Sick of the RNC



Sick of the RNC yet? Enough of the political mumbo jumbo. Here’s some stuff you might already know, but haven’t seen the data.

The last row of the following table shows GDP per Capita growth of Sweden, UK, Germany, Greece, Spain, and Italy relative to the United States.

Screen Shot 2016-07-21 at 1.50.43 PM.png

Over the time period, German production per head grew 16.54% faster than in the United States . Since 2005, Germans “gained” on the United States in terms of wealth. Countries in duress, such as Spain, Italy, and Greece lost in terms of wealth over the time period relative to the US. Americans became wealthier than the UK, Greece, Spain, and Italy over the 10 year time period. Americans lost wealth relative to Sweden and Germany.


The above graph shows per capita growth of the economies of Sweden, the UK, Germany, Spain, Italy,  and Greece relative to the United States.

Savings and Unemployment rates:

Theoretically, we would expect savings rates to rise as unemployment falls, and vice versa. As economies go through booms, people will spend more but also save more. As economies recess, people will lose jobs and spend less, but savings is spent. Dueling effects:

  1. Wealth Effect – As unemployment rises, wealth falls. As wealth falls, savings rates increase. This effect results in unemployment and savings rates to move together.
  2. Income (cyclical) Effect – Consumption rises and falls with the business cycle. In other words, as unemployment rises, incomes fall. As income falls and more people are in between jobs, savings must be spent. This effect results in unemployment and savings rates to move inversely.

Correlation between Savings Rates and Unemployment:

Screen Shot 2016-07-21 at 3.27.28 PM.png

From the correlations between Savings Rates and unemployment, we can infer about the was a country behaves in times of boom and bust. (break it down into time periods). The marginal propensity to save (mps) is an economics term used to describe what percentage of each paycheck we save. From the above data, we can safely assume that Americans will save more when the economy is in recession relative to others, whereas the savings rate in Sweden is relatively impervious to fluctuations in unemployment. Italy actually has a positive correlation coefficient between Unemployment and Savings rates! This means as unemployment goes up savings rates go up! The dominating effect here is the wealth effect. People will spend much less when they don’t have a job. The dominating effect in the US economy is the cyclical effect.

Perhaps this is a result of work force participant optimism. Perhaps the fear of getting another job in the near future after being let go is small in the United States. This could also be the result of cultural differences between Italy and the US, such as employee turnover rate. However, turnover rate in Italy is higher.

Italy’s job turnover rate has been declining over the last ten years ( This metric is computed by dividing the number of employees who left jobs by the total number of employees still working. In the United States, the figure for May of 2016 was 3.4%, or 11.8% annually. In Italy, the figure was 23.9% in 2004 and 17.3% in 2014. This higher turnover rate means Italians are leaving jobs at a higher frequency, both by choice and otherwise. The rate in the United States has largely remained unchanged since 2002, hovering around 12% annually.

Perhaps it is cultural differences. Maybe Italians are more prone to save when they don’t have a job because they have a firmer family structure than the average American. They are taken care of at home, and aren’t forced to spend on groceries and rent. Again, this is all guesswork.

Side note: Here is the annualized employee turnover rate in the US broken down over each month. More people leave jobs in January and August than any other months in the year.


Just something to think about.

– tommander-in-chief


Sick of the RNC

Does Communism Cause Cancer?

Provocative subject, so let me clarify. How are smoking habits today associated with who we sided with in World War Two? Further, how are our smoking habits associated with the GDP of our respective countries?

Walking around San Francisco, you can’t go a block downtown without getting smoke blown into your face, and cigarettes are expensive. They’re addicting, sure, but what kind of income do you need to be making in order for this addiction to no longer be economically possible. At what point, economically, are citizens forced to give up tobacco in order to simply survive? Another way of asking this is what does the demand curve for tobacco look like?

An article on shows consumption of tobacco geographically, changes in consumption by region, and pie charts to depict consumption by country.

The countries that consume the least tobacco annually are:

·      Guinea
·      Solomon Islands
·      Kiribati
·      Uganda
·      Rwanda
·      Samoa
·      Democratic Republic of Congo
·      Ethiopia
·      Vanuatu
·      Guyana

The countries that consume the most tobacco per capita are:

·      Bosnia and Herzegovina
·      China
·      Luxemborg
·      Belgium
·      Slovenia
·      Russia
·      Macedonia
·      Lebanon
·      Belarus
·      Montenegro

For a little relativity, the average Montenegrin smokes 4,124.5 cigarettes per year, or 11.3 a day (or 15.5 a day if you only count trading days).

In the names above, do you see any particular pattern? Think economic, political, cultural similarities.

Granted, most of the low consumption countries were merely occupied by the Allies as they island hopped their way to Japan. Also, if you sum the GDP per capita of the bottom 20 countries, you get just barely over the GDP per capita of the USA.

If I expand my list to the top 20 tobacco consuming countries, just three were on the Allies side of WWII. That’s 85% of the top 20 tobacco consuming countries that fought for the Axis powers. Analyzing the bottom 20 tobacco consuming countries, 18 of the 20 were on the side of the Allied powers. That’s 90% of the bottom 20 countries that fought for the Allies! The cluster at the top right in the graph are the top 20 consuming countries, the cluster at the bottom left are the bottom 20 tobacco consuming countries.


Now the line of thinking goes, “how much does wealth impact my desire to smoke cigarettes? Tom just said, all the lowest tobacco consuming countries are tiny compared to the largest tobacco consuming economies; shouldn’t it be that the lower you income, the less likely it is you’ll smoke?”

I did an analysis across 181 countries across the globe using data from in order to see if GDP per Capita has explanatory power in determining annual consumption of cigarettes within each country. Side note: to control for the mean, I took the natural log of all data.

Testable Equation: (i represents each respective country)

Cigarettes Per Dayi = α + β(GDP Per Capitai)

If there is a direct, positive correlation between GDP per capita and Cigarettes smoked, we’ll see a beta value of one and an alpha value of zero. Running the regression across 181 countries returns the following:

Alpha Interpret Beta Interpret
3.997 Large alpha; greater than zero .7335 Positive beta; less than one

gdp to cigs.jpgGraphically:

The beta value less than one, but still positive implies that there is a strong correlation between GDP per capita and amount of cigarettes smoked. Intuitively, the more money you have, the more cigarettes you can buy. This means consumers see cigarettes as a “normal good” for all you econ buffs. Normal goods are usually things like Coke as opposed to generic brand. Meanwhile, we are continually fed ads depicting people whose lives have been ruined by cigarette smoke.

The large alpha value means that nicotine is still addictive; it means people will still smoke 54 (e^4) cigarettes a year even if their country’s GDP per capita is zero. Kinda funny, kinda not.

In conclusion, does communism cause cancer? Cigarettes cause cancer. Seventeen of the top 20 tobacco consuming countries were part of the Axis powers in WW2. I’ll let you decide for yourself.

– Tommander-in-Chief

p.s. Email me if you want the whole data set:

External Articles:

Does Communism Cause Cancer?

Predicting the Future…

Autocorrelation occurs where past data can be used to predict the future. *snore*. If you’re still reading, think about it like this. If you know your friend, Alex, is always late, you will assume that he will arrive late every time. But if Alex is only late some of the time, you’re not sure when he will actually arrive on time, or when he will be late. We can observe what’s happening or use an ARCH test. Hang with me here.

Let’s say Alex is involved in an afterwork softball team, and they play on Tuesdays and Thursday. Games tend to run longer than scheduled. You notice that he only late on Tuesdays and Thursdays; you can start to predict his tardiness. So if your buddy wants to get beers on a Tuesday after softball, you can expect him to be late. You’re using past data to predict the future.

If I had used an ARCH model to predict when my buddy would be late, it would have told me that on average, my friend is late on Tuesdays and Thursdays more than any other days.

Maybe I missed my mark here, but the idea is not simple. If you need further clarification here’s the investopedia version:


The goal of the ARCH test is to control for autocorrelation in variances, then see if there is any kind of pattern there. Control for the mean, then look for a pattern in the errors. If there’s a pattern in the variances, and we can predict when the next period of high variance will be. You’ll be predicting big booms and drops. Timing the market would be possible, and also arbitrage opportunities more easily identifiable (which is what hedge funds do).

ARCH outline:
First log returns to make your data symmetrical. To get rid of autocorrelation in the variances you use a “lagged time factor” of volatility. The ARCH and GARCH models control for a stationary mean in the variances. Like this, using σ for variances in returns:


If you look at the equation above, you’ll see that we want a βvalue of 1 in order to prove that past volatility is a predictor of volitility. If β1 doesn’t equal 1, that means all currently accepted limits of risk are bogus.

Investors use these tests to forecast how volatile markets will be in the future. All current models of risk used at big banks all over the country assume volatility is random and normally distributed and that it can’t be predicted. Volatility rises and falls randomly, following a random path according to these models (Monte Carlo, Analytical).

Lehman blew up at the end of 2008 because it was using Monte Carlo simulations to predict how much the bank could lose on any given day. This model assumes normal behavior; i.e. normal returns, normal variance. In times of panic, the market’s behavior is far from random. The ability to predict when these times of high volatility will be remains allusive to companies and investors alike.

There are also some implications in proving how inefficient (unfair) options prices are. If you can prove that future options premiums are over- or underpriced, there’s an opportunity to make money.

My professor, Mr. Asensio, used the analogy of charging someone for “falling tree insurance”. The insurance company will give you a quote; say $2,000 dollars a year to cover your house if a tree falls on it. Say the average damage cost for a homeowner is $40,000 every time a tree falls into their home. The insurance company is expecting a tree to fall on your house once ever twenty years. If you pay $2,000 a year for 20 years and in the 20th year a tree falls on your house, you broke even. You got out ($40,000) what you paid in ($2,000*20). (Assuming the exact cost to fix your house was $40,000).


A futures contract is an agreement to purchase an asset at a set price at a future date. For example, if I’m going to sell you my car and you can’t pay me until next month, but I agree to sell you the car at the agreed price next month. We’ve just entered a futures contract.

Further, suppose your car was an expensive, one-of-a-kind Ferarri; custom-built for you. One of one. After you agree on a set price, news comes out that they’re building 500,000 more Ferarris just like yours. The price for your Ferarri is going to drop because it’s no longer the only one of its kind.

But who cares, I’ve already locked in the price and my buyer is still on the hook to pay me the full amount.

Again, using the Ferarri example, say before he buys, the buyer hears rumors that Ferarri was going to start producing the model of your Ferrari again. He expects the price to go down, but he still isn’t sure how much the price will fall, because Ferarri has yet to announce how many new cars they will produce. He wouldn’t buy the Ferarri at today’s price, he would negotiate for a lower price; guessing how far it will drop when Ferarri announces their increase in production. He is essentially forecasting the price drop when the news is announced.

For instance, the buyer assumes that there will be 500,000 more Ferraris made. He makes his views known in the negotiation process, but the seller disagrees. The seller thinks they’re only going to make 250,000 more. They hammer out a deal, each weighing their risks if the other party’s predictions are correct. They arrive to an estimate somewhere in the middle, say 375,000 and price the car accordingly, each happy they got a deal.

The buyer is happy because he is purchasing a Ferarri at less than market price. The seller is happy because he knows the price of the Ferarri could drop much lower than the agreed upon price.

The problem with this occurs when one party’s predictions are correct a higher percentage of the time, and the price on the futures contract doesn’t take that into account.

Bob from Big Bank of America is a seller of futures contracts. He understands markets very well, and is able to predict futures prices better than you (the buyer). You think you think your prediction is just as likely to be correct as his, so you hammer out a deal somewhere close to the middle of your two estimates. He is getting the better deal, because his estimate of the prices is always closer, but he can negotiate for a better deal.

Assume per gallon price of gas is $2.50 today. Bob says he will sell me gas for $2.25 a gallon, but I can’t have it until tomorrow. Bob expects the price to drop to $2.00 tomorrow. Playing the ignorant investor, I think buying gas for $2.25 a gallon is a steal. So I take his deal and tomorrow the price actually drops to $2.10 a gallon, I get caught with my pants down, because I’m stuck overpaying for gas today. Bob gets a great deal, because, although he was wrong about the drop, he still sold the gas at higher than market price.

The ARCH test tries to find when Big Bank Bob is hustling markets. They try to find where one party is better at predicting the price over the other. As an investor you want to put your money on the party that is usually right. You can make big money on these using levered bets. Risky? Yeah. Dangerous? Maybe. Potentially Lucrative? Absolutely.

I hope I increased your understanding of futures markets and how these things are calculated.

– Tommander-in-Chief


Disclaimer: If markets are efficient, you can’t make money here. If insurance companies are paying out exactly how much they charge for their products, they don’t make money. The insurance is appropriately priced, and neither party would engage in any type of transaction. But people buy insurance on everything from houses, to boats, to teeth. They think that by paying a small amount each month, they can avoid being slammed at by a big bill. Buyers of insurance certainly think they are getting a good deal. If insurance companies achieve a steady stream of cash flows and predictable payouts, they can generate profits by charging a tiny premium on your insurance over the predicted value. Essentially this tiny premium is a “peace-of-mind premium”; so you can sleep at night not worrying about if the tree in your front yard goes through your living room window you’ll be slapped with a big bill. All in all, insurance are arranged so both parties gain.


Predicting the Future…

Walnut IRA

In 10 years, about 18.1% of the U.S. population will be over 65. In 15 years, almost 20% of our population will be of retirement age.

You might be asking yourself, “How are we going to pay for all these damn old people?” Social security hasn’t exactly been getting good press in recent years; “Social Security’s total expenditure has exceed its non-interest income since 2010.” ( This is just fancy talk for Social Security is running out of money.

While my trust in lawmakers and our government hasn’t completely faded, I don’t think I’ll put all my retirement eggs into the social security basket. 401k’s, 403b’s, 457’s, IRA’s, Roth IRA’s, and pensions: they’re all necessary, easy options for each and every one of us to take advantage of. But the 401k has caps, you can’t invest more than $18,000 annually. Where should you put the money you’re saving for retirement?

I think I’ll ‘branch out’ from the old norms. Here’s my idea: tree farming. Yeah, tree farming. I know a lot of you do quite a bit of reading already, so put down your sultry sex novels about all the varying tints of light black and pick up a how-to book on growing your own trees. It’s an art, to say the least, but think of all the farmers who grew crops before the Google machine was even invented. Start up time/costs might deter you from this lucrative business, but the long-term payoff will be worth it.

Trends in agriculture:

We are constantly bombarded with images of barren ground where beautiful forests once stood. Statistics on the inefficiency of sexy renewables, such as solar and wind energy, are everywhere. Global warming and humans are teaming up to destroy the planet. It’s a problem and we need to face it. We hear a lot about oil in financial news and global disaster in environmental news but we hear little to none about how to grow our own fuel. Biofuel, it’s called. And anyone with a chunk of land can produce it.

Shown below is the production of all energy in the United States. By combining the waste, biofuel, and wood categories, we see that biomass produces 48% of all renewable energy (

Renewable energy makes up only 9% of the U.S. energy production.
Renewable energy makes up only 9% of the U.S. energy production.

The goal of biomass renewable energy is to harvest energy while still storing carbon in the ground. Below-ground biomass is, you guessed it, the amount of biomass stored below ground, in an organism’s root system. A willow has a large amount of below-ground biomass that can’t be harvested. A willow has low nutritional needs so it can grow in mineral poor soil. It can grow in hardy conditions i.e. Northern United States. Willows are also carbon-sinking crops; after harvest, they leave carbon in the ground (including the carbon dioxide output of the machines used to produce the crop). Sure, it’s a good crop for the environment, but how does this play into my retirement scheme Mr. Schleusener?

Willows, from the genus Salix, possess an extremely high profit margin. A acre of willow can yield 4 to 5 tons of marketable rods per harvest; at a market price of $10 a pound, a farmer’s revenue are $80,000 per acre per harvest! Willows have an average lifespan of 20 years before needing to be replanted; they can be harvested every year after their 2nd birthday. The plant’s lifetime revenues will be $1,440,000!

Costs? Land, labor, water, protection (from vicious deer). University of Kentucky College of Agriculture published an article quoting the cost of land, labor, and management to be “$4,000 to $40,000 per acre” per harvest, dependent of location, size, quality of product, etc.

Lets take the highest of their estimate just to be safe. Revenues of $80,000 net costs of $40,000 yield $40,000 per acre per harvest of profit. That’s just one acre of land at the highest cost estimate, without taking into account returns on land.

Another bonus of the willow crop is their ability to reproduce from stems. Simply replant the new crop from trimmings taken from the old crop. As long as you have the extra land, expansion will be easy.

Let’s say willows aren’t really your cup o’ tea. If you’re an investor who cares little about cash flows now as opposed to after your time has passed, consider trees as a legacy you will provide to trustees. Walnut trees take around 30-60 years to fully mature. During this time, you can collect the nuts, use them as food, and sell the surplus. Six thousand pounds of walnuts can be harvested from an acre of trees every season. Selling at three bucks a pound, your revenues approximate to $18,000 per acre per year. Minimal profit, sure… but the plants pay for their own installation over their lifetime. According to, a fully-grown walnut tree can bring in $4,000 to $5,000 each at harvest. An average of 250 trees can be grown on a single acre, resulting in revenues of $1,000,000 to $1,250,000 per acre. Not a bad investment.unclesamwantyou

A 10% tax credit is also awarded to those who intend to sell their crop at maturity. The land and the trees are both tax deferred, until a capital gain is made. This is similar to a traditional IRA, where the tax is charged upon withdrawal. states, “The average [acre] of walnut trees has an average return of 14% per year”. For relativity, the average annual return of the S&P 500 from 1966-2015 was 11.01%. In 2015, the S&P 500 returned -0.73%. Equities are a great way to earn money on your money if you know how to do it correctly. Otherwise, stick with what you know, or can easily learn.

Whether you’re a lawyer, real estate agent, artist, or professional athlete, you always need a place to get away for a while. Instead of a ski-cabin at Veil, buy a small farm in Northern California. Instead of a beach house, build a beautiful retreat home on a lake in Idaho. Make your retirement a place where your kids and grandkids go to find peace and quiet from their busy, hectic every day lives. If you want to create real value, give back to the environment, and leave something of lasting significance as your legacy, invest in a profitable farm getaway.

Thanks for reading.

Note, if you’re actually interested in the biofuel projects being done with Willows read this:

Some notes about social security:

Social security spending in our country totaled $840 billion in 2014, representing about “a quarter of federal spending.” ( Social security has two sources of income: payroll and income taxes. A huge majority (97%) of this income is derived from the payroll tax. The payroll tax is generally 12.4% of earnings up to a certain point; the tax is split evenly between the employer and employee. (If self employed, you have to bear the whole tax, sorry guys.) “The Old Age and Survivors Insurance Trust Fund is financially adequate throughout and beyond the short-range period (2015-24) period… [However], Social Security’s total expenditure has exceed its non-interest income since 2010.” (


Walnut IRA


I recently quit chewing tobacco, and, as many former nicotine addicts know, your brain does this crazy thing where we try to rationalize our use of the substance. I would say to myself, “Well, everyone has a vice, right? Whether it’s caffeine, food, booze, wasting time on Instagram, etc…. You name it and I guarantee it can be abused, and is abused by at least one of the seven billion people on earth. So what if mine happens to be chewing?”

Laying in bed at night, I pondered the question above. Assuming my thinking was correct, I took the connection further into financial markets. If everyone’s got a vice, who’s to say financial firms (which are made up of people) aren’t subject to the vices of their employees or executives?

I googled, “top excuses made by drug users”. I got a top ten list from, but for brevity sake I’ll only mention the top four.

4.) Everyone else is doing it? So why shouldn’t I?

3.) I’m not hurting anyone else.

2.) I need it to be ‘social’.

1.) I need it to be successful.

The goal of every financial institution in the world is to maximize profit. Just look at the 2008 financial crisis. All the media attention that J.P. Morgan has been getting recently is over their reckless behavior selling worthless assets to unknowing investors. I would probably do a crap job of explaining a mortgage backed security, so for an understandable, interesting explanation go watch The Big Short (Margot Robbie, naked, in a bathtub lays it all out for you surprisingly simply). I put a short explanation at the bottom of this post for those of you interested.

At the beginning of the crisis of 2008, financial institutions flooded the markets with these worthless securities and made real dollars. My point being, financial firms will do (and have done) ANYTHING to prop up their valuations.

Onto my real point, vices. Ever heard the term ‘window dressing’ (keyed “Repo 105″ by Lehmann Brothers before its undoing)? (Cohan, No, not getting new curtains or window painting your friend’s car windows before the homecoming game. Window dressing is a common practice amongst investment banks and mutual funds to make it appear as though their financials are better than they are. For example, one measure of the security of a company is liquidity. Liquidity measures the company’s ability to survive if every one of their customers suddenly runs to the bank and pulls out all their money. One measure of liquidity is the leverage ratio. The more debt it has relative to its assets, the higher the leverage ratio, simply speaking. The lower your ratio, the less likely you are to go bankrupt when the whole market takes a turn for the worse.

In order to appear more financially sound, just before earnings are announced, investment banks will sell short-term bonds (some can be as short as one day) in exchange for cash. They count the bonds as assets, and pay off some of their longer-term debt with the cash. In one move, they increase assets and decrease debt; effectively lowering their leverage ratios. After the earnings are announced and in the books, they load back up on long-term debt in exchange for cash and repurchase the short-term bonds. Debt goes back up, assets go back down, and we’re back at the same place we started in terms of leverage; investors none the wiser.

Everyone is led to believe that financial companies are much safer than they actually are because of this immoral practice. Banking is founded on trust. If I give my money to a bank, I trust them to keep it safe and have it readily available if I ever need it. If my bank is practicing window dressing, how am I to know my bank won’t suddenly go bankrupt if the housing market starts to crash? Deception can absolutely crush a formerly trusting relationship.

In 1833 New York City, Benjamin Day founded The Sun; the newspaper was published and sold at a price that allowed the average, literate New Yorker to purchase a newspaper. The Sun was reputable, but recognized the importance of a compelling headline. They published a story about a man (Sir John Herschel) who had invented a new telescope that could see details of the moon. The story etched details of “a delightful valley ‘abounding with lovely islands and water-birds of numerous kinds… [and] a beaver that walked on two feet.” (White, 92) Though this false spread of information was harmless, it compares to what we’re seeing today across reputable financial firms. Frankly, it’s the spread of misinformation. Misinformation used to make huge financial decisions by the average American, such as, where to put money for your kid’s college fund? Where to keep my life savings? Who should I trust with my retirement money?

Bart McDade, head of equities at Lehman Brothers before its collapse, “said the accounting practice was just ‘another drug’ the executives were on”. (Cohan, Let’s go back to the top four excuses an addict makes when confronted:

4.) ”Everyone else is doing it, why shouldn’t I?” Because it’s false information, you cretins.

3.) ”It’s not hurting anyone else.” You mean besides the millions of Americans choosing to invest in your bank?

2.) “I need it to be social.” If everyone else is doing it, it’s social to partake. You don’t want to be seen as the one who ruins the window dressing party. “Next to doing the right thing, the most important thing is letting people know you’re doing the right thing.” – John D. Rockefeller. Expose the industry and you may be rewarded.

1.) “I need it to be successful.” If you need to spread false information to be successful, you’re just con artists dressed up in $5,000 suits.

The rationalization I spoke of at the beginning of this article is attributed to an individual’s limbic system. This bastard is responsible for the late night Twinky you’re shoving in your mouth while watching Jeopardy under the assumption that ‘you’ll run it off tomorrow’. The limbic system is in charge of your emotional and instinctual needs. The reason we are able to abstain from our vices is our frontal lobes. These are your control boxes in charge of rational thinking. They are able to override the excuses your limbic system is giving you through rational, calm reasoning. When I am able to override my craving for a midnight snack or my dire need to check Instagram one more time, my frontal lobe section of my brain overpowers the limbic system. While the people who make up the banks are more than likely capable of fighting off that late night Twinky, the investment banks themselves seem to have evolved absent a frontal lobe. Conclusion: Yes, everyone has a vice, even investment banks.

I would argue that the act of window dressing should be illegal, not only for the sake of investors, but for the sake of the average American.

Fun Fact: Wall Street ‘dogs’ are commonly associated with cocaine and money, both of which directly stimulate the limbic system. Source:

Whew, I’m going out for a Twinky.

Here’s a few links about window dressing in today’s markets.

Mortgage-backed Securities:

Before the 2008 financial crisis, there was the invention of the mortgage-backed security (MBS). The idea behind these securities was to minimize risk across the board, so banks sold pieces of mortgages to other banks, pension funds, mutual funds, hedge funds, and others. It was as easy as buying a stock or bond on the market. In exchange, the banks would reward the investors for taking on the risk with a relatively high return. “Where’s the problem?” some of you might be thinking. “Banks get less risk, I get more return; who’s getting hurt?”

Let’s say John and Jane Doe are hard working, responsible citizens, who pay back their mortgages and still have enough to take the kids to Chuckie Cheeze on the weekends. If they pay back their mortgage in a timely fashion, the banks get paid, the buyers of the MBS (who took on the risk) get their cut, and we had nothing to worry about. Everyone gets paid. Way to go John and Jane, you’re perfect examples of how the system was SUPPOSED to work.

The problem wasn’t with John and Jane, it was with Joe Smith. Thanks to slack standards of lending prior to the financial crisis in 2008, Joe was able to get a loan on a house he couldn’t afford. Joe was a hard worker, ate Ramen noodles for dinner, and didn’t take the kids to Chuckie Cheeze on weekends. Thanks to Joe’s financial illiteracy (and his degenerate mortgage broker), the rates on his mortgage were too high for him to repay. Bills started piling up at Joe’s door. If Joe doesn’t pay, the banks don’t get paid, and the investors who bought the MBS’s don’t get paid. We call this “defaulting” on your loan.

Banks accounted and prepared for the occasional default, because, to quote one of my favorite movies, Forest Gump, “shit happens.” ( However, this ‘shit’ was happening far too often (again, thanks to financial illiteracy and slack lending standards) and investors failed to realize it. Everyone failed to realize it, until it was far too late to amend.

Banks started realizing that some of the MBS’s were crap, utterly worthless, because the people who were supposed to be paying the mortgages were defaulting like crazy. They started unloading these assets. They dumped them onto the market, selling at whatever price they could get, to keep their bottom lines looking tasty.


  1. Cohan, William D. “Lehman’s Demise, Dissected.” Opinionator Lehmans Demise Dissected Comments. 18 Mar. 2010. Web. 28 Jan. 2016.
  2. Clark, Andrew. “Lehman Brothers: Repo 105 and Other Accounting Tricks.” The Guardian. N.p., 12 Mar. 2010. Web. 28 Jan. 2016.
  3. White, Shane. Prince of Darkness. New York: St. Martin’s, 2015.