read that I would recommend to anyone interested in learning how corrupt Wall Street is.

Here is an e-mail I wrote JT Rissman and Paul Pena, two of my fiends who are going to run the Warrior Dash with me on Septerber 17th.

Warriors

I have named the hills at Ravine. It helps me. When I start "Initiator" I talk with him, I say "Hello Initiator, you look good today." I don't know why, but it is easier for me to tackle a hill that I know by name.

Today I did the first part of my run without my shoes. It means I go slower but it also means that my focus switches to my feet and where I am going to step instead of on my body and how tired I feel.

After about 15 minutes, the trail becomes asphalt and I put my shoes back on. The path becomes all downhill and I have to really concentrate to keep my mind from wandering. Near the end of the path there is a trail that leads up a hill that I have named "Oh, My, God, No!” After the first few steps I begin to realize how steep it is and I say "Oh". When I get to what looks like the top, it curves and continues up and I say "Oh, My". With my lungs burning the next curve reveals even more climbing and I scream "Oh my God!". After reaching what feels like the top there is still more hill and that is where the "NO!!!" comes from. "Oh, My, God, No!" is on my mind before I reach it, usually several minutes before I reach it. I play mental games about should I or shouldn't I run it. I usually don't.

Today I did. At the top, out of breath, I decided to extend my run by turning left instead of right. I found two more hills that I named "Bitch Slap" because it came so quickly after "Oh, My, God, No!" and finally "TKO" as I was KO'ed after I got to the top.

I had an interesting sensation about half way up "TKO", I started to feel happy. I thought about how if felt having mud between my toes, how it felt gliding downhill, how I was going to kick you sorry asses on the 17th!!!

Today is the day Patrick is to arrive.  We are all excited.  After breakfast of cereal, we got the boys ready for another day.  Again, all wanted to stay in camp.

Dad, Sarah and I planned a hike to Blue Lake.  Blue Lake is located in the Indian Peaks Wilderness Area about 35 miles south of Estes Park.  The three mile hike to Blue Lake took us through a spruce forest, to Mitchell Lake then turned abruptly heading up into the mountains and above the tree-line.  Several times the trail looked out over beautiful mountain valleys that were picturesque.  The last of the hike took us to Blue Lake.  The back drop was magnificent, two glaciers ending in Blue Lake.  As Dad, Sarah and I enjoyed our lunch, Sarah noticed skiers on the glaciers.  Two skiers and one snow-boarder traversed down to Blue Lake.  They packed up there gear and hiked out...in their ski boots!

Crazy.  It was something I imagine Anthony will be doing in, oh, two years or so.

We drove back to Estes Park to get the boys and Patrick.  Pat looks great: skinny, a full head of hair (I can't help but being jealous) and strong.  We played Guillotine, Plants vs. Zombies, and went to eat Thai food in Estes Park. 

Anthony did the high ropes course at camp, riding a zip line with a huge smile on his face.  Michael had an all day hike to Mills Lake, he wanted to go to Black Lake but the rest of the campers couldn't make it.  Nathaniel had a cook out with hot dogs the played capture the flag with his camp friends.